A Clever Consumer Trick for Ensuring Smart Spending Decisions

shoppingWe all have our own ways of justifying purchases, whether we’re trying to convince ourselves that a new car is essential, or that new boots are a just 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 many purchases are really worthwhile, or just an extravagance.

Using the Cost Per Use Buying Method

To use the cost per use method, simply:

1) Estimate the number of times you will use the item you want to purchase. Just remember to be realistic because it’s easy to overestimate the number of times you will use an item!

2) Divide the usage by the purchase price to get your cost per use. Voila! The resulting calculation identifies the true value of the purchase.

When Cost Per Use Is Advantageous

Here are just a few examples of when the cost per use buying method can be effectively applied:

  • When evaluating the true cost of luxury items. For example, if you’re considering buying a $300 trench coat, you plan on keeping it for three years, and you estimate that you will wear it 200 times per year, then the cost per use is $0.50 ($300/600 uses), which is reasonable for most people.
  • When deciding on the type of car you should buy. Say you’re considering buying a seven passenger minivan. However, if a seven passenger minivan is $5000 more expensive than a standard passenger car, and you keep the minivan for five years, you’re paying $1000 for each of those vacations via the vehicle cost. In that case, you may decide you’re better off saving that $5000 and renting the minivan only when you need it.
  • When deciding how much you should spend on a house. You may want to buy a house with a guest room. However if a house with four bedrooms costs $50,000 more than a house with three bedrooms, and if you only use your guestroom 10 times per year, then it’s costing you $500 per use. It may be more affordable to pay for an inflatable mattress or a futon — or put your guests up in a hotel!

When Cost Per Use Is Not Applicable

There are instances when cost per use can’t be effectively used. For example:

  • When quality outweighs low cost per use. For example, you may be looking to replace your bed regardless of cost because a good night’s sleep affects every aspect of the rest of your life.
  • When you’re only going to use the item once. Groceries and wedding gowns are just two examples.

Regardless of what method you use to make your spending decisions, stop and think before you make any purchase; being aware of your spending and the items you’re buying will help you stick to your budget, and ensure that you continue to live within your means.

This article was written by Timothy Ng who is part of the team at Credit Card Finder, a 100% free Australian credit card comparison and application service.

Photo Credit: aussiegall

Comments

  1. 1

    says

    These are really good tips for deciding whether or not to purchase an item. For example, six years ago I got hooked on Keen sandals. They are not inexpensive, but they are made really well. My first pair cost $100 and lasted three years (I still have them, but I now don’t wear the old pair as often since I have a new pair). I wore them 60% of the time. If I calculated that out it comes to about 15-cents a day. Totally worth it! (my newer pair is pushing 3-years and cost $40 less-a better deal.)

  2. 2

    says

    …which makes wedding dresses easily the dumbest purchases imaginable: worse than timeshares, worse than rustproofing, worse than tickets to a Guns ‘n Roses concert even though the band is now just Axl and a bunch of hired hands and they’ll probably take the stage 4 hours late and only play for 45 minutes and charge a couple hundred dollars for the privilege.

    • 3

      says

      @LittleHouse: I know what you mean. I have a favorite tee-shirt I’m wearing right now that I’ve had since – and I swear to this – 1992. I’ll bet I’ve worn it 500 times. I bet I paid less than $10 for it, but assuming I did pay $10 – that comes out to 2 cents per use! It may be the most cost-effective thing I’ve ever owned. That being said, this cost per use method has its place, but it has to be used smartly. There are certain instances when common sense overrides the information gleaned from its application.
      @Greg: Well said, as usual, Greg. (I really don’t know what more to add to that.) LOL

      • 4

        says

        I have a favorite pair of shorts that I won in a volleyball tournament in 1995. I have patched them a few times, they need another patching, but they are still my favorite shorts!

  3. 5

    says

    I think using the cost per use method is insurance that you’ll pay the least and you won’t overuse which is what most people contend when you buy in bulk. It’s a smart way to purchase and will definitely lead to savings.

  4. 6

    Jenna says

    Also, knowing what you need (say different pieces for work outfits) is always helpful if you need some retail therapy. That way you’re filling some need to go shopping but your not going to regret the purchases you made because you are in fact going to wear them for work.

  5. 7

    says

    Good stuff, Timothy! My favorite trick is to buy high quality items at a discount so I can use them for a long time. Not only do I have a low cost per use, but I can avoid shopping longer (yes, I’m a woman who doesn’t like the mall).

    @Greg: I’m married but I never had a wedding, so I avoided that one!

    @Len: I have an oversized T-shirt from 1987 that my husband still wears occasionally. They don’t make ‘em like they used to!

  6. 8

    says

    Nice advice. You cost per use method is really an eye opener. I never considered this method before and all I look in to the price while buying the product.

    It seems for a product, which we intended to use for long, we do not mind if it is costly.

  7. 9

    Libby says

    I used to work for a very large electronics retailer. People would call wanting to purchase AC adapters for their portable equipment (CD players, etc). They would get VERY upset that the cost was $20. A typical comment would be, “I only paid $20 for the unit!!” We had to politely point out to them that they weren’t replacing the unit, they were replacing the batteries which could easily cost them several times the price of the adapter. They still didn’t get it, so we used “reduce-the-price-to-ridiculous” strategy. this strategy. It’s like this one only in reverse for retailers, of course – LOL. Cost of adapter $20 – will last you a minimum of four years so $5 per year or .10 cents a week. Two AA batteries a week for four years (208 weeks) even when you buy them at the dollar store (4-pk for a $1) is going to cost you $104.00. Light bulb moment!!!

    Btw, I love your blog and have shared it with all my friends. Keep up the great work.

  8. 11

    mary says

    I need/wanted a new kitchen. Couldn’t get the price under $23K. Then it dawned on me that a):my baking stuff took a lot of space b) baking makes me look fat and c) I could buy top of the line pastry in perpetuity for the cost of that remodel.
    So I packed up all the bake ware and mixers and flours and sugar etc and parked it on a neat shelf on the stair landing to my basement. And bought an overpriced $17 fruit tart to celebrate. And maybe 8 more over the next 8 years I owned that house.
    Now we have a saying Let the store- store it. I don’t want my money tied up in household inventory.

  9. 12

    says

    We thought about this when we bought our (small and incredibly overpriced) house in 2004 in So. Cal. My MIL asked “where will we stay?” when we bought a 2BR, 1 BA house. I said “the sofabed in the living room”.

    Seriously, at that time, a 3rd bedroom was an extra $100k.

    We get guests every few years. I have put people up in hotels 3 times, for an average of 3 nights each time. That is about a total of $1500.

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