MM012: Price is What You Pay Value is What You Get
As a proud budgeteer, I'll be the first to admit that I say "no" more often than I say "yes" when it comes to budget decisions. But sometimes, you need (or want) to flex your budget to make room for various purchases. So, how do you figure out the best option? It's easy to look at the bottom line and make a decision from there, but it's more important to make a decision based on what's the best value, rather than the best price.
IN THIS WEEK'S EPISODE
* Why cheaper isn't always better
* How to determine the value of a possible purchase
* How to calculate cost-per-use
* My favorite budgeting tool
* How we used cost-per-use on a lawnmower
Price is What You Pay, Value is What You Get
For those of you following along, you know I have a reputation as a cheapskate. I say “no” to spending more often than I say “yes.” I’m known to be a stickler when it comes to the budget, which means that discretionary spending gets extra scrutiny.
When you’ve got a budget laid out, and you’re looking to add new items in, the bottom dollar is what often gets the focus. It makes sense, right? If you have $5,000 coming in and have $4,900 budgeted out for savings and spending every month, it’s easy to see where a $100 per month purchase might slide in. But, if you’ve got your budget locked down, it can be hard to look past the bottom line when making purchase decisions, whether it’s a new monthly cost or a one-time purchase.
Going a bit further, when you’ve determined that you’re going to make the plunge and make that extra purchase, do you go with the cheapest option so that it fits neater in your budget? Or, do you make a bit of an investment so your purchase will last longer?
A couple years ago, I heard a quote that Warren Buffet popularized that has really stuck with me and helped us evaluate purchase decisions over the years. he said, “Price is what you pay, value is what you get.” Think about that for a minute. It’s more than just the price you pay. When you focus on the value, you can start breaking down your purchase/investment into looking at the longer term. Does it mean that you should just get ignore the cheapest option? No, definitely not, but also, maybe.
There was another quote that I want to attribute to Warren Buffet, but when I was searching the interwebs for the quote, I couldn’t find. If you have some insights here, please reach and let me know; I’d love to properly attribute the quote. (I think) he said that he makes purchase decisions based on his estimated cost-per-use.
Cost-per-Use Pricing Scenarios
Let’s look at some examples. Are you better off paying an annual subscription of $15 for a monthly magazine, or paying $100 per year for a daily newspaper. If you would read both religiously front to back, the magazine is only 15% the cost of the newspaper. But, when it you break it down on a cost-per-use basis, the magazine comes out to $1.25 per issue versus the newspaper which seems like a steal at $0.27 per issue. Now, there’s something else to consider, and that’s whether you need to pay for either rather than just getting your news, information and entertainment from the Internet and podcasts, but I digress.
How about another example. $500 winter jacket or $20 T-shirt? Well, if you wear the jacket for 125 days for five years, and you only wear the T-shirt 10 times, it cost you $.80 each time you wore the jacket and $2 each time you wore the T-shirt.
Let’s modify that last example for a more apples-to-apples comparison. What about a $500 winter jacket with removable fleece liner that can double as a light jacket that will last five years versus a $75 heavy winter jacket that might last two years. Because the more expensive (and better constructed) jacket is more versatile and will last longer, you’ll be able to wear it for 125 days each year versus t...