Managing Overinvestment
In finance, over investment or over-investing refers to the practice of investing more into an asset (or property) than what it is worth on the open market. For instance, if a person buys a used car for $3000, and spends another $25,000 on repairs, even though the market value of 10 year old car is not more than $4000; he might have over-invested by $1000 on that car.
Another example is, if a homeowner makes improvements or additions to her/his house to the point that the owner has invested significantly more than the market value of other houses in that area, then she/he likely over-invested.
How to avoid
Over-investing is not a problem many people have, but it can take place. Losses are hard to take; the pain of loss has twice the emotional vigor of the enjoyment of a gain. The confusion between the investment value and the consumption value can result in over investing. Consumable values are things such as pride of ownership (houses and cars), and rental value. However, investment value comes from the hanging price of similar assets on the market.
- Determine the clear investment goals and strategy.
- Calculate the consumption value discretely from the investment value to avoid over investment.
- Avoid spending more money on consumption value. Since, many people waste their money on buying something, they would not normally consume.