Consumer spending habits are curious and ephemeral things. Analysts try to understand why we buy the things we buy, but it is often a difficult task. For many people there is a certain compulsion that leads us to purchasing things that we do not need or to buy things that might not be the best investment.
This is in part, why our economy has floundered in recent years with many people over their heads in credit card debt due to overspending. We seem to live in a world where many of us have a hard time knowing what things we need and what things we just want. A lot of us think that we need or deserve certain luxuries even if we cannot afford them. This slippery slope is exactly what causes financial problems in households all over the world.
How then should we figure out how to buy items when there are so many options in front of us each day? The first thing to do is to understand the difference between needs and desires. There are basic things that we need in order to maintain a normal and healthy lifestyle. We all need shelter, food, and clothing. What we do not need is a big expensive home, lots of fine dining, and designer clothes. That being said, there is a level of quality that comes into play when we purchase items that we should not ignore. Some things are worth spending a little extra money on, like buying quality clothing that will last for a long time or purchasing a nice home that suits the needs of your families over one that needs a lot of maintenance but is cheaper.
As consumers the first thing we do when we want to purchase something is enter into a complex decision making process. We look for value in the things that we buy, based on information that we gather from the world around us. This is where marketing comes into play. You might not think that product marketing effects you, but it surely does. There is so much marketing in the world around us that it would be nearly impossible for it to not inform our decisions. Whether you are driving down the road, surfing the web, or reading the newspaper you are constantly surrounded by product placement and subtle whispers in your ear to buy this or to buy that. These whispers can be so strong that you find yourself making choices based on them rather than on true evaluation of the cost and the value of an item or service.
Cost Per Calculation Method
In order to get around this barrage of marketing we have to come up with a way to evaluate or options that takes into account cost as the most important factor. This can be done by using the cost per use calculation method. This method is when you take the actual cost of something that you think you need and compare it to how often you will use that item. You can use this method for anything from a pair of shoes to a new house and it will help you figure out how much something will cost each time you use it. Then you can evaluate that smaller cost to see if your investment is actually worth the cost.
For example, let us say that you want to purchase a new pair of shoes with your credit card. The designer shoes that you want are $150 and can only be worn on special occasions because they are fashionable to the point of not being appropriate for work or everyday wear. So, if you spend $150 on those shoes and only wear them five times a year they wind up costing you $30 each time you wear them. That is a pretty expensive pair of shoes. Consider that you could purchase another pair of shoes, that also look good but are more appropriate for every day wear for $100. Those shoes could be worn ten times a year so they only cost $10 each time you wear them. Obviously, the less expensive shoes are the wiser choice not just because they cost less but because you will be able to wear them more often.
This same calculation can be used when purchasing much more expensive items like a home. If you have a family of five it is reasonable to want a four bedroom home. However, if you bought a five bedroom home you could have a guest room. If the four bedroom house costs $150,000 and the five bedroom costs $200,000 you would spend $50,000 extra on that fifth bedroom. If you have guests ten times a year for ten years you would spend $500 on housing your guests each time. That is a significant amount of money, it might be more financially sound to have your guests stay at a hotel, even if you pay for it yourself. On the other hand, it might be worth the investment to you because you enjoy having guests or because they help you out when they visit. If the grandparents come to visit and babysit the children so you can go away for work or pleasure or do handy work around the house, then the savings of having them stay at your house should also be considered.
If you can figure out how and why you spend your money you will be able to make better choices about your finances. Those who are careful about every single expenditure, not just the big purchases, are more likely to build a bit of wealth and comfortable standard of living. Whenever you consider purchasing anything take into consideration how much it will cost each time you use that item. You will also have to consider the quality of an item as it compares to the price because for some things quality is more important than others, like home appliances or vehicles. As long as you can keep your eye on your spending and your head in the game you will be a smarter consumer. Don't let all of that marketing lead you down the path, let your own wisdom and informed decision be your guide.
This article was written by Timothy Ng who is a regular personal finance writer and part of the team at Credit Card Finder, a 100% free Australian credit card comparison and application service. Visit the Credit Card Finder website for more information on budgeting tips.
