Wednesday, October 22, 2014
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May Financial Fitness Challenge--Balance Cost and Value



The English writer Oscar Wilde said a cynic is a man who knows the price of everything and the value of nothing.

Let's rework that phrase: A smart shopper knows the value of a purchase as well as its price.

We write a lot about ways to save money and cut down on costs. Sometimes that can mean paying more to buy goods and services. In the long run, you might be better off paying more money at the outset, especially for items that you expect to use many times or over a long period of time.

For example, a family member wanted a pickup truck. It was going to be a second vehicle, used occasionally, so he didn't want to spend a lot of money for it. He found an older model with low mileage and was happy with the low price tag.

Within a few months he had replaced several belts, the brakes, and the engine. In a few more months the truck needed four new tires. He calculated that, in the first six months, he'd spent more than twice what he paid for the truck. It hadn't been a bargain at all.

I remember many years ago deciding that I needed a new bed pillow and being surprised to find out how much you could spend for one. I ended up buying a really inexpensive pillow at an overstock department store—and in two months it was in worse shape than the one I was replacing.

Sorting cost, quality, and expectations

Part of deciding how much to pay for something is thinking about what kind of performance you need from the thing you're buying. In the case of a pillow, the point is pretty clear: A good night's sleep is almost in the "priceless" category.

The opposite is true for something that has limited use. I'm thinking of a friend who was in a wedding party. She found a pair of designer shoes that went perfectly with her dress and spent her clothing budget for half a year on those shoes. She reported that the shoes were "awesome," and acknowledged that she likely won't wear them again.

"The last of a good thing is better than the first of poor thing."

So calculate the "cost for each wear" or "cost for each use" when you confront a buying decision. Examine quality, cost, and anticipated use to understand the true price.

In the special occasion shoe example, think about how much you're really willing to pay for a one-time wearing. Will you buy the cheapest shoe you can find? Probably not—if you're going to be dancing for hours you still want to be comfortable. But it seems unlikely you'll spring for the top price in this scenario once you think about the real expense.

I was in the Doolin Crafts Gallery in Ireland a few years ago. I overheard then-owner, Matthew O'Connell, telling another customer something that struck a chord. He quoted his mother on the question of quality, saying, "The last of a good thing is better than the first of poor thing."

Exhibit A: The top-quality pillow I eventually bought—after the crummy one disintegrated—is still in good condition. And I suspect that over time I would have paid much more to replace multiple "inexpensive" pillows than I paid for the really good pillow I still use.

Some shoppers assume that paying more money assures quality, but that can be a mistake as well. Some drivers, for example, insist that their cars perform better with premium gas even though the manufacturer recommends regular fuel. If you choose premium you're literally burning money—and no one can afford to do that at today's gas prices.

These considerations play into just about every spending choice we make. When you remodel your home, you're factoring in the initial cost of the improvement, how much pleasure or utility you'll get from the change, what quality you want in materials and furnishings, and even the impact on future resale value. These elements might not be easy to sort out, but it's important to at least think about them to avoid wasting money—in the long run.

Examine quality, cost, and anticipated use to understand the true price.

Financial Fitness Challenge

The people at your credit union make sure you always receive top value at a fair price for your financial needs. They bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.

Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.

ST
Susan Tiffany, CCUFC
askem@cuna.coop



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