Tuesday, May 27, 2014

Myth: You get what you pay for so there's no point in being frugal.

In general, compared to goods of the same type, a more expensive good is more useful than a less expensive good.  A $10,000 car is probably more useful than a $2,000 car because it has newer materials, is in better shape, has more features, is safer, gets better gas mileage, or any of the previous combination of features and many other possibilities not listed here.  Unless you're being scammed, in general, a more expensive good is more useful than a cheaper good of the same class (like cars.)

Economists refer to this as Utility.


Utility measure the ability of a good or service to satisfy one's needs and wants.  Utility is also subjective - the same good may have a different level of usefulness to different people.  A $1.00 ice cold bottle of water has greater utility to the runner who ran 1 mile in a hot summer day than the person who just already finished another bottle of the same water.

The saying "you get what you pay for" refers to the general notion that in most cases, a more expensive good of the same type has more utility than a cheaper good.  This doesn't mean that a person should be indifferent and not care whether they buy the $2,000 car or the $10,000 car.  Perhaps that person only needs a no-frills basic car to get him/her to places around town and a $2,000 used car would satisfy the need.  The $10,000 car will probably not have 5 times the utility as the $2,000 car.  On the other hand, if the $10,000 car is a pickup truck, it'll have more utility for someone who needs to transport his tools with him whenever he's called to do a job (i.e. a building maintenance contractor.)  The $10,000 pick-up truck will have far more utility than the $2,000 sedan in that case.

The Fundamental Rule of Frugality:

Well, unlike the physical sciences, there are no official "fundamental rules" (like the Fundamental Theorem of Calculus), so I'll make one up on the spot:

The Fundamental Rule of Frugality states that you should strive to maximize the average amount of Utility obtained per Dollar of wealth you've spent.

So if you've budgeted $1,000 of spending a month, seriously think of what your most important needs and wants are, and strive to maximize the amount of Utility that those $1000 will buy you each month.  If you can considerably increase your standard of living by spending $1,200 a month due to the increase in Utility (and Utility per dollar of your spending) and it doesn't break your budget and long-term financial goals, then definitely go with that $1200/mo budget.

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