Thoughts on Frugality and the True Cost of Your Purchase
Tip It!As a followup to yesterday’s post about the cheap choice not being the frugal choice, I just wanted to highlight this comment from a reader named michael:
I learned that the cost of something is the price divided by the number of uses.
This is a great way of looking at things, and I couldn’t have said it better myself. It’s well worth paying extra as long as the added cost doesn’t outstrip the added utility of the item that you’re buying.
Published on July 2nd, 2008 - 4 Comments
Filed under: Frugality
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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July 2nd, 2008 at 1:11 pm
I’ve also recently decided to measure it by time.
Most purchases aren’t one-time expenditures. You buy them. Then you may need to buy supplies such as electricity, tonor, gas, needle and thread, dishwasher soap, cleaning/dusting supplies, roofing materials, additional memory, and/or how-to books to keep using it long-term. If it’s something that doesn’t last forever, you’re going to have to re-buy it if you still want it.
So, how much does it cost over time compared to, say, my income?
For example, my computer isn’t just $1600. Since my old one broke after four years, and also cost $1600, then the cost of a computer is $400/year or 1.3% of my take-home income. I really like having a computer and having it be a laptop and having it free of any software that resulted in Bill Gates getting more money. But do I like this part of my lifestyle to spend 1.3% of my income on it forever? That’s a good question.
I pay cash for cars, but save $50/month toward my next car plus average $150/month for gas, maintenance, repairs, and insurance, so that’s $200/month or 6.2% of my income. Owning a car is barely worth this much to me (I don’t need one, just want one, mostly because I often lend mine out to my boyfriend or sister). Currently I buy ten-year-old cars of reliable makes and keep them as long as possible (ten years last time, seven years so far on this car); I would never pay more for a newer car.
And then things sometimes go unexpectedly bad somehow – they go out of style, stop fitting, get worn out quicker because I’m fatter in the thighs now, get attacked by moths, stop working. For example, my cassette tapes, records, and VCR movies are essentially useless to me. I had thought of them as things that last forever (if I took proper care), but now I am re-buying some of them and losing the rest. So you should probably add an additional percentage for this sort of thing.
July 2nd, 2008 at 3:57 pm
if one of your main reasons for having a car is to loan it out, maybe you should reconsider. At what point is it not ok for your boyfriend and sister to not consider how much a car is worth to them, because they can just borrow yours!
July 3rd, 2008 at 9:51 am
So how does this tie into a very big ticket item such as a home? If you divide by hours of use instead of number of uses, it gets interesting. Say you drive a car 5 hours a week and 84 hours a week at home. If you spend 25,000 on a car, then that works out to $420K on a house.
But wait, that house can theoretically last you forever, whereas the car will probably be 10-15 in most cases. And of course, averaged over time a home will generally appreciate while a car clearly depreciates.
July 3rd, 2008 at 12:49 pm
What a nifty adage!
With bigger-ticket items, it doesn’t seem to quite fit. Like Debbie M, I also pay for my cars in cash, setting aside savings over time for the purpose. But the car fund is stashed at Vanguard, where most of the time it makes money. So the calculation of the car’s cost as a percentage of income would need to take into account 10 years’ worth of interest income on the invested savings.
But if you bought the car or the house on time…how could you calculate cost by number of uses? The cost of a car loan or a mortgage is huge. Meanwhile, the real value of the car drops and (theoretically) the real value of the house rises. First, it would be tricky to calculate the actual cost per use against inflation and depreciation; and second, you’d have to weight the number of uses (esp. of the car) by the REQUIREMENT to use it. That is, you must have the car to get to a job in order to earn the money to pay for the car — in most US cities, public transport isn’t a real option. You have to have a roof over your head — though you don’t have to own that roof. How does nonnegotiable necessity affect the value of “number of uses”?
Argh! The math is over my head!