Dont think of price, think of cost per use(sergionajera.com)
sergionajera.com
Dont think of price, think of cost per use
https://sergionajera.com/dont-think-of-price-think-of-cost-per-use
184 comments
I don't think you're necessarily disagreeing. There's a factor that neither you nor the author are considering: value/$. Author is implicitly assuming that the higher cost equates to a higher value (clearly this is never a linear relationship).
So my friends call me the cheapest person they know, but I also think like the author. If there is something I am going to use a lot and the added value helps me, then I'll shell out more for it. Really we're talking about Boots Theory[0]. If you buy cheap rubbish then you'll buy frequently. If you buy quality you may only have to buy once a lifetime, even if it is 3-5x. With your phone, if all you care about is texting and making calls, yeah, you're not getting any added value paying more. If you're a person that takes a lot of pictures and values the camera, you will get added value (don't come at me with the "buy a dedicated camera" because you're not carrying that in your pocket everywhere and thus can't capture the same moments).
So if you wear boots every day, it's better to shell out for the boots that will last you a lifetime rather than ones that will last you a season.
[0] https://en.wikipedia.org/wiki/Boots_theory
So my friends call me the cheapest person they know, but I also think like the author. If there is something I am going to use a lot and the added value helps me, then I'll shell out more for it. Really we're talking about Boots Theory[0]. If you buy cheap rubbish then you'll buy frequently. If you buy quality you may only have to buy once a lifetime, even if it is 3-5x. With your phone, if all you care about is texting and making calls, yeah, you're not getting any added value paying more. If you're a person that takes a lot of pictures and values the camera, you will get added value (don't come at me with the "buy a dedicated camera" because you're not carrying that in your pocket everywhere and thus can't capture the same moments).
So if you wear boots every day, it's better to shell out for the boots that will last you a lifetime rather than ones that will last you a season.
[0] https://en.wikipedia.org/wiki/Boots_theory
> With your phone, if all you care about is texting and making calls, yeah, you're not getting any added value paying more.
If all you care about is texting, making calls, playing the occasional game[1], browsing the web, doing mobile banking, listening to music, watching videos, using social media, responding to work emails, viewing the occasional PDF, word processed document or spreadsheet sent over email, screencasting to a TV, using the device as a mobile hotspot, testing software you write for phones ... and a few more less frequent things (Like using employers paging app, employers internal systems) ... then you don't get any additional value spending more than $400 on a phone.
Don't ask me what you can do with a phone that costs more, because I haven't yet seen anyone do something on their phone that my <$400 phone cannot do.
[1] Wordle, for example, is insanely popular right now.
If all you care about is texting, making calls, playing the occasional game[1], browsing the web, doing mobile banking, listening to music, watching videos, using social media, responding to work emails, viewing the occasional PDF, word processed document or spreadsheet sent over email, screencasting to a TV, using the device as a mobile hotspot, testing software you write for phones ... and a few more less frequent things (Like using employers paging app, employers internal systems) ... then you don't get any additional value spending more than $400 on a phone.
Don't ask me what you can do with a phone that costs more, because I haven't yet seen anyone do something on their phone that my <$400 phone cannot do.
[1] Wordle, for example, is insanely popular right now.
I read on my phone that has 525 dpi and it seems to make a difference (I only found myself comfortable reading all books on my phone on my previous one which had similar dpi without noticing). Your $400 phone likely has half the dpi, worse screen in general and worse camera for a start. Just because you don't benefit from a better phone it doesn't mean nobody does.
And if you are bringing up games, wordle is an odd choice given that it's among the lightest popular games. My counter example is diablo immortal which just came out and I played some to check it out. I'm not convinced it would run well on your phone.
And if you are bringing up games, wordle is an odd choice given that it's among the lightest popular games. My counter example is diablo immortal which just came out and I played some to check it out. I'm not convinced it would run well on your phone.
I've played Diablo Immortal on my phone. As far as I can tell, it worked fine.
I used Wordle as an example of a game played by the masses. There are orders of magnitude more people who play things like Wordle than things like Diablo Immortal, hence my reason for using it as an example.
But still, gaming was poorly specified on my part; I should've mentioned that a $400 phone can play AAA titles, not that a $400 phone can play casual games.
Regarding the 525 dpi, you're correct, no $400 phone will have that. People who have trouble viewing a 300 dpi screen will have to pony up for a more expensive phone.
Where we've apparently landed is that $400 will let you play even AAA titles, but will not buy you 525 dpi.
I used Wordle as an example of a game played by the masses. There are orders of magnitude more people who play things like Wordle than things like Diablo Immortal, hence my reason for using it as an example.
But still, gaming was poorly specified on my part; I should've mentioned that a $400 phone can play AAA titles, not that a $400 phone can play casual games.
Regarding the 525 dpi, you're correct, no $400 phone will have that. People who have trouble viewing a 300 dpi screen will have to pony up for a more expensive phone.
Where we've apparently landed is that $400 will let you play even AAA titles, but will not buy you 525 dpi.
I usually buy a generation older phone. Currently on a oneplus 8 pro I bought for $300 that has essentially that DPI (513) and 120hz screen. I would never want to go back to a lower quality screen.
Yes, if you want crazy hight DPI and a SOTA camera you pay more than $400.
I don't play AAA games and I need a camera good enough that I can read text I've taken a picture of with. I haven't spent over $200 on a phone in about 10 years (I think it was the NA version of the HTC One X).
I don't play AAA games and I need a camera good enough that I can read text I've taken a picture of with. I haven't spent over $200 on a phone in about 10 years (I think it was the NA version of the HTC One X).
I bought a $400 phone and it is pretty much one of the fastest android phones. I never need its performance.
My main phone is an Xs Max that I bought around 15 months old. I just replaced the screen on it because I finally got unlucky on a drop that broke it. (I replaced the battery as well while I had it apart.)
The only real reason I’d consider upgrading is for the better camera on the newer phones. I think I paid $400-450 for that phone 2.5 years ago and just spent $125 on a screen and battery for a phone that will likely be great for another 1.5 years. Under $600 for 4 years seems pretty good.
While I was waiting on the screen to arrive, I bought a 2020 iPhone SE for $150. It’s perfectly usable and in some situations, I prefer the smaller form factor. (I hate the loss of FaceID.)
My wife’s 13 is better for sure, but only really noticeably in the camera.
The only real reason I’d consider upgrading is for the better camera on the newer phones. I think I paid $400-450 for that phone 2.5 years ago and just spent $125 on a screen and battery for a phone that will likely be great for another 1.5 years. Under $600 for 4 years seems pretty good.
While I was waiting on the screen to arrive, I bought a 2020 iPhone SE for $150. It’s perfectly usable and in some situations, I prefer the smaller form factor. (I hate the loss of FaceID.)
My wife’s 13 is better for sure, but only really noticeably in the camera.
Agreed. I'm using a pixel 4a that I bought in 2020 probably, after someone stole the Oneplus 3 that I bought used on Craigslist. The screen is cracker down the middle, but otherwise I literally haven't thought about what I'd pay more for. In fact, by paying more for an ostensibly better phone within the same lineup, it would be bigger and more annoying to use, have no headphone jack, have potentially worse battery life, and cost me a couple hundred more. I knew when I purchased it that there was a high likelihood of the screen getting cracked within the first 2 years, or stolen, and therefore my risk is lower by buying the cheapest viable current variant.
Did you skip the second half of my second paragraph? I discuss this and it seems you agree with me. Several users have responded this way now so I'm a bit confused. Should I have put in a break to clarify? Was it just too long to people skip?
Two things that change between phones that are still relevant are screen and camera quality. There is loosely a correlation between those and the total phone price.
iMessage is a legitimate significant value add to my life. Such a high percentage of my associates have iPhones that having an android is a legitimate harm for interactions (makes you less likely to be added to group chats)
I’m speaking as someone who has used both full time as well
I’m speaking as someone who has used both full time as well
Sure, but that's a network cost, not a phone cost, same as maintaining a membership to a golf club.
For many people the cost of remaining in an iPhone-exclusive network may be worth the extra money, for others they don't have any opportunity cost to leaving the iPhone-exclusive network.
Anecdotally, I also thought that my iMessage contacts were worth the extra money, until I found out all the people in the network used whatsapp far more frequently.
Turned out, the important conversations weren't happening on iMessage anyway, which was a surprise to me at the time.
For many people the cost of remaining in an iPhone-exclusive network may be worth the extra money, for others they don't have any opportunity cost to leaving the iPhone-exclusive network.
Anecdotally, I also thought that my iMessage contacts were worth the extra money, until I found out all the people in the network used whatsapp far more frequently.
Turned out, the important conversations weren't happening on iMessage anyway, which was a surprise to me at the time.
You can get an iMessage capable phone for $429 (the iPhone SE). And for much cheaper than that if you're willing to buy second hand (I'm currently using an iPhone 6S that cost me £100 a couple of years ago will still run the latest version of iOS until September when iOS 16 comes out)
what it gets you is iOS and hence access to the iOS/apple only apps.
I see so many people talk about the Boots theory, and while I don't disagree, there's another side to the story. What if you buy a really nice pair of boots that will last a lifetime and then a couple years later you move to a beach town where you wear sandals all day? Or what if you get paralyzed and have no need for durable shoes? The point is that life is unpredictable and both your circumstances and preferences can change quickly. Also, to extend the analogy further, imagine you have a dog that decides that your boots are a good chew toy. A dog can tear a hole in a pair of $50 boots almost as easily as a pair of $10 boots. I t doesn't matter if the boots last a lifetime of normal use if they get destroyed in six months by an abnormal event.
You've perfectly described one half of what makes me uneasy about "boots theory" which is the added risk of making fewer, larger purchases. The other half is that I find that often the more expensive choice does not have as much quality as needed. Boots theory depends on finding product choices where quality (ie durability, ie expected lifetime) increases faster than price. But my personal experience is that quality increases slower than price. I worry that most boots that cost say 5x the baseline budget boot might have less than 5x the "quality" and therefore expected lifetime. I'd guess my last boots were 5x price, 3x quality, so buying them cost me 2x the cost of the budget boot in terms of lost lifetime value. Finding that boot that has >5x quality is difficult and requires all sorts of extra work working out what reviews to trust etc, and risky because if you make a mistake you could be out of pocket for many multiples of the budget choice cost.
Boots theory is attractive because it's pretty obvious that more expensive products are nearly always better quality. But what actually matters is whether the increase in quality is greater than the increase in price, which I think is much less obvious.
Boots theory is attractive because it's pretty obvious that more expensive products are nearly always better quality. But what actually matters is whether the increase in quality is greater than the increase in price, which I think is much less obvious.
I have heard the advice to ‘buy twice’. The first time you buy a tool (e.g. boots), you’re really just trying it out, so buy a reasonably priced type. If you end up using the tool so often that you want a better one, then go ahead and buy the best type you can afford.
Yes, I was told the same. Lots of us have bought e.g. expensive power tools or electronics gadgets that we have hardly ever used!
It makes more sense if you look at it from the manufacturer/seller perspective. When customers are extremely price sensitive, what do you cut from your product?
There are plenty of answers to the question. But one approach is to make sure it looks as good and works as well for the return period, but doesn't last as long. E.g., you use less material, short the structure in favor of the surface, use lower-quality material, invest less in production quality, or offer shorter warranties.
For example, think of a raincoat. On one end of the spectrum we have the $0.99 disposable poncho, which is basically a garbage bag with a different cut. Up from there are all sorts of methods of improvement: https://www.rei.com/learn/expert-advice/rainwear.html
The better raincoats tend to be correlated with price because if a feature doesn't require additional expense, low-end manufacturers will just add it. And also because while many consumers aren't discerning about quality, many are, and will pay extra for it. Places like Wirecutter and Consumer Reports do the sort of testing that helps keep people honest.
That said, you're very right that there are many other things that influence price. A Burberry raincoat will be 10x the price of REI's favorite raincoats, but it won't last 10x as long. So Boots Theory, which is about good pairs of boots being more expensive than shoddy ones, is correct. But you can't work it the other way and claim that expensive things are always good in the way a night watchman thinks about his work boots.
There are plenty of answers to the question. But one approach is to make sure it looks as good and works as well for the return period, but doesn't last as long. E.g., you use less material, short the structure in favor of the surface, use lower-quality material, invest less in production quality, or offer shorter warranties.
