Steadfast FinancesHow I Find Value Where Others Do Not - Steadfast Finances

How I Find Value Where Others Do Not

Filed in Consumer Education , Frugal Living , Personal Finance 8 comments

Treadmill with motion blur and long exposure (Flickr CC - SashaW)

Since the recession began, I’ve been struggling with the concept of trading down versus trading down to better value. In other words, should I move to a policy of buying brands/goods that might be cheaper and lower in quality, or stick to brands/goods with a lower price but provide a similarly equivalent value.

After all, most of us find some form of comfort or luxury in sticking with the name brands we know, love and trust.

Unfortunately, when I try to explain what I mean by trading down to better value, it often confuses some people considering the word value can mean so many different things to different people.

Some people think value is simply getting 10 percent off of retail price. Some may have a mix of spending filters where they run XYZ item through a mix of personal choices based upon X, Y, and Z variables. The frugality minded may simply say to hell with it, and buy out of fear of saver’s remorse.

So who’s right? Who knows? Probably a mix of all three. The definition can be as rigid or as flexible as you want it to be.

Me being the pain the butt intellectual, I try to find the justification in any situation (whether I believe in the idea of not). So even if I want something really badly, or think it might be a complete waste of money, I generally make a few mental calculations or rationalizations prior to swiping my debit card.

#1 – The Cost per Use Ratio

One of my worst traits as a young adult was to walk away from any purchase that seemed extravagant. Being a frugal minded person motivated to save for retirement, I always thought ignoring the high cost items was the thing to do. As I’ve grown up a bit, I realize this has probably been a miscalculation.

Case in point: my secondhand $300 treadmill.

If this poor contraption could speak, it would probably have said “Uncle” long ago. I’ve owned the treadmill around 18 months, and I routinely used it 4 to 5 days per week. Like anyone, I’ve had my lazy weeks where I’ll putz around and not use it, but since summer 2009, I’ve averaged somewhere between 10 to 14 miles per week.

Here is where the cost per use ratio becomes an effective metric: the more I use it, the lower the cost per mile ratio metric will become.

At 100 miles, cost per mile = $3.00 / mile.

At 300 miles: cost per mile = $1.00 / mile.

At 900 miles: cost per mile = $0.33 / mile.

I generally keep track of my workouts in my Seinfeld calendar, and I can conservatively estimate that between myself, my girlfriend, and a few friends that borrow it on rainy days, it has logged around 900 miles over the last 18 months. And the ratio will only get lower as more time and miles continue to tick away.

#2 – The Low Cost, High Return on Investment

If only the world was such a Utopian environment where we could invest minimal time or money, and have it pay huge dividends each and every time. Unfortunately, that is rarely the case but there are certain situations where creativity and cleverness can pay off big.

Take for example, The Good Human’s recent experience with solar heaters. These solar heating boxes aren’t that expensive to construct, they crank out some serious heat, and best of all, they can make a serious dent in your monthly heating bill. Just think of what the potential ROI on this investment would be if you could hit the off switch on your heating unit every other day during the cold winter months. When you multiply the savings over 5 or 10 years, the savings really begin to add up.

It’s a pretty ingenious solution that apparently requires a minimal monetary investment and probably a days work for an experienced DIY’er. Just one more excellent example that green living and frugal living are one in the same.

#3 – The Vulture Investor

Call me strange, but vultures are probably of my favorite creatures in the animal kingdom. They’ve devised a niche where they exert minimal energy, but somehow, still manage to eek out a pretty decent living on Mother Nature’s scraps.

The same goes with being a vulture investor. They have the option of swooping in when a good value becomes available, making an investment at a minimal price compared to what it may have been years ago, and manage to turn a profit where others could not or acquire a much desired asset at a serious bargain by exercising some patience.

Some of the best examples were the real estate vulture investors who bought condos at 50% to 75% discount from peak bubble prices, and now renting them out or turning them into vacation homes.

#4 – The Hours Worked to Buy XYZ item

One of the more effective ways to shut down a spendthrift in mid-purchase is to remind them they worked 40 hours for XYZ purchase.

If you can dissociate the cost of the item away from dollars, and re-associate the purchase in hours they’ve worked, it might give them a moment of pause. So if you might want that HDTV, don’t think of it costing you just $1000, but it will cost you 40 hours of actual time at work.

