The key to having a lot of money is to save a lot of money. Having a 20-50% savings rate consistently over the long term will let you keep money. However, a lot of others tell you how to save, but not a lot tells you how to buy. Spending money on things that are lower cost to save money could be detrimental over the long term. Warren Buffett famously said,
Price is what you pay, value is what you get.
The key is to increase your value, not increase your bank account. Having money is great, but looking at the short term benefits of saving money could make you worse off than spending expensive items. Why? Great question! For the most part (more than 50% of the time), expensive things are better quality.
Exceptions are commodity items, things that aren’t differentiated at all except for the brand. Clothes, fruit, luxury cars, gas, etc. are some of the things that come to mind. Paying a premium for these items isn’t worth it.
You get the same value as a non-branded item but pay more. The idea is to look for differentiation in features of the product and price and determine if the differentiation is worth the difference in price.
Knowing How to Buy
This past Thursday, my car battery was having problems. I ran frantically over town to find the one auto shop that carried my car’s battery. I spent close to $130 after taxes to replace the battery. If I knew a lot about cars, I would have brought the issue up when I was negotiating for the car, but I didn’t.
I only focused on getting the lowest price. I also had to spend an extra $37 to just buy a cap for my coolant as a result. (Dealers sure know how to play their hand).
Because I don’t want to be taken advantage of again, I’m putting in the hours to read the owners manual. I want to be educated so that I know how to buy a car correctly the next time around. Price shouldn’t have been the only thing I focused on.
I shot myself in the foot as a result because I should have popped the hood open and asked questions when I was buying. Knowing how old the battery is and making sure parts aren’t missing are basic things I should have known.
Putting that aside, the battery that I replaced had benefits that give more value than its cost. The mileage capacity for my car went from 300 miles to 420 miles. The car now can drive 120 miles more per full tank than before. I usually pay about $20 per month for gas. The additional 120 miles will let me pay $20 per month AND A HALF for gas.
That’s a yearly savings of $80 ($240 per year before the change vs spending $160 per year after) given that oil prices stay the same. The battery has a 3 year warranty, meaning I spent $130 to save $240. If oil prices rise, I realize even more savings (I don’t think it will rise anytime soon, however).
I could have easily focused on the short-term money outlay of $130 and not paid for a new battery. That’s looking at the short-term effects and not the long-term effects. If looking at the long-term, I would be better off spending money than saving. Knowing how to buy can be more beneficial than knowing how to save.
Focus on Value, Never the Price
Some examples where value should be looked at more closely include health services, food, cars, debt, and most important of all, time. These are things that almost everyone pays for and has to have, so might as well figure out how to buy.
Holding off on going to the doctors or dentist because it’s too expensive or going to a sub-par review doctor is risky. Not getting a filling for a chipped tooth today can lead to needing a root canal in the future. Save a couple hundred now to spend a couple thousand later is not smart.
Going to a cheap doctor saves a couple dollars but a medical mistake can cause thousands if not tens of thousands of dollars in medical bills. It could even be considered risky to go to a bad doctor. It’s not smart to take on risk when you are the one buying a physical product or service.
I’ve been there. I saved a lot of money on food costs by only spending my days in McDonalds and eating ham and cheese sandwiches. Eating only McDonalds is life-threatening. I hope I didn’t accumulate any trans-fat by only eating McDonalds. I saved a few dollars every day by eating cheap food but if I didn’t stop, I would have racked up thousands in medical bills. Again, not very smart when looking at the bigger picture and the long-term.
I told my parents that I only wanted to spend $5k to buy a car because I wanted to be frugal. It was my money that I was going to spend so I wanted to call the shots. Oh, how my life would be different if they hadn’t advised me otherwise.
The only kind of cars that go for $5k is one that has 80k+ miles and need regular maintenance. Maintenance costs are significant. Short-term savings for long-term loss situation once again. I’m glad not to have paid all of my attention to the price and focused on the value instead. I upped my budget and spend 10k to buy my car.
When you take on debt, you’re buying debt. Most debt is not worth buying because of the covenants and obligation. However, some debt is worth buying.
Time is finite. Once it’s spent, it’s gone. Forever. As a result, doing things that buy you time can be money well spent. How to buy time? Look for products that give you efficiency. For example, I could spend money on a bicycle to go to work which will save me gas but it won’t buy me extra time. I could live without a cell phone but my work would never be done so efficiently if I hadn’t had a cell phone.
Looking to buy only necessities to save money is good, but there are limits to the benefits. Buying value to live more efficiently and better lives have endless benefits. You have to figure out if money is more valuable or if time is more valuable. Every situation is different.
I learned that I shouldn’t buy something if it’s not a necessity. I agree completely that I should only buy things that I need. However, it was too ingrained in my brain to the point where I wouldn’t spend any money unless I need it for the short term. Long-term viability is what matters and spending money can be a great way to add value if done responsibly.
One thing that I did leave out is in investing. Always look for value in the stock market and never focus on price. It takes a little bit of research to make sure that what you’re buying will add value but putting in the time can let you live a better life!
Readers, do you feel like you have a grasp on how to buy? How do you make spending decisions? Let me know in the comments below!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
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