For example, think of a raincoat. On one end of the spectrum we have the $0.99 disposable poncho, which is basically a garbage bag with a different cut. Up from there are all sorts of methods of improvement: https://www.rei.com/learn/expert-advice/rainwear.html
The better raincoats tend to be correlated with price because if a feature doesn't require additional expense, low-end manufacturers will just add it. And also because while many consumers aren't discerning about quality, many are, and will pay extra for it. Places like Wirecutter and Consumer Reports do the sort of testing that helps keep people honest.
That said, you're very right that there are many other things that influence price. A Burberry raincoat will be 10x the price of REI's favorite raincoats, but it won't last 10x as long. So Boots Theory, which is about good pairs of boots being more expensive than shoddy ones, is correct. But you can't work it the other way and claim that expensive things are always good in the way a night watchman thinks about his work boots.
> Or what if you get paralyzed and have no need for durable shoes?
While this is possible, I don't think that's really something you can go about with your life. Shit luck does happen. But you can keep your boots away from your dog.
You should acknowledge black swans, but you shouldn't plan your entire life around accounting for them.
While this is possible, I don't think that's really something you can go about with your life. Shit luck does happen. But you can keep your boots away from your dog.
You should acknowledge black swans, but you shouldn't plan your entire life around accounting for them.
This is a risk perspective (and a correct one). But the risk is quantifiable. It's generally probability x severity.
So what's my probability of moving to a beach town and never needing boots again? Probably very low, since I will be unlikely to move and even if I did I would still use my boots for things like hiking, working around the house, etc. The risk is therefore very small as well. The same can be applied to your other scenarios. Uncertainty makes us uncomfortable, but it can often be reasonably quantified.
So what's my probability of moving to a beach town and never needing boots again? Probably very low, since I will be unlikely to move and even if I did I would still use my boots for things like hiking, working around the house, etc. The risk is therefore very small as well. The same can be applied to your other scenarios. Uncertainty makes us uncomfortable, but it can often be reasonably quantified.
The boots theory also falls flat in regards to style. I've never seen a single person wear boots older than maybe 10 years. Paying 3x-5x on anything with the "once a lifetime" ideology only works for timeless stuff like wrenches, measuring cups, or anything that hasn't remotely changed since 1945. Which is a very small list.
I know someone with vintage Doc Martens from the 90s that they still wear. I personally find Doc Martens uncomfortable, but I am happy to introduce you to them so you can confirm that old boots do get worn.
I have a pair of dress shoes that are approaching ten years old. I spent more than I ever had on any pair of shoes but they continue to be comfortable and are easy enough to resole, clean, etc.
There are enough items in the world of apparel (I hesitate to use the word "fashion") that are timeless, at least on the scale of a human lifetime. My belt is twenty years old. My watch (due for service) is over twenty years old.
A good shirt will last longer than a cheap shirt. If you buy carefully (i.e. not just what's in "fashion" that season), it can work for a long time.
I had a US-made dress shirt that lasted me close to 15 years and I think I spent less than $40 on it. It's a shame those mills are long gone because few shirts last that long and I'm not willing to find out if spending $400 on a shirt gets me the same quality.
At some point clothes become a Veblen good. The idea is to spend on quality, not on marketing or details that don't add to the durability of the item.
I have a pair of dress shoes that are approaching ten years old. I spent more than I ever had on any pair of shoes but they continue to be comfortable and are easy enough to resole, clean, etc.
There are enough items in the world of apparel (I hesitate to use the word "fashion") that are timeless, at least on the scale of a human lifetime. My belt is twenty years old. My watch (due for service) is over twenty years old.
A good shirt will last longer than a cheap shirt. If you buy carefully (i.e. not just what's in "fashion" that season), it can work for a long time.
I had a US-made dress shirt that lasted me close to 15 years and I think I spent less than $40 on it. It's a shame those mills are long gone because few shirts last that long and I'm not willing to find out if spending $400 on a shirt gets me the same quality.
At some point clothes become a Veblen good. The idea is to spend on quality, not on marketing or details that don't add to the durability of the item.
Style only matters if part of your value proposition is the status an item confers. Using the earlier example, a $400 phone won't get you any cool kid points, but I'm assuming the OP is basing their decision on functionality more than form/status.
Utilitarian boots that can be resoled/repaired can absolutely last a very long time. I have a custom made pair of hiking boots that are a good 20 years old or more. If you're referring to fashion wear, you're quite right.
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The boots theory is questionable because the difference between shoes isn't that big. What the story actually talks about is that poor people barely have enough to cover their daily needs. The rich have more than enough and they use the surplus for truly "durable goods" like education.
Additionally, what if all you carry is a swiss army knife? It does everything you need and want it to do. Yet, when you lose or break that SAK, you're left with nothing to do your tasks with.
If my laptop, tablet, Garmin GPS or phone break, I am inconvenienced. As opposed to, completely dead in the water.
If my laptop, tablet, Garmin GPS or phone break, I am inconvenienced. As opposed to, completely dead in the water.
> With your phone, if all you care about is texting and making calls, yeah, you're not getting any added value paying more.
If that's all you care about, paying $400 like I do is silly - you can get it much cheaper.
The $400 phone I get takes fairly good photos (it's one of my main criteria in deciding on phones). Sure, if I want great photos, I'll have to pay more. I've decided that an extra $1100 over 3 years is not worth it for the marginal improvements in photo quality. But I know for some people it is, and that's fine.
Regarding the boots, we're both saying the same thing, which I think is not what the author is saying: You're fixing a time interval (e.g. 30 years), and calculating that it's cheaper to get the expensive boots vs the cumulative cost of cheap shoes in that time period.
When you fix the time interval (e.g. 30 years), comparing rates vs comparing absolute totals is equivalent.[3] What I typically see is that people take this equivalence and begin to compare against different time intervals (option X is for 2 years, option Y is for 5 years). This is what leads to so many silly blog posts saying you'll never get a better investment than your employer's ESPP benefit, because you get a huge return.[1][2]
In any case, the author isn't using the Boots Theory. He's looking at cost per use - and not utility/cost as a whole.
[1] https://thefinancebuff.com/employee-stock-purchase-plan-espp...
[2] I'm pro ESPP - but looking at those claimed return numbers is almost useless. It's trivial to make more money with, say, a mere 5% annualized return.
[3] When comparing investments, you also need the same input. It starts getting messy - which is why the standard advice is to convert to absolute dollars and compare.
If that's all you care about, paying $400 like I do is silly - you can get it much cheaper.
The $400 phone I get takes fairly good photos (it's one of my main criteria in deciding on phones). Sure, if I want great photos, I'll have to pay more. I've decided that an extra $1100 over 3 years is not worth it for the marginal improvements in photo quality. But I know for some people it is, and that's fine.
Regarding the boots, we're both saying the same thing, which I think is not what the author is saying: You're fixing a time interval (e.g. 30 years), and calculating that it's cheaper to get the expensive boots vs the cumulative cost of cheap shoes in that time period.
When you fix the time interval (e.g. 30 years), comparing rates vs comparing absolute totals is equivalent.[3] What I typically see is that people take this equivalence and begin to compare against different time intervals (option X is for 2 years, option Y is for 5 years). This is what leads to so many silly blog posts saying you'll never get a better investment than your employer's ESPP benefit, because you get a huge return.[1][2]
In any case, the author isn't using the Boots Theory. He's looking at cost per use - and not utility/cost as a whole.
[1] https://thefinancebuff.com/employee-stock-purchase-plan-espp...
[2] I'm pro ESPP - but looking at those claimed return numbers is almost useless. It's trivial to make more money with, say, a mere 5% annualized return.
[3] When comparing investments, you also need the same input. It starts getting messy - which is why the standard advice is to convert to absolute dollars and compare.
I’m not sure I follow your argument about ESPP.
It’s almost always the case that maxing out your ESPP contribution is a good idea instead of getting the money earlier and investing it in something else. It might even be worth getting a loan and still maxing out the contribution should you require more cashflow (because 10% loan is still cheaper than missing out on ~90% return). But the t return is limited to your max contribution percentage * your salary, therefore you still need to think about what to do with rest of your money.
How making more money in absolute terms in some other investment invalidate the above?
It’s almost always the case that maxing out your ESPP contribution is a good idea instead of getting the money earlier and investing it in something else. It might even be worth getting a loan and still maxing out the contribution should you require more cashflow (because 10% loan is still cheaper than missing out on ~90% return). But the t return is limited to your max contribution percentage * your salary, therefore you still need to think about what to do with rest of your money.
How making more money in absolute terms in some other investment invalidate the above?
> It’s almost always the case that maxing out your ESPP contribution is a good idea
I completely agree. I did say I'm pro-ESPP.
The key point you miss is that the amount you can make is somewhat capped - and for many companies, the cap is 5% of your salary. It's almost always nice, free money, but most of the times it's a relatively small amount of money. It should not rank high in your whole investment scheme.
To take things to an absurd level, I can offer you a deal: You give me $1 (and cannot give more), and 6 months later I'll give you $10. That's a 9000% rate of return. Fantastic deal, right? But is it a big part of your investment strategy? I hope not.
> How making more money in absolute terms in some other investment invalidate the above?
It doesn't invalidate it. The trouble is when people focus on the rate of return more than the absolute amount, and decide to pick ESPP instead of investments that will make more money. When you look at absolute amounts, it's clear that ESPP, even though is good, is inferior.
If you do both, then it's not a problem.
I completely agree. I did say I'm pro-ESPP.
The key point you miss is that the amount you can make is somewhat capped - and for many companies, the cap is 5% of your salary. It's almost always nice, free money, but most of the times it's a relatively small amount of money. It should not rank high in your whole investment scheme.
To take things to an absurd level, I can offer you a deal: You give me $1 (and cannot give more), and 6 months later I'll give you $10. That's a 9000% rate of return. Fantastic deal, right? But is it a big part of your investment strategy? I hope not.
> How making more money in absolute terms in some other investment invalidate the above?
It doesn't invalidate it. The trouble is when people focus on the rate of return more than the absolute amount, and decide to pick ESPP instead of investments that will make more money. When you look at absolute amounts, it's clear that ESPP, even though is good, is inferior.
If you do both, then it's not a problem.
Yeah, the standard ESPP I’ve seen (twice now) is essentially a series of call options (at 6, 12, 18 and 24 months in the future). If the option is not 15% in the money at vesting, the plan resets and it is replaced by one that is in the money.
Look at the price for actual call options at these intervals and you will have an approximate idea of the value of this financial instrument. It’s probably substantial, almost certainly more so than the opportunity cost on your money (unless you must meet critical expenses or pay off credit card debt). And if you always sell the same day you buy, the risk is quite low (if the plan is at its bottom and the stock price falls 15%, basically, but most ESPP dates are just after earnings which limits the types of surprises you’re in for).
Look at the price for actual call options at these intervals and you will have an approximate idea of the value of this financial instrument. It’s probably substantial, almost certainly more so than the opportunity cost on your money (unless you must meet critical expenses or pay off credit card debt). And if you always sell the same day you buy, the risk is quite low (if the plan is at its bottom and the stock price falls 15%, basically, but most ESPP dates are just after earnings which limits the types of surprises you’re in for).
> Always think in absolute dollars and not in rates.
Technically, you should think in probability weighted log-dollars to maximise your economy over the long term. (The Kelly criterion.)
In some cases this is equivalent to thinking in terms of fractions of your total wealth -- this is how the Kelly criterion is popularly presented.
For small ("everyday", as Bernoulli put it) amounts, this is equivalent to absolute dollars. So you're right, but it's a special case of a more general principle.
Technically, you should think in probability weighted log-dollars to maximise your economy over the long term. (The Kelly criterion.)
In some cases this is equivalent to thinking in terms of fractions of your total wealth -- this is how the Kelly criterion is popularly presented.
For small ("everyday", as Bernoulli put it) amounts, this is equivalent to absolute dollars. So you're right, but it's a special case of a more general principle.
That assumes your utility of money is logarithmic in amount, which is not necessarily true.
Looking at the wikipedia derivation of the Kelly criterion, taking the logarithm of the expected rate of return E[r] = (1 + fb)^p (1 - fa)^(1-p) is just to make finding the derivative easier (because logs are monotonic). Nothing else.
Common misconception. It does not.
