Let us say you have Rs.1,00,000/- with you.
With the Rs.1,00,000/- you start a business. The business earns Rs.20,000/- per year. You have added to the value of Rs.1,00,000/- By Rs.20,000/- This is known as investment because you increase the value of the money.
Let us say you buy a Car with this Rs.1,00,000/-. If you did not have a car of your own earlier, this car brings comfort and enhances your efficiency. The car takes you to your office in more comfort. You can work more and work better. Your social status increases and your boss is pleased by your performance.
He gives you both a promotion and a raise. If you were earning Rs.50,000/- per month earlier, your new raise has let us say taken it to Rs.75,000/- per month You have thus increased your wealth by 50% per month. This car purchased too can be considered an investment because it helps to increase your wealth.
Now let us say you spent Rs.20,000/- on the car by changing its upholstery. Clearly this spending is consumption because the changed upholstery would hardly have an impact on increasing your overall wealth.
So, the spending that increases your overall wealth is an investment while the spending that does not increase your overall wealth is consumption.
Investment and consumption are also two sides of a coin. If you were to buy shares of the company making upholstery which you bought, it would be investment while purchase of the upholstery was consumption.
So how are you impacted if the price of upholstery goes up?
If the price of the upholstery goes up, you will certainly feel the pinch as a consumer. However, as an investor you may laugh all the way if the share prices go up on account of high demand for upholsteries.
Hence, clearly it is important that there is both consumption and investment in an economy for the economy to grow in a balanced manner.
On the other hand, even you as an individual need to partake both in consumption and investment to enjoy a balanced life which gives you returns while at the same time allowing you to enjoy some luxuries of life.