So you’re thinking about buying something, or you’re comparing two purchases. You have the ability to pay for the purchases you’re considering. But you find yourself wondering how to determine whether you can really afford it. Being able to pay for something isn’t exactly the same as being able to afford it. Whether or not you have the cash or credit to pay for it is a simple question to answer. Whether the item is something you’ll later regret buying is a whole other issue.
Determining real value
Value is all about perspective. What’s valuable to me may not be valuable to you. The best method I’ve found for getting some perspective on how valuable stuff I might buy would be to me involves three steps:
- How much would I use the item?
- In terms of my labor hours, how much does this item cost me?
- If someone told me I had to work X hours to have this thing, would that sound like a good bargain to me?
Step 1 is fairly simple. Think about the occasions you would use the item. Observe occasions like it to make sure there isn’t a complication you’re missing. For example, you think buying a treadmill for home would be a better value to you than having a gym membership, but then you take a closer look and realize the only time you have for working out is at 6am, and the problem with that is, you live in an apartment or condo and it’ll wake up your neighbors who will complain, and that’ll be the end of the treadmill. You can stop right there: the gym membership is a better bargain for you at this point.
You’ll make mistakes on Step 1 sometimes – for example, you buy a new smartphone thinking you’ll be browsing the web everywhere you go, then six months later you move to a place that doesn’t have great cell phone coverage for your provider. That’s okay – when refunds aren’t possible, there’s always selling stuff to recoup at least some of your loss. It happens.
Step 2 is more complex. First, you need to determine how valuable your labor time is. Look at your net income in a pay period. Calculate the number of hours you actually work (salaried workers may work longer hours than their paycheck actually states). Add on the number of hours you spend traveling to and from work. I also add in unpaid break periods because, as I see it, if I didn’t have to work at a job, I wouldn’t have to spend that lunch hour near my place of work and I could be home doing laundry or something I’ll have to put off until I get home. Divide your net income by the number of hours you came up with. That’s how much money you’re really getting when you work for an hour.
You could get even more stringent with this and deduct other costs from your net salary, such as the cost of your commute (don’t forget an average cost for car maintenance), the cost of clothing and meals you wouldn’t need to purchase if you worked from home or didn’t have to work at all. You could also add in the value of any benefits you get, such as insurance, if you know what they are.
Once you’ve worked out what you’re really taking home for an hour of work, you can look at a potential purchase in terms of how many hours of work it will cost you. Somehow when I put things into that perspective, it seems like a much bigger investment than when I think strictly in dollars.
Remember: when calculating the cost of the thing you want to buy, add in taxes and any other miscellaneous fees. For example, the cost of refills or new filters or the type of pricey coffee you have to use with the fancy coffee maker you’re considering buying.
Putting it all together
So you’ve figured it out, and that article of clothing is going to cost you twenty hours of labor. Is it worth it? Go back to step 1 – how much are you going to get out of owning it? How much would you get out of a cheaper piece of clothing that only costs four hours of labor? Is the difference worth it? It depends. If you think that piece of clothing is going to help you get a promotion because your boss is a brand snob, or you’re sure you’ll wear it hundreds of times before it wears out, maybe so. But if you just really, really want it, and you have a history of tiring of clothes long before they’re worn out, maybe not.