It makes only two assumptions:
- Growth compounds, and
- More is better.
Under those two assumptions, log-dollars is what you need to optimise.
By coincidence, logarithmic utility of money would also lead to the same conclusion, but that's mathematical happenstance, and not something going into the model.
----
Another way to put it: the Kelly criterion prescribes logarithmic utility. It says that to maximise growth (under above assumptions) you ought to adopt logarithmic utility. If you don't, you get worse results.
It makes only two assumptions:
- Growth compounds, and
- More is better.
Under those two assumptions, log-dollars is what you need to optimise.
By coincidence, logarithmic utility of money would also lead to the same conclusion, but that's mathematical happenstance, and not something going into the model.
----
Another way to put it: the Kelly criterion prescribes logarithmic utility. It says that to maximise growth (under above assumptions) you ought to adopt logarithmic utility. If you don't, you get worse results.
That doesn't make sense, could you please elaborate? What do you mean by "growth compounds"? Do you mean that the value of 10% more is the same across all wealth levels, in which case you're implicitly assuming logarithmic utility?
By growth compounding I simply mean that the 2 % interest you earn today you earn not only on your starting capital, but also on the interest earnings of last year.
Another way to phrase it is that you reinvest your winnings.
Another way to phrase it is that you reinvest your winnings.
You’re not really disagreeing with the author.
* $/use isn’t really a rate in the way you’re describing with predatory financing. It’s not a cost hiding measure but one of many ways of estimating utility. Optimizing for price alone and not $/utility will bite you for lots of goods.
* A $400 phone used 100 times is $4/use and a $1000 phone used 100 times is $10/use so markets still have plenty of an effect.
* $/use isn’t really a rate in the way you’re describing with predatory financing. It’s not a cost hiding measure but one of many ways of estimating utility. Optimizing for price alone and not $/utility will bite you for lots of goods.
* A $400 phone used 100 times is $4/use and a $1000 phone used 100 times is $10/use so markets still have plenty of an effect.
Those seem expensive options. Why not take your phone out of your pocket more to check the time more? That would increase your use, and thus reduce the $/utility.
Thinking in terms of rate can still be used to wrongly justify things to yourself. Or can be used by others to make things seem like a good deal.
E.g. I should start a new hobby because I am definitely going to keep at if for 5 years! And then you don't.
E.g. I should start a new hobby because I am definitely going to keep at if for 5 years! And then you don't.
Actually the installments are a great way to think about purchases.
I have a budget of 500€ for sports per year. I use this on gyms, running shoes and what not.
I wanted to get into skiing so I bought some skis this year. It was about 700€.
Normally this doesn’t fit my budget. But I’m gonna keep these skis for at least 4 years.
Now the price is 175€/year. And I still have a bigger portion of my budget left for other sports.
I have a budget of 500€ for sports per year. I use this on gyms, running shoes and what not.
I wanted to get into skiing so I bought some skis this year. It was about 700€.
Normally this doesn’t fit my budget. But I’m gonna keep these skis for at least 4 years.
Now the price is 175€/year. And I still have a bigger portion of my budget left for other sports.
Amortising the cost over n years isn't the same as calculating a 'per use' rate though. (For many things it makes more sense, don't get me wrong, just pointing out the difference.)
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i mean if you have trouble not staying in a budget, I suppose that helps, just seems weird to tout that as a great way, if you are overall spending more money...
That's amortization?
This only works if you subtract 175 from your sports budget for the next 4 years. The problem with this thinking is that in 2 years you'll forget this commitment you made to yourself and end up giving yourself that full 500 again. Thus spending more money
For non-necessary payments I think of it in cheeseburgers. Would I rather have this five hundred dollar phone or eat a cheeseburger a hundred times?
Cheeseburger all day every day... but then I need to think about the quality of life degradation that 100 additional cheeseburgers would bring... sigh The rabbit hole never ends.
Sure, a hundred cheeseburgers in a day would be too much, but if the phone will last three years, that's about three burgers a month ... could be worth it!
What you're doing is considering opportunity costs, which is quite a good thing to do.
Cheeseburger, cheeseburger, cheeseburger, cheeseburger. Android no iPhone.
> Thinking in terms of rates is how people would fall for predatory installment purchases in the old days (you can have a new computer for just $2.5 a day!)
Or SaaS.
Or SaaS.
I think he's phrasing it poorly and you're not too far from where he is.
It's essentially a reworking of the "Boots" theory or poverty. Cheap things will typically wear out faster and need to replaced often.
Like in your phone example. You actually based and compared them on rate. $1000/2yrs is worse than $400/3yrs. Hell, even $1000/3yrs is worse than $400/2yrs.
That $2.50/day computer is going to wind up being $2.50 * number of days owned when it is finally replaced. It will take 800 days to match the value if the computer costs $2000 initially. If you keep that computer longer than 2 years, 2 months, and 9 days, you're now paying more than the value of the computer.
I think the author's suggestion would be to just pay the $2000 up front. It's a lot of money right now, but if you keep the machine for 3 years, that's like $1.83 per day you paid for the computer.
It's essentially a reworking of the "Boots" theory or poverty. Cheap things will typically wear out faster and need to replaced often.
Like in your phone example. You actually based and compared them on rate. $1000/2yrs is worse than $400/3yrs. Hell, even $1000/3yrs is worse than $400/2yrs.
That $2.50/day computer is going to wind up being $2.50 * number of days owned when it is finally replaced. It will take 800 days to match the value if the computer costs $2000 initially. If you keep that computer longer than 2 years, 2 months, and 9 days, you're now paying more than the value of the computer.
I think the author's suggestion would be to just pay the $2000 up front. It's a lot of money right now, but if you keep the machine for 3 years, that's like $1.83 per day you paid for the computer.
It's not backwards, but nothing is black and white.
An example of where looking at the cost per use makes sense is a gym membership. --If I consider the gym is worth, say, $5/visit and it costs $50/month, then I know I have to go at least 10 times a month to feel like I'm getting what I'm paying for.
On the other hand, yeah, my phone is not something that I'm going to try and figure out a cost per use, not the least because each use has a different intrinsic value to me (contacting someone is more valuable than checking the news, at least for me).
An example of where looking at the cost per use makes sense is a gym membership. --If I consider the gym is worth, say, $5/visit and it costs $50/month, then I know I have to go at least 10 times a month to feel like I'm getting what I'm paying for.
On the other hand, yeah, my phone is not something that I'm going to try and figure out a cost per use, not the least because each use has a different intrinsic value to me (contacting someone is more valuable than checking the news, at least for me).
> then I know I have to go at least 10 times a month to feel like I'm getting what I'm paying for.
This is also dangerously close to going backwards about it. Figuring out how much you need to do something purely to "get your money's worth" out of it is the sunk cost fallacy!
It's better to start from how many times you want to go to the gym, multiply it with your desired cost per visit, and then see if this total exceeds the cost of the membership.
I know that's what you were suggesting, but the way you presented it seems to me, well, backwards!
This is also dangerously close to going backwards about it. Figuring out how much you need to do something purely to "get your money's worth" out of it is the sunk cost fallacy!
It's better to start from how many times you want to go to the gym, multiply it with your desired cost per visit, and then see if this total exceeds the cost of the membership.
I know that's what you were suggesting, but the way you presented it seems to me, well, backwards!
>It's better to start from how many times you want to go to the gym
Which you may or may not get close to.
It's easier with subscriptions generally. It's a good idea to constantly be reviewing how much you're using the subscription and how much value/benefit you're getting from it. And of course, that equation can change over time if the subscription fee goes up or you stop using something as much.
Which you may or may not get close to.
It's easier with subscriptions generally. It's a good idea to constantly be reviewing how much you're using the subscription and how much value/benefit you're getting from it. And of course, that equation can change over time if the subscription fee goes up or you stop using something as much.
> Always think in absolute dollars and not in rates. $1000 is $1000 whether the cost per use is pennies or tens of dollars. Thinking in terms of rates is how people would fall for predatory installment purchases in the old days (you can have a new computer for just $2.5 a day!)
It depends on the opportunity cost. If you can get a house for 3600 a month, and the house appreciates in value in excess of the discount rate, then it's worth it to purchase that house.
It depends on the opportunity cost. If you can get a house for 3600 a month, and the house appreciates in value in excess of the discount rate, then it's worth it to purchase that house.
> It depends on the opportunity cost. If you can get a house for 3600 a month, and the house appreciates in value in excess of the discount rate, then it's worth it to purchase that house.
To add to this, there is also the opportunity cost of buying the more expensive option because the difference is only $1/day. Spending $365/year on the more expensive option is missing out on getting some other item[1] for $365/year.
Like I keep telling people who ask me why I don't pay for $FOO instead of using $BAR (where $FOO is "Windows", or "Office365", or some development tool and $BAR is OpenOffice, Vim/Emacs, git from the cli, Linux, etc).
The answer to any "Well $FOO only costs you $10/m, and if you are a professional using it as part of your profession, then you should be able to afford it" is "I can afford lots of things, doesn't mean I am necessarily going to buy them".
[1] Sticking with the phone example, taking a phone that works out to be cheaper by $365/year means that you could spend the extra money for redundancy (if your phone breaks, simply buy a new one in 30m), you get a drawing tablet (suddenly, whiteboarding during zoom meetings saves 30m - what's your hourly rate?), or you put it into a index tracker or stock or debt, and get a positive return.
To add to this, there is also the opportunity cost of buying the more expensive option because the difference is only $1/day. Spending $365/year on the more expensive option is missing out on getting some other item[1] for $365/year.
Like I keep telling people who ask me why I don't pay for $FOO instead of using $BAR (where $FOO is "Windows", or "Office365", or some development tool and $BAR is OpenOffice, Vim/Emacs, git from the cli, Linux, etc).
The answer to any "Well $FOO only costs you $10/m, and if you are a professional using it as part of your profession, then you should be able to afford it" is "I can afford lots of things, doesn't mean I am necessarily going to buy them".
[1] Sticking with the phone example, taking a phone that works out to be cheaper by $365/year means that you could spend the extra money for redundancy (if your phone breaks, simply buy a new one in 30m), you get a drawing tablet (suddenly, whiteboarding during zoom meetings saves 30m - what's your hourly rate?), or you put it into a index tracker or stock or debt, and get a positive return.
> It depends on the opportunity cost. If you can get a house for 3600 a month, and the house appreciates in value in excess of the discount rate, then it's worth it to purchase that house.
In this case, the absolute value analysis yields the same result, so it doesn't really "depend". I'm not saying you will always go wrong thinking in terms of rates. I'm saying you'll never go wrong thinking in terms of absolute values.
In this case, the absolute value analysis yields the same result, so it doesn't really "depend". I'm not saying you will always go wrong thinking in terms of rates. I'm saying you'll never go wrong thinking in terms of absolute values.
I've not heard of Engineering Economics before, can you recommend any great textbooks that are preferably standalone and have good examples?
Actually, most of them tend to have exactly that phrase in their title. Count me in the group who wishes far too late that he had held onto his copy instead of selling it at a discount to another student.
I think any introductory textbook on Managerial Economics would cover the same material. It's just that Engineering Economics books tend to use industrial plants and machinery for most of their examples.
I think any introductory textbook on Managerial Economics would cover the same material. It's just that Engineering Economics books tend to use industrial plants and machinery for most of their examples.
Apparently I did not keep my textbook, and don't remember which one I had.
This one[1] is probably decent (looking at its table of contents):
https://www.amazon.com/Engineering-Economic-Analysis-Donald-...
It's not a sophisticated topic. If you're a non-CS engineer who knows calculus and algebra well, this is one of the easiest topics in the curriculum.
Even if your calculus is poor, simply using the concepts with a spreadsheet will get you almost all the way.
This one[1] is probably decent (looking at its table of contents):
https://www.amazon.com/Engineering-Economic-Analysis-Donald-...
It's not a sophisticated topic. If you're a non-CS engineer who knows calculus and algebra well, this is one of the easiest topics in the curriculum.
Even if your calculus is poor, simply using the concepts with a spreadsheet will get you almost all the way.
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I'm not sure why absolute values are inherently easier to analyze than rates.
My income is a rate so I find normalizing on time to be pretty useful. I think $/use is pretty similar to normalizing on time
My income is a rate so I find normalizing on time to be pretty useful. I think $/use is pretty similar to normalizing on time
> I'm not sure why absolute values are inherently easier to analyze than rates.
