How to Evaluate Your Purchases
"Some people know the cost of everything but the value of nothing."
-Oscar Wilde
The first day of school is coming up and I need some new shoes. I'm in my early teens and I am rough on shoes. We go to the store and the only purpose is to find the cheapest shoes we can find that fit my feet.
Growing up, there was an emphasis on thrift, which we defined as buying the cheapest possible items we could. This, I propose, isn't the proper way to evaluate decisions, nor is it the proper way to be thrifty.
To the extent we could afford it, it would have made more sense to spend a little more on higher-quality shoes. Higher-quality shoes will last longer, and the cost-per-wearing would have been less.
This isn't saying that I needed name-brand shoes. Nor is this saying we should have spent money we didn't have.
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A few years ago, my wife and I bought a camping trailer. It's fiberglass, and fiberglass trailers tend to cost more per square foot than regular, non-fiberglass trailers. What we get for that extra cost is a lighter trailer with a longer life expectancy and a higher resale value. Counterintuitively, when we consider the cost per night, including the resale value, it is actually cheaper to have a trailer that costs more.
We need to consider more than just price (don't simply buy the cheapest). We also need to consider if we get what we pay for with name-brand products (don't simply buy a name that doesn't offer function).
Evaluating Quality
We need to buy things, and when it comes time to make a decision about whether or not to buy a generic version or a name-brand version, evaluating the quality will help you choose wisely.
There are not simply two choices; generic or name-brand. It's a continuum. I'm also not here to tell you that one should ALWAYS buy generic or ALWAYS buy name-brand. I'm here to have to ask yourself WHY you are making the purchase. Once you answer that for yourself, you'll better be able to know and understand what level of quality you actually need.
Evaluate what you need the product to do. For example, do you need a jacket that can keep you warm in harsh, varying conditions, or do you need a jacket to keep your warm in between your car and your office? How much value do you place on fashion? Give yourself permission to put your money into the features that you need, but only buy those features that you need and let go of the thought that you need to buy "the best." There is no "best." There is only the best for you.
Often, the cost of the name of name-brand products does not come with quality - at least not the same spike in quality that comes from the non-luxury versions. The drawings in this section only use two axes, price and quality.
The value of the name-brand shows up on the price-axis, but it doesn't show up much on the quality-axis. These drawings don't show the third axis - status. The status-axis would show how much recognition you would get from the purchase. I'm not showing that axis because I propose that buying for status should not be in your decision process. Buy for function, not status.
Cost Per Use
How do you evaluate quality? One way that you might enjoy is to calculate a cost-per-use (CPU). By using the CPU method, you can figure out how much it costs you per time. For example, assume a relatively cheap product would last for two years and costs $500, but you can spend double the amount ($1,000) on something that lasts 10 years. Using CPU, the cheap product costs $250 per year, but the more expensive product costs $100 per year. In this case, the expensive product is less expensive on a per-year basis.
Just because it would generally last longer, doesn't mean it would be better for you. If you don't use that product for 10 years, then you aren't actually getting the benefit. Keeping this example going, if you only think you'll use the product for four years, then the cost-per-year for the cheap product is still $250 (because it only lasts two years) and the expensive product is also $250. In this case, it would cost about the same, all else equal, but you could buy a newer cheap product in two years.
You can also use CPU to compare buying something to renting something. If you do the math to determine how much something costs per use, you can then ask yourself whether or not you would rent that product for the same price. If you wouldn't, then it's probably better to keep renting (if you can) than buying. However, if CPU results in a number that you would be happy to pay each time, then it probably makes more sense to buy - again all else equal (you have to take into account storage costs, transportation costs, and so on).
Evaluating Purchases
You might be thinking I oversimplified things. After all, how can you possibly know how long you're going to use the product? I bought some shoes when I was in Nashville a couple of years ago. With shoes, I feel pretty confident that I'll still be wearing shoes in 10 and 15 years, they will still fit, and they are pretty time-universal so they'll likely still be in style that far in the future. On the other hand, I bought a pair of cross country skis a few years ago. I thought I was going to become a cross country skier. I would have planned on skiing for many years. Yet, three years later I realized that I'm not very good at it and thus don't enjoy it very much.
The trick, then, is to make some guesses. We can make a guess about how long we'll use the item in the best-case scenario. This should be easy for us. In fact, we do this by default as a way to justify our purchases. With my skis, this was my thinking I would ski for many years. The next step, then, is to ask yourself critically, what the worst-case scenario is. What would it take for the best-case to not happen? Can you imagine this purchase not working out? Have there been times when you were wrong in the past? Answer these questions to think about the worst-case scenario. Then, you can use your two estimates to try and figure out what the most likely case is.
Once you know all three, you can calculate a CPU for each case. With that knowledge, you can see if there are any situations in which that changes your decision. For example, maybe the cost-per-use of the worst-case-scenario is unreasonable. Maybe spending $2,000 on a bike that you might use for one summer (about $667 per month), is unreasonable, which nudges you to consider a less expensive bike or no bike at all.
Of course, you should keep in mind the resale value. In the bike example, if you would try to sell the bike, then factor in what the net cost would have been. If you sold the bike at the end of the summer for $1,400, then it cost you $600 to use for the summer - or about $200 per month. Be honest, though. Don't calculate a resale value if you know yourself and suspect you'll let it sit in your garage.
Focus on Yourself and Your Needs
The most important point I want to make is to focus on yourself. How much value will you get out of it? How functional will this be for you? Status doesn't contribute to how you will be using the product. It will take effort, particularly if you have a tendency toward status purchases.
Give yourself permission to buy quality, but buy as much quality as you need and not more.
You only have one life. Live intentionally.
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Related Money Health® ReadingReferences and InfluencesDan Ariely, Jeff Kreisler: Dollars and Sense
Thomas Stanley, William Danko: The Millionaire Next Door
Note: Above is a list of references that I intentionally looked at or thought about while writing this article. It is not meant to be a definitive list of everything that influenced my thinking and writing. It's very likely that I left something out. If you notice something that you think I left out, please let me know; I will be happy to update the list.
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