We 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