Simple: $10K is greater than $8K. Analysis is complete.
Is 10% better than 8%? Not always. It depends on how much you put in and what the duration for those investments are. This is trivially true, yet so many people ignore this aspect.[1] People also get confused between simple and compound rates.
In a lot of real world investment situations, the inputs and timelines aren't the same. In real estate there are plenty of investments that require a minimum investment and have a fixed timeline (cannot withdraw in that time period). Quickly: Is a $50K investment at 8% compound rate over 7 years better than a $40K investment at 10% simple rate over 5 years?
There are also investment strategies that require periods of holding cash. It's not trivial to compare those with, say, an S&P 500 investment using only rates.
The standard taught in the engineering economics classes:
1. Fix your time interval to whatever is relevant for your situation.
2. Compute the cash you will have at the end of that time interval (i.e. absolute amount)
3. Go with the higher one.
[1] Yes - even in the absolute analysis, you should have the same timeline, and technically it's equivalent to a rate comparison in that sense. But I've found that when people do the absolute analysis, they never seem to forget to account for the timelines being the same.
Simple: $10K is greater than $8K. Analysis is complete.
Is 10% better than 8%? Not always. It depends on how much you put in and what the duration for those investments are. This is trivially true, yet so many people ignore this aspect.[1] People also get confused between simple and compound rates.
In a lot of real world investment situations, the inputs and timelines aren't the same. In real estate there are plenty of investments that require a minimum investment and have a fixed timeline (cannot withdraw in that time period). Quickly: Is a $50K investment at 8% compound rate over 7 years better than a $40K investment at 10% simple rate over 5 years?
There are also investment strategies that require periods of holding cash. It's not trivial to compare those with, say, an S&P 500 investment using only rates.
The standard taught in the engineering economics classes:
1. Fix your time interval to whatever is relevant for your situation.
2. Compute the cash you will have at the end of that time interval (i.e. absolute amount)
3. Go with the higher one.
[1] Yes - even in the absolute analysis, you should have the same timeline, and technically it's equivalent to a rate comparison in that sense. But I've found that when people do the absolute analysis, they never seem to forget to account for the timelines being the same.
Cost per use absolutely makes sense when the items being compared have different lifespans. Although that's more estimating depreciation than what the article is talking about.
Do you remember the title of the book?
>I personally pay less than $400 a phone and keep it for over three years. Paying $1000 for a phone just two years is not an improvement.
Either you aren't using your phone much or you are needlessly suffering with inferior product. Wearing cheap shoes for years when you could afford comfortable high quality shoes is not a virtue. Same goes with tools we use.
Either you aren't using your phone much or you are needlessly suffering with inferior product. Wearing cheap shoes for years when you could afford comfortable high quality shoes is not a virtue. Same goes with tools we use.
Have you considered that other people have different needs than you? My last phone (Nokia 640) cost about $200 and I kept it for 6 years. My current Samsung A12 is better in every respect and cost about $170 through AT&T. I'll probably keep it at least 5 years. I honestly can't imagine what usable benefit a $1,000 phone would provide.
Yes, you can also walk bare feet, but that doen't make you any more virtuous. How did you invest that $900 you so diligently saved?
>I honestly can't imagine what usable benefit a $1,000 phone would provide.
unless you never leave your house you lack imagination pretty hard. how about just having 5G speeds for internet? what about actually quality camera? how about any of the millions of interactions a modern smartphone allows? yeah you (probably) can do most of thaty shit with old phone, but you thats like using 6 year old computer
>I honestly can't imagine what usable benefit a $1,000 phone would provide.
unless you never leave your house you lack imagination pretty hard. how about just having 5G speeds for internet? what about actually quality camera? how about any of the millions of interactions a modern smartphone allows? yeah you (probably) can do most of thaty shit with old phone, but you thats like using 6 year old computer
Have you seen what has happened to the market for fuel inefficient vehicles lately?
> Have you seen what has happened to the market for fuel inefficient vehicles lately?
I have not. What has happened? Have SUVs stopped being the most popular class of passenger cars being sold?
I have not. What has happened? Have SUVs stopped being the most popular class of passenger cars being sold?
The demand for the big diesel SUVs that get about 9 miles to a gallon has gone away, and people are trying to sell them for 20% of what they'd bring a year ago.
That sounds... odd. The big diesel SUVs and pickups that get around 9MPG are typically fairly old and used mainly as tow vehicles for businesses or people with large boats, horse trailers, etc. The acquisition cost of a more fuel efficient vehicle that has similar horsepower, torque and towing capacity is far higher than just paying more at the pump.
This isn't passing the smell test. Do you have examples of it happening?
This isn't passing the smell test. Do you have examples of it happening?
> The demand for the big diesel SUVs that get about 9 miles to a gallon has gone away, and people are trying to sell them for 20% of what they'd bring a year ago.
Any idea what they are replacing them with? Diesel's are pretty fuel-efficient after all, compared to petrol.
Any idea what they are replacing them with? Diesel's are pretty fuel-efficient after all, compared to petrol.
You will use the computer for more than 400 days, so the rate is useful.
Rates are usually only good when comparing apples with apples. So if you know you'll use the computer for N days, and the alternative is roughly for the same N, then comparing rates and comparing absolute numbers is an identical analysis.
But if you're comparing using a computer for 5 years vs eating cheeseburgers over 10 years, using rates become more challenging, and is prone to faulty analyses.
My point, though, is that cost per use is not usually a helpful metric.
But if you're comparing using a computer for 5 years vs eating cheeseburgers over 10 years, using rates become more challenging, and is prone to faulty analyses.
My point, though, is that cost per use is not usually a helpful metric.
> My point, though, is that cost per use is not usually a helpful metric.
I think it can be: say you're comparing two cars with the same fuel efficiency, one's more expensive and more luxurious (or to make the same efficiency less contrived, you're considering the 'luxury interior package' upgrade) - roughly how many times (or hours) will you use the car over your ownership; it might be helpful to consider the per use (or hour) cost of that extra comfort.
Or (as a hobbyist/DIYer) a fancier tool vs. Draper/Silverline/Amtech/unnamed clones that'll get it done but won't last nor make you feel warm and fuzzy while using them. How many times will you actually need a ⅑" tartan paint brush with 90deg handle? Maybe it's quite expensive to get the better one that will last for the one time you'll use it. (I'm not very good at that one - know I'd hate myself the second time used it.)
I think it can be: say you're comparing two cars with the same fuel efficiency, one's more expensive and more luxurious (or to make the same efficiency less contrived, you're considering the 'luxury interior package' upgrade) - roughly how many times (or hours) will you use the car over your ownership; it might be helpful to consider the per use (or hour) cost of that extra comfort.
Or (as a hobbyist/DIYer) a fancier tool vs. Draper/Silverline/Amtech/unnamed clones that'll get it done but won't last nor make you feel warm and fuzzy while using them. How many times will you actually need a ⅑" tartan paint brush with 90deg handle? Maybe it's quite expensive to get the better one that will last for the one time you'll use it. (I'm not very good at that one - know I'd hate myself the second time used it.)
> I think it can be: say you're comparing two cars with the same fuel efficiency, one's more expensive and more luxurious (or to make the same efficiency less contrived, you're considering the 'luxury interior package' upgrade) - roughly how many times (or hours) will you use the car over your ownership; it might be helpful to consider the per use (or hour) cost of that extra comfort.
You can get away with this because you are fixing the time interval: You'll presumably drive both cars the same amount, for the same number of hours. Hence a total amount vs per use (or per hour or per year) gives the same result. What the author is doing is comparing per use cost for very different entities, with unclear timelines.
Ask a random person: Is it better to use your phone for 2 cents, or eat an $8 McDonald's meal?[1] Putting aside that both serve very different needs, the question is missing the component: Over what time frame? The phone will die one day, but I'll always have the option to eat McDonald's.
[1] I have no idea where he lives where a McDonald's meal is over $14...
You can get away with this because you are fixing the time interval: You'll presumably drive both cars the same amount, for the same number of hours. Hence a total amount vs per use (or per hour or per year) gives the same result. What the author is doing is comparing per use cost for very different entities, with unclear timelines.
Ask a random person: Is it better to use your phone for 2 cents, or eat an $8 McDonald's meal?[1] Putting aside that both serve very different needs, the question is missing the component: Over what time frame? The phone will die one day, but I'll always have the option to eat McDonald's.
[1] I have no idea where he lives where a McDonald's meal is over $14...
Yes, I don't think it's helpful for comparing apples and oranges, just for considering whether you want one thing at all, or which among a single class of thing.
An example I've often used before is a Netflix subscription - I wouldn't pay much more for it, but a lot of things look like a bad deal/much lower utility in comparison to it. Pint of beer = half a month's Netflix, for example. It's not helpful, it's a recipe for overpaying for some things and unnecessarily depriving yourself of others.
An example I've often used before is a Netflix subscription - I wouldn't pay much more for it, but a lot of things look like a bad deal/much lower utility in comparison to it. Pint of beer = half a month's Netflix, for example. It's not helpful, it's a recipe for overpaying for some things and unnecessarily depriving yourself of others.
It should really be "cost per meaningful use" or "cost per productive use". Being able to check your news feed on your phone 60 times a day probably doesn't confer as much utility as being able to check your friends' messages 10 times a day.
I don't see why you got downvoted, maybe by a resentful droog or two. This is a fantastic addendum.
The overall idea is better expressed as – value stuff based on how important it is to you vs just the dollar amount associated with it, which is pretty generic and obvious advice. Trying to simplify it down to "cost per use" or some other similar metric is pointless. Is the $3000 flight ticket that you use once worth more or less than a $1000 phone you use thousands of times or a $5 coffee you drink in one gulp? No one other than you can answer this for yourself.
of course it's not possible to come up with an ironclad set of rules on how best to spend money, especially not in the space of a single blog post. but that doesn't mean it isn't worth trying. if nothing else, it helps to become more intentional about how you spend your money, which most people would probably benefit from.
I personally don't find the concept described in this blog post very useful. I prefer to think in terms of annualized/amortized costs, especially within the perspective of money-stress-time tradeoffs. I could see others finding it helpful though.
I personally don't find the concept described in this blog post very useful. I prefer to think in terms of annualized/amortized costs, especially within the perspective of money-stress-time tradeoffs. I could see others finding it helpful though.
Along these lines, I find that not many people correctly calculate the cost-per-use of their car. They only think of the cost of gasoline burned, and maybe tolls and parking. They don't think about the cost of insurance divided by the number of trips, or the capital cost of the car amortized over the years of ownership. If people thought hard about the cost-per-use of driving, then other transportation options start to look more attractive.
Some of us have calculated it... and it is frightening! I have an Excel sheet of all the cars I've ever purchased or leased, and the cost per mile of them, and it is staggering. Thankful to have enjoyed some fun cars, I cannot imagine just how much of this economy is powered solely by this car dependency we have in the US.
I've also estimated my cost to commute to my tech job in the suburbs (thankfully full-time remote now), and it was staggering how much that was including insurance, maintenance, tolls, electricity, etc., compared to free options/transit/corporate bus/remote work/my daily mortgage cost.
I've also estimated my cost to commute to my tech job in the suburbs (thankfully full-time remote now), and it was staggering how much that was including insurance, maintenance, tolls, electricity, etc., compared to free options/transit/corporate bus/remote work/my daily mortgage cost.
> not many people correctly calculate the cost-per-use of their car
Cost-per-use by itself is fairly meaningless, costs needs to be compared against value-per-use.
What is the worth of: a visit to my friends; taking a surfboard to the beach; taking a load of firewood to my parents; an emergency 2AM visit to a suicidal acquaintance; taking my nephew and his friends to the skatepark; helping a friend move; picking up a Craigslist chair.
Other transport options usually have severe limitations on availability, flexibility, cost, destination, load, etcetera. Optionality and peace-of-mind has huge value too (i.e. availability if urgently required, even if it happens that nothing urgent comes up).
Last time I mentioned on HN how useful a car is, someone suggested hiring a car instead, which is ridiculously more expensive and extremely inconvenient (at least where I live).
Disclaimer: I am carless at present. The non-financial costs are extremely high.
Cost-per-use by itself is fairly meaningless, costs needs to be compared against value-per-use.
