By Timothy Ng
We all have our own ways of justifying purchases, whether we are trying to convince ourselves that a new DVD is an essential, or that new boots are just a requirement with winter around the corner. However, what if there was a way you could look at your purchases, to see their true value, so that you could tell right away whether you were making a smart purchasing decision, using the process as a tool to help you live within your means and stay out of unmanageable credit card debt?
That process is the “cost per use” method of purchasing and it can help you decide whether a purchase is really worthwhile, or just an extravagance.
The cost per use method fits within your ordinary buyer decision process, which is a proven process we all go through when we buy something new. Therefore, once you know how the cost per use method works, you can use it is all of your buying decisions.
Using the Cost Per Use Buying Method
To use the cost per use method you simply need to do a quick calculation before you make a purchase to estimate the value you will get out of the purchase. The method does not work for every purchase as there are sometimes variables which do not fit into the calculation. However, it can be a useful tool to help with your decision to buy or not to buy.
To use the cost per use buying method:
1) Estimate the number of times you will use the item you want to purchase. This is where you need to be realistic because it is easy to overestimate the number of times you will use an item and if you want this method of decision making to help you make a financially responsible decision you need to be aware not to overestimate the usage.
2) Divide the usage by the purchase price to get your cost per use. This is a simple calculation you can make on the spot to help you see the true value of a purchase you are considering and you can use it for just about any purchase you are making.
When the Cost Per Use Buying Method Is Advantageous
Here are just a few examples of when the cost per use buying method can be effectively applied:
· When you need help evaluating the true cost of luxury items. For example if you are considering buying a gorgeous $300 trench coat, and you plan to keep it for three years and you estimate that you will wear it 200 times a year then the cost per use is $0.50 which works out to be pretty affordable.
· When you need help deciding on the type of car you should buy. You may be considering buying a seven passenger minivan to be able to transport your friends on your yearly road trip holiday. However if a seven passenger minivan is $5000 more expensive than a standard passenger car and you keep the minivan for five years you are paying $1000 for each of those vacations through the cost of your vehicle, and you might be better off saving that $5000 and renting a minivan only when you need it.
· When you need help deciding how much you should spend on a house. You may want to buy a house with a guest room for when family or friends stay. However if a house with four bedrooms cost you $50,000 more than a house with three bedrooms, and if you only use your guestroom 10 times a year then it is costing you $500 per use and it could be more affordable to pay for an inflatable mattress or a futon, or put your guest up in a hotel.
When the Cost Per Use Buying Method Is Not Applicable
There are also instances when the cost per use buying method cannot be effectively used:
· When the quality outweighs low cost per use. Only you can decide on the times when quality will outweigh a low cost per use calculation but these may be times such as when you are looking to replace your bed because a good night’s sleep affects every aspect of the rest of your life. Therefore, while you may calculate the cost per use on a mattress you will have for 10 years and sleep on every night, the lowest calculations may not always be the best because this may be something you want or need to invest in.
· When you’re only going to use the item once. The cost per use method does not work on every purchase as some things will only be used once, such as groceries, or a wedding gown.
Although the cost per use method does not work for every purchase, it is important to get into the habit of thinking about the true value of your purchases and how often you really are going to use them in relation to how much you are paying for them. You will then find yourself being more discerning when it comes to paying for your purchases because you can see their true value.
Where the Cost Per Use Method Fits Within the Buyer Decision Process
Before you make a purchase you will go through five common stages which have been identified as important stages in your decision-making process. The buyer decision process includes:
1) Recognition of need. This is where you first realize that you have a need or problem which can be solved by purchasing a product to help.
2) Search for information. You will then look for more information to help you find the product which will meet your needs. You may do your own research online or in store, as well as talk to family and friends.
3) Analysis of alternatives. This is where you will use the information you have gained to help you decide about which product best suits your needs, evaluating all alternatives against each other. This is where you can use the cost per use method to gauge the value of each alternative. Take the time to consider the cost per use of each option as compared to the purchase price so that you can look at your options and decisions within the context of your budget.
4) The purchase decision. Next you will make the final decision about which products to buy and this is where you will weigh up whether the cost per use methods really applies, or whether this is a one-off purchase, or the purchase of something where quality must be considered equally against value, such as the purchase of the most comfortable work shoes if you are on your feet all day. At the same time in the final decision-making process you need to again be looking at your purchase in relation to your budget and how you are going to pay for it now without going into credit card debt because even though you may, for example, be using your purchase at a cost per use price of just $0.20 for the next five years, you have to pay for it now.
5) Post purchase assessment. This stage can also be known as buyers’ remorse or cognitive dissonance where you evaluate whether you are happy with your purchase or whether you would make a different decision next time. It is here that you can assess the success of the cost per use method and whether you are happy with your resulting purchase having taken the cost per use into account.
Regardless of the method which works for you it is important to find a way to stop and think before you make any purchase because being aware of your spending and the items you are buying can help you keep to your budget, live within your means and therefore avoid credit card debt.
This article was written by Timothy Ng who is a regular writer and part of the team at Credit Card Finder, a 100% free Australian credit card comparison and application service. Visit the Credit Card Finder website for more personal finance tips, or subscribe to their RSS feed for more practical articles.