Dec 212015

Maximizing Utility

Earning money is a learned skill. If we put in the time and effort, we can learn to increase our earning potential. But making money is only half the battle.

An equally important aspect of personal finance is spending money. 🙂 Some people may not realize it, but spending is a learned skill as well. This means we can learn to become better shoppers. Knowing where to look for deals, buying in bulk, and eating with the seasons will naturally help us save. But if we buy an expensive blazer on sale and only wear it once, then are we really saving money, or are we spending our earnings on something we don’t really want to keep? ?

This is why part of being a skilled spender is understanding how much utility we’ll get out of our purchase. Utility refers to the total satisfaction received from consuming a good or service. For example I normally wouldn’t pay for a donut. ? In fact, even if it was free I probably still donut want one. I’m just not a big fan of the hole thing. ? But I’ll gladly pay for a Hershey’s Cookies ‘n’ Creme. That’s my favourite chocolate bar!? So to maximize my utility I would pick a Hershey’s over a donut given those two choices, even though the Hershey’s is likely more expensive. In other words, the value of my purchase comes from how much enjoyment it gives me, – not from what I paid for it. 😉

Consumers who understand this correlation between their spending and utility are smart. 🙂 They tend to be excellent spenders since they don’t waste their hard-earned income on rubbish that doesn’t give them much fulfillment. Economists even have a unit of measuring enjoyment or utility, called Utils. 😀 At the end of the day it’s not about maximizing savings, but it’s rather about maximizing happiness. 🙂 Instead of looking for deals on pricing, we should be looking for bargains on satisfaction. 😀

My $1,500 Gift

I noticed I had some money sitting around. So after considering what brings me enjoyment and satisfaction, I’ve decided this year for Christmas to buy myself some new stocks in my tax deferred account. 🙂 So last week I purchased 20 shares of media company Viacom Inc (VIAB,) and 10 shares of the well-known retailer, Wal-Mart (WMT.) The total cost came to about $1,500 USD, rounded to the nearest hundred. This will be my last investment of the year.