What is the worth of: a visit to my friends; taking a surfboard to the beach; taking a load of firewood to my parents; an emergency 2AM visit to a suicidal acquaintance; taking my nephew and his friends to the skatepark; helping a friend move; picking up a Craigslist chair.
Other transport options usually have severe limitations on availability, flexibility, cost, destination, load, etcetera. Optionality and peace-of-mind has huge value too (i.e. availability if urgently required, even if it happens that nothing urgent comes up).
Last time I mentioned on HN how useful a car is, someone suggested hiring a car instead, which is ridiculously more expensive and extremely inconvenient (at least where I live).
Disclaimer: I am carless at present. The non-financial costs are extremely high.
> What is the worth of: a visit to my friends; taking a surfboard to the beach; taking a load of firewood to my parents; an emergency 2AM visit to a suicidal acquaintance; taking my nephew and his friends to the skatepark; helping a friend move; picking up a Craigslist chair.
In urban Europe (the one I'm familiar with, at least), I find public transit, then renting cars/vans and straight up calling cabs/Uber when needed is still absurdly cheaper, particularly with European gas, insurance and maintenance prices, and somewhat limited parking space. Sure, the odd 100€ cab fare to urgently go somewhere far hurts in one shot, but according to my own numbers for where I live, just having a used car lying around "just in case" without any mileage is 304€/mo.
In urban Europe (the one I'm familiar with, at least), I find public transit, then renting cars/vans and straight up calling cabs/Uber when needed is still absurdly cheaper, particularly with European gas, insurance and maintenance prices, and somewhat limited parking space. Sure, the odd 100€ cab fare to urgently go somewhere far hurts in one shot, but according to my own numbers for where I live, just having a used car lying around "just in case" without any mileage is 304€/mo.
> having a used car lying around "just in case" without any mileage is 304€/mo
I fully understand that we are comparing apples and grapefruit here, but in my case, living in rural USA, that would cost less than $50/month and most of that would be the cost of insurance.
I fully understand that we are comparing apples and grapefruit here, but in my case, living in rural USA, that would cost less than $50/month and most of that would be the cost of insurance.
> Cost-per-use by itself is fairly meaningless, costs needs to be compared against value-per-use.
That implies the only alternative is not doing things? You can just order a taxi?
I think for many car users the total 'cost per use' of their car exceeds the average taxi fare they'd pay for those journeys.
Nevermind considering public transportation.
That implies the only alternative is not doing things? You can just order a taxi?
I think for many car users the total 'cost per use' of their car exceeds the average taxi fare they'd pay for those journeys.
Nevermind considering public transportation.
> You can just order a taxi?
A trip to my parents and back is ~$180 by Uber - I go more than once a week so that would be way more than $10k per year.
And an Uber doesn’t come with a tow ball: I often use a trailer out there or back (I mentioned firewood, but also dump runs and moving stuff from/to storage).
The Uber has a variable wait-time, and is not useful if I have to go anywhere urgently, and an Uber often values my wasted time at $0. Note when I live in large cities I do choose to use either Uber or car, depending on costs versus gains.
An Uber is no use to take my disabled Mum anywhere.
I think it is condescending to suggest whacky alternatives to most people (public transport, taxis, bikes, etcetera). Most people have weighed up the alternatives and made an expensive choice because of the value provided. The majority of people are not wasting money and buying status symbols.
> Nevermind considering public transportation.
Bloody hell, that is a moronically inane comment. I can catch a bus to my parents. There is one bus a day - it arrives there in the evening at 5:30PM, at it leaves from my parents at 7:30AM, and there is a nice long walk at the end, which is fun in a storm. Oh, the bus only runs on weekdays, not the weekends. I don’t get to choose where my parents live. Public transport is never urgent, good luck if my parents need my help suddenly. I can’t transport anything I can’t carry, and it wastes hours of time each way (indirect, slow, annoying).
Public transport has its uses (I do use Christchurch buses), but it simply doesn’t support many uses (a load of firewood), and it takes a lot of time, plus extra risks (the bus at my parents didn’t turn up the other day - I don’t know why).
Did I mention a car has plenty of other uses? My parents are just one of many similarly valuable uses. I do own a very cheap small-engine second-hand car, not a status symbol. Did I mention a car is available at night, when public transport has stopped running?
Edit: PS: this weekend there are 100km/h winds, and driving cold rain. Walking and waiting at busstops can be very very unpleasant in many cities. Perhaps you have access to a metro, but most people don’t.
Edit 2: I hope you are not an engineer. I feel that in my comment that you answered, I said why I use a laptop with Illustrator, and you replied telling me I could use an etch-a-sketch and my mobile phone camera.
A trip to my parents and back is ~$180 by Uber - I go more than once a week so that would be way more than $10k per year.
And an Uber doesn’t come with a tow ball: I often use a trailer out there or back (I mentioned firewood, but also dump runs and moving stuff from/to storage).
The Uber has a variable wait-time, and is not useful if I have to go anywhere urgently, and an Uber often values my wasted time at $0. Note when I live in large cities I do choose to use either Uber or car, depending on costs versus gains.
An Uber is no use to take my disabled Mum anywhere.
I think it is condescending to suggest whacky alternatives to most people (public transport, taxis, bikes, etcetera). Most people have weighed up the alternatives and made an expensive choice because of the value provided. The majority of people are not wasting money and buying status symbols.
> Nevermind considering public transportation.
Bloody hell, that is a moronically inane comment. I can catch a bus to my parents. There is one bus a day - it arrives there in the evening at 5:30PM, at it leaves from my parents at 7:30AM, and there is a nice long walk at the end, which is fun in a storm. Oh, the bus only runs on weekdays, not the weekends. I don’t get to choose where my parents live. Public transport is never urgent, good luck if my parents need my help suddenly. I can’t transport anything I can’t carry, and it wastes hours of time each way (indirect, slow, annoying).
Public transport has its uses (I do use Christchurch buses), but it simply doesn’t support many uses (a load of firewood), and it takes a lot of time, plus extra risks (the bus at my parents didn’t turn up the other day - I don’t know why).
Did I mention a car has plenty of other uses? My parents are just one of many similarly valuable uses. I do own a very cheap small-engine second-hand car, not a status symbol. Did I mention a car is available at night, when public transport has stopped running?
Edit: PS: this weekend there are 100km/h winds, and driving cold rain. Walking and waiting at busstops can be very very unpleasant in many cities. Perhaps you have access to a metro, but most people don’t.
Edit 2: I hope you are not an engineer. I feel that in my comment that you answered, I said why I use a laptop with Illustrator, and you replied telling me I could use an etch-a-sketch and my mobile phone camera.
> A trip to my parents and back is ~$180 by Uber - I go more than once a week so that would be way more than $10k per year.
So you do the 'cost per use' calculation, and probably you find that car ownership is a better deal than a taxi? Nobody's saying it's a way of showing a purchase is always wrong!
> And an Uber doesn’t come with a tow ball: I often use a trailer out there or back (I mentioned firewood, but also dump runs and moving stuff from/to storage).
Obviously you compare like for like. Probably no taxi tows, but you could hire a car for the weekend.
If you're doing this every week and with other uses I expect owning a car is still the best option, I just don't know why you're trying so hard to miss the point.
So you do the 'cost per use' calculation, and probably you find that car ownership is a better deal than a taxi? Nobody's saying it's a way of showing a purchase is always wrong!
> And an Uber doesn’t come with a tow ball: I often use a trailer out there or back (I mentioned firewood, but also dump runs and moving stuff from/to storage).
Obviously you compare like for like. Probably no taxi tows, but you could hire a car for the weekend.
If you're doing this every week and with other uses I expect owning a car is still the best option, I just don't know why you're trying so hard to miss the point.
It feels like you are pushing a political agenda. It seems to me that you are not responding in good faith.
> tows, but you could hire a car for the weekend.
I already commented “hiring a car instead, which is ridiculously more expensive and extremely inconvenient (at least where I live).”.
I gave examples where hiring a car doesn’t make sense (urgency, emergency, optionality). There is no local car hire, so getting to and from a car hire would cost me significant time.
I think your point is that sometimes people just go with the easiest option, without thinking of “cheaper” alternatives. I own a car, but I can’t use it at present, so I am currently forced to use alternatives. I can categorically state that the costs of other options are extremely high for my situation. The real costs are not financial, they are the things I can’t easily do because the alternative options usually have constraints that suck.
Edit: Hiring a car to do a load of wood makes no financial sense: I would be better off just buying wood instead. Moving wood with my own car makes financial sense because the marginal cost of using my car is low, and the wood and it’s transport mostly only costs my time. Converting my time to wood makes sense in my context for some friends and family.
> So you do the 'cost per use' calculation
No. My original comment is that looking at costs alone is silly. The value you get also matters - in my case the high value of things that my own car gives me that alternatives do not give me (or alternatives could, at a stupidly high financial/time/other cost).
The example I gave is the ability to rush out to my parents or help my friends after midnight, which has a very high optionality value to me. Uber is expensive, incurs delays, and causes my precious time to be wasted. Perhaps you could suggest I hire a car for 365 days to cover that /sarcasm.
I just don’t understand your condescending tone. I think it is obvious that many people use cars because the value they get far outweighs the costs, and many people have looked at the alternatives and found they don’t stack up for them. I am one of those people. Why persist on suggesting alternatives to me.
Essentially I think the original article is a really flawed way of looking at things. I use my T-shirt for 16 hours a day, so I should pay thousands for the perfect T-shirt?
> tows, but you could hire a car for the weekend.
I already commented “hiring a car instead, which is ridiculously more expensive and extremely inconvenient (at least where I live).”.
I gave examples where hiring a car doesn’t make sense (urgency, emergency, optionality). There is no local car hire, so getting to and from a car hire would cost me significant time.
I think your point is that sometimes people just go with the easiest option, without thinking of “cheaper” alternatives. I own a car, but I can’t use it at present, so I am currently forced to use alternatives. I can categorically state that the costs of other options are extremely high for my situation. The real costs are not financial, they are the things I can’t easily do because the alternative options usually have constraints that suck.
Edit: Hiring a car to do a load of wood makes no financial sense: I would be better off just buying wood instead. Moving wood with my own car makes financial sense because the marginal cost of using my car is low, and the wood and it’s transport mostly only costs my time. Converting my time to wood makes sense in my context for some friends and family.
> So you do the 'cost per use' calculation
No. My original comment is that looking at costs alone is silly. The value you get also matters - in my case the high value of things that my own car gives me that alternatives do not give me (or alternatives could, at a stupidly high financial/time/other cost).
The example I gave is the ability to rush out to my parents or help my friends after midnight, which has a very high optionality value to me. Uber is expensive, incurs delays, and causes my precious time to be wasted. Perhaps you could suggest I hire a car for 365 days to cover that /sarcasm.
I just don’t understand your condescending tone. I think it is obvious that many people use cars because the value they get far outweighs the costs, and many people have looked at the alternatives and found they don’t stack up for them. I am one of those people. Why persist on suggesting alternatives to me.
Essentially I think the original article is a really flawed way of looking at things. I use my T-shirt for 16 hours a day, so I should pay thousands for the perfect T-shirt?
> I use my T-shirt for 16 hours a day, so I should pay thousands for the perfect T-shirt?
Not if it (as it won't) doesn't make it correspondingly better, but I think it is a good example, because yes, if you're anything like me we probably shouldn't balk at the price of basic clothes so much given their utility.
I think the times I've most successfully applied this line of thinking was to cutlery, and to bedding.
Not if it (as it won't) doesn't make it correspondingly better, but I think it is a good example, because yes, if you're anything like me we probably shouldn't balk at the price of basic clothes so much given their utility.
I think the times I've most successfully applied this line of thinking was to cutlery, and to bedding.
>That implies the only alternative is not doing things?
The option is often not to do things. Leave aside the fact that I live in a semi-rural area. Even if I lived closer into the city, there are a bunch of outdoor activities (hiking/kayaking/etc.) that I do which require a car. Could I rent? In some cases with the caveat that the vehicle may not have an appropriate rack to transport a boat for example. And I probably can't just wake up Saturday morning and decide to go somewhere.
My observation is that people do indeed tend not to do activities that have a lot of friction for them. And it goes both ways. I'm very selective about making the effort to go into the city for evening activities.
