Your personal finance equation is simple — spending plus savings is equal to income. Non-discretionary spending includes grocery and utility payments whereas discretionary spending includes fine dining and entertainment. But what about spending to acquire goods that are investment-like? That is, spending you cannot categorise as investments, yet form part of aggregate wealth. Here, we discuss such type of spending.

Personal effects

Take gold. You can invest in physical gold; buying from, say, MMTC-PAMP. Or invest in financial gold through gold exchange-traded funds (ETFs). While financial gold is preferable for its better liquidity, physical gold from MMTC-PAMP comes with 999.9 purity.

But what if you buy jewellery made of 22 carat gold or less? These are not considered investments because they are not meant to provide monetary returns; you derive emotional return from them. They are considered personal effects or personal property, which form part of aggregate wealth, but not your investment portfolio.

The above distinction is important. Many individuals consider personal effects as investment. That could be an issue because such purchases are more valuable to the owner than to a potential buyer. That is, gold jewellery bought ten years ago or gifted to by a family member has an emotional value to you. But it would just be used gold jewellery to a potential buyer. Therefore, selling price may be less than equivalent new jewellery. Think of the difference between selling and replacement price as the emotional value you derived from owning it through time.

The above argument does not hold for celebrities personal effects that are eventually auctioned. For instance, jewellery owned by, say, Late Princess Diana. They become collectibles over period, given the narrative associated with them. Such personal effects become investments, popularly referred to as passion assets.

Conclusion

Be mindful of the difference between personal effects and passion assets. You are likely to suffer from endowment bias more with personal effects than with passion assets because of greater emotional value attached to the former. This refers to our tendency to attach a greater value to the things we own for consumption purposes than if we did not because the pain of parting with them is greater than the happiness of getting something in return.

(The author offers training programmes for individuals to manage their personal investments)

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