When I was working in working my first college job (my Dirty Job in the mosquito lab), you can bet your ass I used this method before buying a keg of Sam Adams versus a keg of Natty Light.

#5 – Avoiding the Value Trap

Like most people, I’m a sucker for a good deal. But just because an item is selling for 20% off, it doesn’t mean that it’s a solid value. Who’s to say the price will stabilize at the 20% off level? What if the price continues to fall? Maybe it will cost half as much the following year if you exercise a little patience?

I see this all the time being that I’m somewhat of a buy on the dips or value investor. I’m constantly fearful of of buying a stock that just fell 20% in value, and then the stock dropping another 20% after I buy. The lesson learned is that just because I think it’s cheap, it doesn’t mean everyone else thinks similarly. Thus, your perceived value acts like something like a Venus Fly trap (e.g. value trap) by baiting you into thinking you’ve got a good deal, but end up getting trapped in the end.

Similarly, the concept of a value trap applies to everyday consumer life. If you were lured into buying that HD plasma screen for Christmas 2008, you will likely be pretty PO’d when you see the same (if not better) HDTVs selling at half the price for Christmas 2009. If you really wanted the TV, then no big deal, I’m sure you’re enjoying it but if you suffer from buyers remorse, you might be gritting your teeth a bit walking through Best Buy this year.

So what about you?

Got any tips or unique ways that you assign or calculate value before making a big purchase? If so, be sure to mention them below.

creative_commons_bw Photo by SashaW

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Posted by CJ   @   2 November 2009 8 comments
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8 Comments

Comments
Nov 3, 2009
8:12 am

Hey Matt, good article.

I’ve been searching high and low to buy a vacation property in Incline Village, Nevada (Tahoe) but to little success. Prices are only down about 15% there which is frustrating.

Found a 3/2 for $700,000 on 0.4 acres of land. Sweat location, but it’s a tear down and I’d have to plop another 500K into it. Rental yield without fixing it up is still a pitiful 4%.

San Francisco isn’t that much better for prices. Actually, it’s worse.

The problem with buying places -50% from the peak is that they are places NOBODY wants to live in, in the first place.

Do you own property Matt? If so, do you mind sharing what your Zillow, or online valuation price direction looks like?

I did a recent post highlighting that all 5 properties I track have seen a 15-20% rebound since this summer Curious to know if it’s more widespread than California and Hawaii.

Nov 3, 2009
10:50 am
#2 Matt SF :

I live in a place where the housing bubble was a relative non-event, so we don’t have anywhere near those problems (or opportunities). The New York Times published an excellent graphic earlier this year illustrating the severity of the bubble in some cities and the others that didn’t. Mainly those cities that aren’t known for their cultural achievements or media popularity.

However, I’ve seen Miami condos (www.condovultures.com) going for as much as 75% off their peak price. You can also find a video of new properties selling at 50% in the video link I included in the vulture investors heading above.

I’m questioning if real estate can ever be treated as an appreciating asset within the next 10 years. Seeing that credit is harder to get, and so many people got burned, if the demand will ever be sufficient to generate significant annual returns. Seems to me like it would be a cash flow business like it used to be.

Nov 3, 2009
10:02 am
#3 Matt Jabs :

Great topic Matt! If we do not employ some type of spending filters/value calculations we WILL fall prey to our own unending wants. It is intellectual indeed to process purchases in this way.

For me, the biggest filter I employ is “Do I need it?”

And my favorite that you mentioned is “#4 – The Hours Worked to Buy XYZ item”

Most of us fail miserably to consider how many hours we will have to (or had to) work to finance the purchase we are about to make.

Good stuff!

Nov 3, 2009
11:04 am
#4 Matt SF :

Thanks Matt. I knew most people would like #4 considering “cost/hours worked” is one of the most underutilized metrics of the purchasing process.

Considering how easy it is to swipe a credit/debit card these days, I would hope that the idea can catch on the more we mention it.

Nov 3, 2009
1:48 pm

Great links, MattSF.
I think I clicked and looked at all of them!

Nov 3, 2009
2:05 pm
#6 Matt SF :

Glad you liked it Andrew. I worked on this one for a while since it’s my “self-justification” why I make some big purchases, but tend to be so frugal on others.

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