The option is often not to do things. Leave aside the fact that I live in a semi-rural area. Even if I lived closer into the city, there are a bunch of outdoor activities (hiking/kayaking/etc.) that I do which require a car. Could I rent? In some cases with the caveat that the vehicle may not have an appropriate rack to transport a boat for example. And I probably can't just wake up Saturday morning and decide to go somewhere.
My observation is that people do indeed tend not to do activities that have a lot of friction for them. And it goes both ways. I'm very selective about making the effort to go into the city for evening activities.
I don't understand why this is so controversial - you compare the cost of the owned car to the cost of alternative way of doing whatever weird and wonderful requirements exist - if there's literally no other way then call it infinite.
I don't think anybody and certainly not I ever said 'a standard taxi or bus will do for everybody in all circumstances'.
To me it's a helpful comparison to make (even though I'm not very good at obeying its advice) because I have the need so little that however exorbitant a taxi or hire car might seem at the time, it beats year-round insurance, tax, depreciation, etc. hands down.
(I obey it in the sense that I don't own a vehicle, just not in justifying taxis as readily as I ought.)
I don't think anybody and certainly not I ever said 'a standard taxi or bus will do for everybody in all circumstances'.
To me it's a helpful comparison to make (even though I'm not very good at obeying its advice) because I have the need so little that however exorbitant a taxi or hire car might seem at the time, it beats year-round insurance, tax, depreciation, etc. hands down.
(I obey it in the sense that I don't own a vehicle, just not in justifying taxis as readily as I ought.)
> the capital cost of the car amortized over the years of ownership
How many years will I own my car? How do you know?
Maybe some folks buy a new car on a regular basis, but others will keep a car as long as they can. The denominator isn't known for everyone here.
And then there's inflation, recession, etc. which can make the numerator unclear too.
How many years will I own my car? How do you know?
Maybe some folks buy a new car on a regular basis, but others will keep a car as long as they can. The denominator isn't known for everyone here.
And then there's inflation, recession, etc. which can make the numerator unclear too.
All true. But if you're one of the folks who regularly buys a new car, you kind of know that. If you're one who keeps a car as long as you can, you know that too. So you can make, not totally accurate calculations, but calculations that are enough within the ballpark to show you whether transit is an economically interesting alternative.
How accurate is "enough within the ballpark" though? This isn't something where an order-of-magnitude estimate or even a factor of (say) 2 error is negligible. Can you really predict the future to within like 10% accuracy? How accurate do you think you need to be?
Let's do something resembling reality. Say your subway transportation costs around $13/weekday. (I just looked up a random round-trip BART ticket for the Bay Area, in case that makes it easier for people here to relate.) Probably more like $20/weekday if you add bus and parking.
Now say the drive for that is around 30mi. At $4/gal gas (pre-2022) and 30 mi/gal the driving cost might cost you $4/day just for gas (probably optimistic). Say you buy a $35k car and plan to keep it 8 years, then sell it for $5k. That'd cost you roughly $14.50/weekday in depreciation. Add that to the gas price and it's around $19.50/day.
I haven't even accounted for maintenance yet (on the car side), nor for non-work rides (on the public transportation side), but so now you have ~$20/day vs. ~$20/day. How in the world do you decide?
Now consider gas prices shot up > 50% in a year. And we have a recession coming and you might lose your job (less gas usage, I guess?) and so decide to keep your car longer. And we have inflation. And your car might get totaled in between... or not. And you might have random stuff come up that increase costs on each side... or not. Exactly how do you do the math here to figure out which one is more beneficial?!
I'm not saying you can't do the math, but as I see it, every factor adds in such a huge margin of error into both the numerator and the denominator that the result of the computation easily becomes pretty useless. And this is before even accounting for convenience/QoL improvements that you can't put into numbers... what's the value of being able to get your kids their favorite meal, or show your friends around town, or...
Let's do something resembling reality. Say your subway transportation costs around $13/weekday. (I just looked up a random round-trip BART ticket for the Bay Area, in case that makes it easier for people here to relate.) Probably more like $20/weekday if you add bus and parking.
Now say the drive for that is around 30mi. At $4/gal gas (pre-2022) and 30 mi/gal the driving cost might cost you $4/day just for gas (probably optimistic). Say you buy a $35k car and plan to keep it 8 years, then sell it for $5k. That'd cost you roughly $14.50/weekday in depreciation. Add that to the gas price and it's around $19.50/day.
I haven't even accounted for maintenance yet (on the car side), nor for non-work rides (on the public transportation side), but so now you have ~$20/day vs. ~$20/day. How in the world do you decide?
Now consider gas prices shot up > 50% in a year. And we have a recession coming and you might lose your job (less gas usage, I guess?) and so decide to keep your car longer. And we have inflation. And your car might get totaled in between... or not. And you might have random stuff come up that increase costs on each side... or not. Exactly how do you do the math here to figure out which one is more beneficial?!
I'm not saying you can't do the math, but as I see it, every factor adds in such a huge margin of error into both the numerator and the denominator that the result of the computation easily becomes pretty useless. And this is before even accounting for convenience/QoL improvements that you can't put into numbers... what's the value of being able to get your kids their favorite meal, or show your friends around town, or...
> I'm not saying you can't do the math, but as I see it, every factor adds in such a huge margin of error into both the numerator and the denominator that the result of the computation easily becomes pretty useless.
You just described TCO, unpredictability in TCO, capital intensivity and several kinds of risk. All super useful heuristics to guide a decison. Just don't try to squeeze them into one filter...
Take us deciding on buying a car versus car sharing. We wanted low TCO, low cash flow risk, and low environmental impact. The signal from the low TCO filter was slightly ambiguous, but both other filters were super clear. Car sharing it was.
You just described TCO, unpredictability in TCO, capital intensivity and several kinds of risk. All super useful heuristics to guide a decison. Just don't try to squeeze them into one filter...
Take us deciding on buying a car versus car sharing. We wanted low TCO, low cash flow risk, and low environmental impact. The signal from the low TCO filter was slightly ambiguous, but both other filters were super clear. Car sharing it was.
The problem is economically interesting is only part of the equation for getting people to make the jump. The sheer convenience of a car is priceless to many people.
Nah, we start with market value when new, a representative rate or method of depreciation, and a residual value. You can take a straight line of depreciation, double declining, etc. Residual value is usually a ballpark figure with the actual closing disposal value representing a loss or gain upon disposal. You're overcomplicating it taking in too many parameters to be a useful rule of thumb or guideline for those concerned with the numbers. As you're pointing out however, the relevant parameters do vary from person to person. Anywho, personal finance isn't really bookkeeping for a business.
How many years will I own my car? How do you know?
You amortize the cost over the planned lifetime. If you keep the car for longer than planned, great, you get a free usage extension! If you need/want to replace the car sooner than planned, you need to factor the sunk cost of the previous purchase into the cost/benefit equation of your next.
You amortize the cost over the planned lifetime. If you keep the car for longer than planned, great, you get a free usage extension! If you need/want to replace the car sooner than planned, you need to factor the sunk cost of the previous purchase into the cost/benefit equation of your next.
And then if you have the 'nice car' and the 'old car', you may end up favoring the old car for a bunch of activities, reducing the total use you get out of the nice car.
Also vehicles aren't lumps of gold. They rot while sitting still, even in a garage - which fewer and fewer of us do.
Also vehicles aren't lumps of gold. They rot while sitting still, even in a garage - which fewer and fewer of us do.
> Along these lines, I find that not many people correctly calculate the cost-per-use of their car. They only think of the cost of gasoline burned, and maybe tolls and parking. They don't think about the cost of insurance divided by the number of trips, or the capital cost of the car amortized over the years of ownership. If people thought hard about the cost-per-use of driving, then other transportation options start to look more attractive.
They do think about this, which is why the second-hand market for cars is so healthy.
To be accurate, you should restrict your assertion to those people who only buy brand new cars, which is necessarily a far small population of people who buy second-hand.
There are more people who think about this (they buy second-hand) than people who don't.
They do think about this, which is why the second-hand market for cars is so healthy.
To be accurate, you should restrict your assertion to those people who only buy brand new cars, which is necessarily a far small population of people who buy second-hand.
There are more people who think about this (they buy second-hand) than people who don't.
I find people making the opposite mistake: They take the total cost of ownership, and say that paying an extra $8K for the car is a small fraction of the total cost, and over 10 years that's just paying an additional $2.20 a day, so it's no big deal.
$8K is $8K - it doesn't matter if it's all paid in one day, or spread over 10 years.[1]
I always notice how they like to look at the cost per day and not, say, the cost per year. I suppose if the daily cost still looks high they'll calculate the cost per hour. Or as in this case, the cost per use just because it makes the number even smaller.
[1] If you exclude opportunity cost. If you include it, investing $8K up front will likely give you better returns than investing $2.20 a day.
$8K is $8K - it doesn't matter if it's all paid in one day, or spread over 10 years.[1]
I always notice how they like to look at the cost per day and not, say, the cost per year. I suppose if the daily cost still looks high they'll calculate the cost per hour. Or as in this case, the cost per use just because it makes the number even smaller.
[1] If you exclude opportunity cost. If you include it, investing $8K up front will likely give you better returns than investing $2.20 a day.
At current rates of inflation, it is actually quite a bit cheaper to pay over 10 years if you can finance it without much interest. However, your point stands -- this should not be used to justify purchases and to view things as cheaper than they really are.
In most of the US, not having a car at all places you in a severe hardship. Public transit is usually underfunded or scarce. Daily life needs extra planning, effort, and time.
So a car may be purchased based on pure utility, or for uncommon but plausible capabilities, or for luxury or status.
So a car may be purchased based on pure utility, or for uncommon but plausible capabilities, or for luxury or status.
But people are well aware of the cost of carrying insurance and of buying a car in the first place. Those costs aren't incurred per-use; accounting for them per-use can only make car ownership look more attractive than otherwise, not less.
I'm thinking of negative costs of alternatives too. Cars are expensive, but on other hand how would the alternatives make me feel in both time and use... How much would I actually pay for not doing something...
I consider maintenance, insurance etc. But I weigh that against it takes twice as long to get to work by bus. I work 13 hour shifts so travel time is important to me.
The counterpoint, based on the assumption that eating out is an experience, rather than a commodity: https://bigthink.com/neuropsych/want-happiness-buy-experienc...
> this means you spent about $0.02 per use, 2 cents every single time you use your phone. That seems like a way better deal than the $14.05 McDonalds meal that you just bought last week
What? Why would you compare a "use" of your cellphone to a really big McDonalds meal? I mean, I should stop eating because there's no way I can eat a meal for less than the cost of using a cellphone one time?
What? Why would you compare a "use" of your cellphone to a really big McDonalds meal? I mean, I should stop eating because there's no way I can eat a meal for less than the cost of using a cellphone one time?
A related idea is depreciation.
You haven't lost $700 by buying a pair of skis. You have exchanged $700 in cash for at least $500 in a pair of skis that is now previously owned.
So you might lose, say, $200 immediately for the privilege of buying something brand new. And then another $100 if we include up-front the effort to sell them to someone else.
But the rest of the money is still there, in the shape of skis.
As you use the skis they will depreciate in their second hand value -- this is when the money is actually lost, bit by bit. You can estimate how much the second-hand value of the skis are with 10 uses, 100 uses, 1000 uses, and so on. This is the real cost per use.
You haven't lost $700 by buying a pair of skis. You have exchanged $700 in cash for at least $500 in a pair of skis that is now previously owned.
So you might lose, say, $200 immediately for the privilege of buying something brand new. And then another $100 if we include up-front the effort to sell them to someone else.
But the rest of the money is still there, in the shape of skis.
As you use the skis they will depreciate in their second hand value -- this is when the money is actually lost, bit by bit. You can estimate how much the second-hand value of the skis are with 10 uses, 100 uses, 1000 uses, and so on. This is the real cost per use.
I like that thinking. It also became clear to me when moving. You can actually sell good furniture that you don't want anymore, and get quite some money back. And if you are considerate in which furniture you buy, you can assume you'll also get money for it, should you not need it anymore.
Thus for example, a purchase of a $2000 designer table might not be that huge, if you use it 5 years and get $1500 for it afterwards, you only paid $100 per year to have the table you wanted.
I would rather buy $200 table from Ikea use it also for 5 years no problem and when I don't want it give it away for free. It is still $40 a year.
