Oct 222012

Last week I wrote about how people spend over $3,000 a year on impulse shopping. If we wish to spend less money and time, but still add value to what we purchase we have to understand how the passing of time will affect our perceptions of what we buy. Maybe you’re smart and are already doing this (^_^) But did you know that economists have a term for this?  Marginal utility is how satisfied we become with each additional use of a product over and over again.

For example after a rigorous #PFWorkout , we would probably be thirsty.  So drinking a glass of water would be very satisfying ヽ(´ー`)┌ But if we then drank another glass of water, it wouldn’t be as refreshing as our first. And if we continued to drink a  third glass, the satisfaction would be even less.  This is called diminishing marginal utility; when something gives us less pleasure each time we use it 🙁 Another example is leasing a new vehicle because the new-car feel and smell diminishes each time we drive it, yet our monthly payments don’t change.

On the other hand, learning to golf at first might be frustrating, difficult, and not very fun. But the more you golf and the longer you keep practicing the better you will get and the more fun you will likely have. Same can be said about other skills too like cooking. When children plead to their parents “Please, just ONE more level,” they are getting increasing marginal utility from their video game, because they feel that each additional level is more fun than the previous one.

Economists use marginal utility to determine how much of a product or service a consumer will buy. But we are not economists. We are consumers, savers, and investors. So here’s how we can use marginal utility to help make the most of our spending decisions. Whenever we are about to purchase something, we can ask ourselves what kind of marginal utility does this item have for us, diminishing or increasing? If it gives us more pleasure over time then that’s good because it adds value to our lives! Like purchasing stocks that pay dividends and starts to DRIP after a certain number of shares is reached,  or wine which tastes better as it ages, or collectibles. Everyone’s definition of utility is different, so learn what yours is.

Please don’t make the mistake of buying a new pair of shoes falsely believing that the joy you feel at the time of the purchase will last for many years.  Some individuals fool themselves into thinking Wow, only $149.95. Regular price is $250. I gotta have this. I’ll make sure to wear it a lot. when the reality is that they’ll wear it less than 10 times, probably forget about them in the closet, and then give them away many years later.

But unlike those people, we’re smarter. We know to factor in the diminishing marginal utility into the price. Honestly ask ourselves will the novelty eventually wear off,  and then finally decide if it’s worth our money. If it’s still worth the price tag then buy it, otherwise keep your money.  I’ve spent so far about $100 on clothing this year by thinking this way. I have a pair of nice shoes for when I go out with acquaintances,  but for work and casual walks I just wear them cheap $25 sneakers from Costco because they’re cheap, comfy, and fortunately my job doesn’t involve meeting with clients :0)