I also don't know anything about designer tables or design furniture so I probably would get ripped off on buying first and then second time when selling.
In the end I don't have any patience for selling things so I would even low ball the price just to get rid of stuff. Heck even giving stuff away for free is sometimes annoying.
If I would plan not to move anymore or be sure to live somewhere for 20+ years I could consider designer furniture even if I would pay too much for it :).
I also don't know anything about designer tables or design furniture so I probably would get ripped off on buying first and then second time when selling.
In the end I don't have any patience for selling things so I would even low ball the price just to get rid of stuff. Heck even giving stuff away for free is sometimes annoying.
If I would plan not to move anymore or be sure to live somewhere for 20+ years I could consider designer furniture even if I would pay too much for it :).
That's ignoring capital cost, i.e. the cost of not having access to the $2000 for 5 years. It's practically zero if you are able to afford a $2000 designer table, but should be included if you're being 100% honest.
Meh, second hand ski market is very patchy, the selection isn't great and different boot sizes might require binding remounting. Skis only last 100 or so days so cost/day is tiny compared to other ski expenses. You could save a few hundred dollars by buying second hand but then you have a big risk of injury from bindings not working properly. The time and effort looking second hand is a big factor too.
Trying to quantify the psychological value of our experiences to do some kind of double entry booking that justifies our expenses seems like kind of a fools errand to me but that's pretty much what you'd have to do if you wanted to optimize your personal expenses. Time of use doesn't necessarily translate to value or make sense to amortize by. If I do something that makes me just slightly happier or even worse off many times, or I do something for a short time only once creating a memory I look back on for the rest of my life with satisfaction then obviously the single use expense was superior.
> what you'd have to do if you wanted to optimize your personal expenses.
Yeah, it's called budgeting and being poor. Some of us try to maximize this satisfaction and lifelong memories while avoiding incurring significant personal debt on a low salary. Tradeoffs and opportunity costs abound. Of course not everyone should or would be better off being cognizant of these costs and quantities, but some of us have to be by necessity.
Yeah, it's called budgeting and being poor. Some of us try to maximize this satisfaction and lifelong memories while avoiding incurring significant personal debt on a low salary. Tradeoffs and opportunity costs abound. Of course not everyone should or would be better off being cognizant of these costs and quantities, but some of us have to be by necessity.
The article falls short on the comparison part. Why is the author comparing the cost of using a phone for a couple of minute to the cost of eating out that you usually do maybe once or twice a month? The duration should be similar. Following the author's example of buying a $1000 phone every 2 years, that would cost about $9.2 every week or about two McDonalds meals every month. If I'm given the choice between the two, I'd take the McDonalds.
Here is another take, when I compare two things on price, I take the price difference and apply 5% compound interest on it for 30 years. That about how much I would save if I put the money on my mortgage instead. Or when the mortgage was paid off how much it would earn in my retirement savings.
Also, now I have two kids, I always think how much its going to cost my kids. Sure I could buy a $1000 phone now, or I could leave my kids $10,000 extra in the Will. :)
Also, now I have two kids, I always think how much its going to cost my kids. Sure I could buy a $1000 phone now, or I could leave my kids $10,000 extra in the Will. :)
From what I recall, Warren Buffet thinks about things in the same way, which is one reason he’s famously stingy.
It’s a blessing and a curse, because it leads to wealth but can end up in some weird end states. Like having an uncomfortable lifestyle that the money-controller can tolerate, but other members of the family chafe at.
Be careful to value the compounding interest in your own happiness and the compounding value of the happiness of those around you. Through that lens, a marginal $10k (on top of an already secure retirement fund) might be worth far less than a marginal $1k investment in the happiness of yourself or your friends and family.
Money is not a goal in itself after all, it exists to further our true goals in life. In this day and age it’s all to easy to get distracted by the money game, and forget what our true goals are.
It’s a blessing and a curse, because it leads to wealth but can end up in some weird end states. Like having an uncomfortable lifestyle that the money-controller can tolerate, but other members of the family chafe at.
Be careful to value the compounding interest in your own happiness and the compounding value of the happiness of those around you. Through that lens, a marginal $10k (on top of an already secure retirement fund) might be worth far less than a marginal $1k investment in the happiness of yourself or your friends and family.
Money is not a goal in itself after all, it exists to further our true goals in life. In this day and age it’s all to easy to get distracted by the money game, and forget what our true goals are.
This is a good point raised also by Deming early on in one of his books. The cost of any investment is not just the money spent, but also the risk-free rate compounded on that money over the time the investment is in use.
In periods when the risk-free rate is 2 %, that is what any investment costs you in addition to the principal, as Deming put it poetically, "every day, rain or shine, even on Sundays."
In periods when the risk-free rate is 2 %, that is what any investment costs you in addition to the principal, as Deming put it poetically, "every day, rain or shine, even on Sundays."
I would have hated for my parents to not buy something so that they could leave me money. I mean not that they had that problem, they died pretty much broke, but still. They taught me how to make my own money.
There's some wisdom in the overall point, but the example of a mobile phone is completely upside down. I for one don't want to think of pulling a device out of my pocket in terms of some kind of microtransaction. Rather I want it to be a natural extension of my own mind, including running software that serves my interests rather than corporate spyware.
Of course one is always able to do a post-facto "price per use" calculation, it's just an extremely myopic paradigm to be thinking in. Even $/month is too small minded - that's how salesmen push you into paying way too much and financing things. But thinking $/year starts to make sense, letting you take into account things like how long upstream software is going to be supported etc.
Also yes, most everybody knows the tabs for eating/drinking out add up to a considerable amount of discretionary income. Those too are better brought into the $/mo and $/year paradigm.
Of course one is always able to do a post-facto "price per use" calculation, it's just an extremely myopic paradigm to be thinking in. Even $/month is too small minded - that's how salesmen push you into paying way too much and financing things. But thinking $/year starts to make sense, letting you take into account things like how long upstream software is going to be supported etc.
Also yes, most everybody knows the tabs for eating/drinking out add up to a considerable amount of discretionary income. Those too are better brought into the $/mo and $/year paradigm.
I got the gist of the article with a quick speed-read. I have kinda used this unknowingly for a very long time. I have also helped a lot of people make buying decisions, especially when they find the upfront cost high.
My view is -- start from the cost of your use and buy it even if it is on the costlier side upfront. This is also akin to buying smaller number but of high quality item so they last longer and thus the life-time cost to usage is way beneficial than buying cheap that you need to repeat frequently.
Breaking down the cost down to the number of hours use per day, and thus if a Laptop lasts 3+ years, how much is the actual cost for each hour. Now, will it "spark joy" buying a better but costlier Laptop that will last years.
My view is -- start from the cost of your use and buy it even if it is on the costlier side upfront. This is also akin to buying smaller number but of high quality item so they last longer and thus the life-time cost to usage is way beneficial than buying cheap that you need to repeat frequently.
Breaking down the cost down to the number of hours use per day, and thus if a Laptop lasts 3+ years, how much is the actual cost for each hour. Now, will it "spark joy" buying a better but costlier Laptop that will last years.
Same for me: cost per use is helpful to get you thinking about total cost of ownership and product lifetimes.
It's a really good way to evaluate how much you should pay for the second purchase of a tool - also whether the price is worth the warranty.
My Bosch laser Level for example cost $150 more then the alternative, but came with a 6 year as opposed to 1 year warranty. At a total price of $600, I was buying it at $100 a year guaranteed availability. Whereas the cheaper option actually cost me $450 for only 1 guaranteed year of service.
It's a really good way to evaluate how much you should pay for the second purchase of a tool - also whether the price is worth the warranty.
My Bosch laser Level for example cost $150 more then the alternative, but came with a 6 year as opposed to 1 year warranty. At a total price of $600, I was buying it at $100 a year guaranteed availability. Whereas the cheaper option actually cost me $450 for only 1 guaranteed year of service.
And for tools: If you buy the inferior one and then break it or decide to get the upgrade, your cost will be $450 + $600. You will not overpay $150 but $450.
Also better tools tend to give you better outcomes.
With tools you can go both ways. Good tools give you better results, last longer and feel better to use. On the other hand they often cost 4x what a cheap tool would cost that you wouldn't wear out as a DIY'er.
A no name hammerdrill is €50 and a boschhammer €200. Most homeowners won't wear out the no name drill drilling a few dozens holes in concrete. If you do wear it out your final costs is only 25% higher than if you went for the pro tool to start.
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My spending habits changed considerably when I started to include the cost of real estate required in my calculations.
I encountered this first in a forum discussion about boilers - someone pointed out that the largest cost component isn't even the unit itself, but all the space it takes.
Anyway whenever I think of buying a treadmill, I remind myself that the actual cost is an additional €4500 just for the real estate and perhaps a gym membership would have been cheaper, but since I still haven't gotten one, perhaps it's less important to me than I think.
I encountered this first in a forum discussion about boilers - someone pointed out that the largest cost component isn't even the unit itself, but all the space it takes.
Anyway whenever I think of buying a treadmill, I remind myself that the actual cost is an additional €4500 just for the real estate and perhaps a gym membership would have been cheaper, but since I still haven't gotten one, perhaps it's less important to me than I think.
The extremely sad fact is that doing this calculation for storage costs in a major city means you are often better off simply throwing out or giving away the item instead of storing it, and buying a replacement when you need one.
If you don’t buy the treadmill, you don’t save money on the real estate you already own. It either goes unused or is used for a different purpose. Is this really the right way to think about the trade offs?
Makes a lot of sense if you're space constrained, could see yourself getting space constrained in the future, or value open space. Even then, though, if you needed the space for something else, you could recoup all of the real estate cost and some of the cost of the treadmill by selling it.
It keeps my hoarding habit, passed on through generations of people who lost everything in wars, at bay.
I just amortize the cost over the useful period.
$2k bed / 10y = $200/y.
If that’s worth it for me to upgrade then it’s simple to make the call. We spend a third of our life sleeping so having a good bed is a worthwhile investment.
$2k bed / 10y = $200/y.
If that’s worth it for me to upgrade then it’s simple to make the call. We spend a third of our life sleeping so having a good bed is a worthwhile investment.
That assumes the $2k bed is any better than the $1k bed. There is a lot of info proposing it’s not even better than the $500 bed but the marketing teams can easily sell it at a massive markup because people split the cost over years and use.
I don't know about newer viscoelastic foam beds, but I've had the experience of buying several standard foam mattresses (due to life event lots of family was flying in) and there is a quality difference between the lower and mid grades.
One would typically try them out at the showroom - it'd be really nice if they could let you sleep a whole night on one.
One would typically try them out at the showroom - it'd be really nice if they could let you sleep a whole night on one.
This is incorrect for many sane reasons. You don't get any value out of your phone for every use, so paying that 0.02USD is not cheap. It's like a pay-per-use subscription. Everyone who deals with investing knows that absolute money means everything - every 1000USD you spend is much costlier because it never has a chance to collect compound interest of inflation-adjusted ~5% annually for the next 30 years. That works out to 4481USD that you are never going to have.
Aaah yes .... "cost per use".
Its not the favourite unit of measurement of the cloud salesmen for nothing.
"Come to my cloud" harks the salesman .... "look, X is only $0.000000001 a go, Y is only $0.00095 a go .... its so CHEAP".
I think we know how it all pans out. You / your company ends up with an eye-watering cloud burn rate.
Beware the double-edged sword as they say, "cost per use" is not the panacea ... apart from for the seller, perhaps.
Its not the favourite unit of measurement of the cloud salesmen for nothing.
"Come to my cloud" harks the salesman .... "look, X is only $0.000000001 a go, Y is only $0.00095 a go .... its so CHEAP".
I think we know how it all pans out. You / your company ends up with an eye-watering cloud burn rate.
Beware the double-edged sword as they say, "cost per use" is not the panacea ... apart from for the seller, perhaps.
That only happens if you don't compare cost of use in both cases. If the upfront is $100 for the other option, you should calculate what the cost per use is at 10k/100k/1m/10m/whatever uses, and estimate which of those you think you'll hit and make the decision based on that .
It’s true that Thai curry is a one use item. But have you tried eating an iPhone?
Is a human stomach within spec for the IP68 rating?
This is how I think about a lot of things, also with consideration of the absolute price, but I try not to take it too far, because you do need to just enjoy your purchases some times. I try not to view my purchases now within the broader context of my entire life of what-ifs, and accept a certain amount of risk that I'll just need to sell some stuff or take a loss if major circumstances change. When I did do this, I ended up living in a 1 Bedroom + Den, except the den was empty because I couldn't rationalize buying any mid-tier furniture, since it was likely that it would either take forever to sell, or I'd need to just toss it, but either way it would be irritating. I do consider them in the context of the year or a few years, and the depreciation on whatever it is. When you break down the cost of a car for example, with an eye for both of these extremes, it becomes very challenging to rationalize the purchase, because it almost never works out.
There is a subtlety missing from this article. The absolute cost is relaxant as well as the cost per use.
The absolute cost is very important because it relates to budgeting and total resources.
The cost per use is interesting for making decisions between exclusive alternatives.
Should you buy a hot tub (no)? It’s not just the initial cost but also the maintenance cost (chemicals). When you divide total cost by actual use in hours it’s clear it’s a bad deal.
I often think of entertainment cost in terms of cost-per-entertainment-hour. AAA video games, for example, provide a much lower cost per entertainment hour than movies or amusement parks, for example.
I often think of cost in non monetary terms as well.
When you think about the hours required to maintain something per hour of enjoyment, a lot of things that you can afford all of a sudden seem like bad ideas (many kinds of pets, hot tubs, etc.)
So thinking about usage in a buying decision is a very helpful tool in making good decisions, although it’s in addition to looking at whether you can afford the total cost.
The absolute cost is very important because it relates to budgeting and total resources.
The cost per use is interesting for making decisions between exclusive alternatives.
Should you buy a hot tub (no)? It’s not just the initial cost but also the maintenance cost (chemicals). When you divide total cost by actual use in hours it’s clear it’s a bad deal.
I often think of entertainment cost in terms of cost-per-entertainment-hour. AAA video games, for example, provide a much lower cost per entertainment hour than movies or amusement parks, for example.
I often think of cost in non monetary terms as well.
When you think about the hours required to maintain something per hour of enjoyment, a lot of things that you can afford all of a sudden seem like bad ideas (many kinds of pets, hot tubs, etc.)
So thinking about usage in a buying decision is a very helpful tool in making good decisions, although it’s in addition to looking at whether you can afford the total cost.
Not a day goes by, that I don't loudly exclaim "god I love this hot tub, best purchase ever" to my dog as I ease into it on my lunch break.
Agree, to a point. This was how I justified purchasing a relatively nice stereo setup 13 years ago.
Today, I look at the math, on a cost-per-day or cost-per-use angle, and I'm so happy that I went for something nice that I enjoy.
I do feel like cost-per-day amortized is probably more interesting for a lot of decision making.
We probably over-estimate how often we'll use a product or service.
Today, I look at the math, on a cost-per-day or cost-per-use angle, and I'm so happy that I went for something nice that I enjoy.
I do feel like cost-per-day amortized is probably more interesting for a lot of decision making.
We probably over-estimate how often we'll use a product or service.
Don't think of price, think of return of investment (ROI).
The decision if I should buy a phone for $400 or $1000 should come after answering the question "Are the extra features for $600 worth something to me?" - for some people they'll be worth - e.g. having better quality photos of their family, or having better FPS on the high-end MMORPG. Others don't need that, they don't have a ROI on the extra $600, so should skip the more expensive one.
Now, going out with an old friend and spending $100 on a night out - it's a huge ROI for some, for others not, although I think the latter wouldn't have gone out at first place. The same is valid for holidays and any kind of experiences - people will have huge ROI and will go.
The one McD menu - that's where I personally will never find ROI, so can't speak about it. Even if I am starving, buying a loaf of bread, butter and some potatoes for less than $14 will give me much more ROI.
The decision if I should buy a phone for $400 or $1000 should come after answering the question "Are the extra features for $600 worth something to me?" - for some people they'll be worth - e.g. having better quality photos of their family, or having better FPS on the high-end MMORPG. Others don't need that, they don't have a ROI on the extra $600, so should skip the more expensive one.
Now, going out with an old friend and spending $100 on a night out - it's a huge ROI for some, for others not, although I think the latter wouldn't have gone out at first place. The same is valid for holidays and any kind of experiences - people will have huge ROI and will go.
The one McD menu - that's where I personally will never find ROI, so can't speak about it. Even if I am starving, buying a loaf of bread, butter and some potatoes for less than $14 will give me much more ROI.
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I would expect the monthly service fees to be included in the phone example. And transportation costs when going out for food or drinks.
As a hiker, I have spent a lot of time calculating the cost and weight per calorie of food, and the fuel to cook it.
As a hiker, I have spent a lot of time calculating the cost and weight per calorie of food, and the fuel to cook it.
Similar to individual units of stock prices being meaningless on their own.
TCO and ROI are far more important.
For example, inkjet printers are insanely expensive per use.
Generally, the larger and more expensive the laser printer, the cheaper it is per page.
TCO and ROI are far more important.
For example, inkjet printers are insanely expensive per use.
Generally, the larger and more expensive the laser printer, the cheaper it is per page.
As a deal hunter, I also think of "reminder you got a good deal per use". Nice dopamine hit using an item and being reminded "what a steal". I'm a cheap date.
Really interesting way of looking at things. I use my phone about 6 hours every day. That’s 2,190 hours a year. That’s a lot of time yikes, but anyways, that’s about $0.50/hour of use or about $3/day. I pickup my phone about 110 times per day. That’s $0.027 per pickup. Pretty cheap and worth it when you look at it in those terms. Streaming services, not so much. That’s the magic of marketing. I love pay as you go pricing, but when it’s realistic.
This is going to absolute lead to price gouging because today you can only items in one segment. For example price of bread to other bread. But if you start using cost per use all of a sudden you will be forced to justify 50 bucks for a loaf of bread or 100 bucks for a peanut butter bottle, after all a jar of peanut butter lasts a long time. Yes supply and demand and competition will still exist but they will all learn and adapt.
I liked the general idea but found the examples counterproductive. I personally prefer cooking whole foods at home. However, paying $14 for one meal would provide calories needed to live. I do not "need" to touch my phone 32,000 times at 2 cents a piece.
30 years from now I will hopefully retain some my experiential (expensive) travel memories but may not remember/care if I used a value or flagship phone for a given 24 month period.
30 years from now I will hopefully retain some my experiential (expensive) travel memories but may not remember/care if I used a value or flagship phone for a given 24 month period.
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I often consider it as cost per hour tempered by some notion of utility. Some things become trivial costs when considered like this.
A computer, per hour of utility, becomes fractions of cents, coupled with the notion that it is practically indispensable to me then it is a no brainer.
My car on the other hand is incredibly expensive per hour, and with increasing public transit and cycling near me, its utility is also in question.
A computer, per hour of utility, becomes fractions of cents, coupled with the notion that it is practically indispensable to me then it is a no brainer.
My car on the other hand is incredibly expensive per hour, and with increasing public transit and cycling near me, its utility is also in question.
You could make the argument that the phone, combined with all the extremely addictive "services" it provides, is just a piece of hardware that allows the advertisers to use you (via these services, like social media).
In that case it's you, paying thousands for the hardware, to enable others to use you and the limited time you have on this earth.
In that case it's you, paying thousands for the hardware, to enable others to use you and the limited time you have on this earth.
There's some parallels to traditional animal husbandry.
On the one hand, we domesticated some cows to get milk, in another sense the cows have enslaved the farmers and gotten them work all day to pamper them like royalty, the farmers ensure there is always food in all seasons, they're made to build the cattle shelter from the weather, they go out and hunt predators, they shovel manure, they get up at ungodly hours to milk the cows, and so forth.
So who actually domesticated whom?
On the one hand, we domesticated some cows to get milk, in another sense the cows have enslaved the farmers and gotten them work all day to pamper them like royalty, the farmers ensure there is always food in all seasons, they're made to build the cattle shelter from the weather, they go out and hunt predators, they shovel manure, they get up at ungodly hours to milk the cows, and so forth.
So who actually domesticated whom?
I mostly use this for after-purchase evaluation. If I spend $80 on a pair of shoes and at the end of their life they’ve cost $10 per use, I’m not happy. If I spend $500 on a couch and by the end of its life it’s cost $0.25 per day, I’m pleased. I don’t decide beforehand exactly what value I expect to get out of it, but I know it when I see it.
You're pleased with 2000 uses for a couch? Imagine paying 25 cents each time you sit on the couch.
And this is why microtransactions mostly don't work for, e.g. content purchases.
If you assume you use a couch 50% of days--because you travel, sit other places, etc. you're talking about over 10 years which seems sort of reasonable. And OK you can try to find something used or something at Ikea, but $5K isn't a completely extravagant number for a couch, especially if you own a house.
If you assume you use a couch 50% of days--because you travel, sit other places, etc. you're talking about over 10 years which seems sort of reasonable. And OK you can try to find something used or something at Ikea, but $5K isn't a completely extravagant number for a couch, especially if you own a house.
Yes I do imagine that.
There was a site I saw on HN once that made consumer reviews based around a cost by lifetime of use metric. I found it quite interesting.
I’m not sure if it was usable life, or how long the user kept it.
Somethings don’t break, they’re just not very good, and it makes sense to replace them with a more useful version. Most things just break tho.
I’m not sure if it was usable life, or how long the user kept it.
Somethings don’t break, they’re just not very good, and it makes sense to replace them with a more useful version. Most things just break tho.
Helpful. But this mental model can be improved.
A McDonald's meal is an expense.
A mobile device, you can argue, is an investment.
The device can return daily joy*. A meal is, special events with friends aside, a soon forgotten one-off.
* The device can also be a distraction and a time-suck. That needs to be factored in.
A McDonald's meal is an expense.
A mobile device, you can argue, is an investment.
The device can return daily joy*. A meal is, special events with friends aside, a soon forgotten one-off.
* The device can also be a distraction and a time-suck. That needs to be factored in.
Don't we already have enough propaganda.? I get it, vendors have their wet dreams of endless money stream. Has nothing to do with what I want. So far I am managing pretty good with perpetual licenses except where it makes sense (like Netflix).
Seems to this ex-economist like cost per use is trying to be a crude approximation of $/util
The fallacy in the article is trying to compare price of phone versus price of food.
The two are so different that it makes no sense to put them in the same comparison.
One should compare phones within the category of other phones. Compare food with other foods.
The two are so different that it makes no sense to put them in the same comparison.
One should compare phones within the category of other phones. Compare food with other foods.
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Think of how many people bought RVs…. Never having been camping before! After you drop 50 grand is not the time to decide you don’t like something.
It drives me nuts that we don't have a printer/toner database with cost per page.
Back in the bad old days, when I had an ink jet in college, cost per printed page was easily in the dollars possibly even as high as fives of dollars per page.
Later in college, I bought a used laserjet from the university surplus sale for $20. That little printer got me through several reams of paper before the toner went out. By that point I was in the pages per penny range.
Later in college, I bought a used laserjet from the university surplus sale for $20. That little printer got me through several reams of paper before the toner went out. By that point I was in the pages per penny range.
I believe a lot of commercial contracts for printers (Canon, Xerox, etc.) can be priced this way.
This is how I justify the purchase of guitars and bicycles.
The next step is happiness/price.
Always think in absolute dollars and not in rates. $1000 is $1000 whether the cost per use is pennies or tens of dollars. Thinking in terms of rates is how people would fall for predatory installment purchases in the old days (you can have a new computer for just $2.5 a day!)
The other obvious problem is looking at cost absent of a market. It's not just how much it is worth it to you, but what the competition is offering it for. I personally pay less than $400 a phone and keep it for over three years. Paying $1000 for a phone just two years is not an improvement.
Edit: I spoke very dogmatically above. Using rates can be OK in certain situations where the analysis becomes equivalent to using absolutes, but it's not at all rare for rate analysis and absolute analysis to differ, and people make the mistake of using rates there. You will never, ever, go wrong by looking at absolute amounts, though - and it's usually the easier way to analyze.
In my engineering undergrad, Engineering Economics was a required course. I remember a fellow student said "I often return other engineering textbooks to get some cash, but this book is more useful than most of my engineering ones." Decades later, I can say he was definitely right. All too often I see engineers making poor financial decisions based on heuristics when they're quite capable in doing the (simple) math. But a lifetime of being exposed to flawed ways of thinking of money provides a convenient shortcut.