Personal Finance: How Considering Utility When Purchasing Quality Items Can Save You Even More Money

In my last post, I wrote about how purchasing quality items can save you money. To my delight, this topic seems to have been quite popular with the people who visit this blog, and the post has received many visitors. It's wonderful to see that others are finding the things I write about useful.

One particularly astute reader remarked that my argument in favor of purchasing quality items lacked an important exception: Long term utility or lack thereof. That is, a purchased item only needs to last as long as it is useful to the buyer.

Allow me to explain.

In my original post on purchasing quality items, I shared my experience with a particular backpack that I had purchased and have subsequently used for many years. The high quality nature of my backpack has saved me money over the long run. However, the fact that I have saved money is entirely dependent on another fact; that I've needed the use of a backpack over so many years in the first place.

Consider technological items, as they provide a prominent example of the point I'm trying to make. Items like televisions, smartphones and personal computers can all be purchased with quality in mind. However, all of these items are also prone to becoming obsolete over time. Therefore, there is little point in buying such items based on how long they are likely to last. Instead, such items should be purchased based on how long they will be useful to you.

Clothing provides another example. Most people enjoy dressing rather fashionably and take pride in their appearance. Fashion trends, particularly for younger people, tend to change rapidly over time. This fact plays against the benefits of purchasing clothing based on how long it will last. Instead, you should purchase clothing to last for the length of time you'll likely want to wear it.

Determining Utility

In my original post, I described how to contrast the cost of an item against its expected lifespan. Now that we're adding the concept of utility to our discussion we need to add a third variable to our formula: We need to contrast the cost of an item over its useful lifespan. To do this, we need to understand utility.

Utility is a word used to describe the usefulness of an item or its ability to serve a particular function. The utility of an item is not derived from the longevity of an item alone. Instead, to consider utility, we must also introduce elements of ourselves. For example, a vehicle could be expected to last through a certain number of miles of use over its lifetime. However, as a driver, the car is only useful to you as long as you still have need of a car and don't mind being seen driving it. This is utility.

To determine the utility of an item, ask yourself the following question:

"How long is item X going to perform its desired function?"

Depending on the item, the answer to this question can be complex or relatively simple. Before making a purchase, consider carefully how long the item you're purchasing will be useful to you. Then, combine the principles found in my previous post and choose an item of sufficient quality to last as long as it will be useful to you. Avoid spending money on an item that will last beyond the period of time in which you'll find it useful, as extra expenditures of this nature will be very difficult to recoup.

I'll conclude by reviving an example from my previous post:

"Imagine that you need to purchase a new set of tires for your car (which you're planning to keep for a long time) and that there are two tire models you are considering. Tire A costs $80 per tire and is expected to last 50,000 kms. Tire B costs $100 per tire and is expected to last 75,000kms. Which do you buy?"

We previously concluded that purchasing Tire B is the better purchase and offered an 18% savings over the life of the tire. However, consider what would happen if we change the assumption that you're planning to keep the car for a long time and instead specify that you are planning to send the car to the wreckers in about 45,000kms. Now which tire should you buy?

Obviously Tire A is the better purchase in this case. Without considering utility (i.e. that we only need the tire to last 45,000km) we would have purchased Tire B and been out $20. This is why it's important to consider not only how long an item will last, but also how long you actually need it to last.

Personal Finance: How Quality Can Save You Money

Nearly 13 years ago I purchased a new backpack before starting university. At the time, I chose the backpack based on fit, size and because I knew it was similar to what the majority of students were using at the time. I didn't know it, but my new backpack would end up being one of the best purchases I have ever made.

When I purchased the backpack, a 30L MEC Brio (size no longer available), I paid roughly $60 for it and would have been pleased if it lasted through my first year of school. Had this been the case, it would have cost me $0.16 / day, an amount I was willing to bear for the sake of having a backpack.

Upon completing my degree, the same backpack still slung over my shoulder, I began to notice what a great purchase I had made. With my backpack still in like-new condition, I embarked on the next stages of my life and continued to carry it with me every day. It's come with me every day to work, wandered three continents and done everything else I've expected of it. It still looks great, I've never repaired it and it will soon be 13 years since I nonchalantly plucked it off the rack.

After about a decade of ownership, I made an important realization: My $60 backpack had already lasted 10 years, bringing its cost over time to less than $0.02 per day. Not only was my backpack still doing everything I needed, it was actually saving me money! Here's why:


Why Cost Over Time Matters

We all have to purchase things to get through life. Our individual needs may vary, but we all have the need to purchase things that we're unable to produce for ourselves. Some people purchase many things, others purchase few, but we all do it.

When most people make a purchase, their primary concern is to acquire the required item at the lowest possible cost. There's nothing wrong with this at all. Saving money at the time of purchase is certainly advantageous, however, since we're focused on our long term wealth, we also need to consider the cost of an item over the long term. This is where cost over time comes in.

Calculating cost over time allows us to understand how the price of a purchased item impacts us in the long run. This is very important, because it allows us to find financial savings we might not be able to otherwise. How, you ask? Allow me to explain.

Imagine that you need to purchase a new set of tires for your car (which you're planning to keep for a long time) and that there are two tire models you are considering. Tire A costs $80 per tire and is expected to last 50,000 kms. Tire B costs $100 per tire and is expected to last 75,000kms. Which do you buy?

Many people would examine this decision strictly by considering the price and choose to purchase the cheaper Tire A. Choosing Tire A saves the purchaser money upfront, but let's see what happens when we calculate the cost of the tires over time:

Tire A: $80 / 50,000kms of use = $0.0016 / km
Tire B: $100 / 75,000kms of use = $0.0013 / km

Tire B provides a savings of over 18% in the long run!

Why Quality Matters

But how do you really know how long a purchase is going to be useful to you? For something consumable (window cleaner, breakfast cereal, car tires, etc) the amount of use you can get out of your purchase is often easy to deduce. Window cleaner is sold in set volumes, breakfast cereal is sold by weight and car tires are sold with an advertised life expectancy. For items like this, it is easy to calculate the cost over time. For the breakfast cereal, you just pick the box that gives you the best cost to weight ratio. For the window cleaner, you look for the best cost to volume ratio, and so on.

What about other things though? What about a pair of shoes? What about a blender? What about a major appliance? It is far more difficult to determine the cost of these items over time because it's hard to know how long they will last. It is here that we enter the domain of considering the quality of an item.

Consider my backpack again. When I snatched it off the shelf, I checked that it fit me well and that it was the size I wanted. I did not, however, try to assess how well it was made. I didn't check if it was made out of rugged materials or if the stitching in key places was well done.

In order to determine the quality of an item you are purchasing, you have to be able to make some sort of judgement about how well it will be able to continue to serve the desired function. This can be difficult, because it may require you to understand a little bit about what you're purchasing, but it is here that you can save a lot of money.

Our world is flooded with different options for every imaginable product. Consider shoes. Even for a particular style, there are hundreds of different choices available to you. Thus, when we make a purchase, we have to carefully study the desired items to determine how long they will last. Here are a couple of tactics that can be used to determine quality:

• Look carefully at the product and assess the build quality. Do the components look well manufactured? Are there weak points? Do the materials look like they would last a long time?
• Read reviews. If available, reviews are a great way to learn about the quality of a product, as people that have had bad experiences will often write reviews stating their disappointment. If the reviews for an item indicate that the item is prone to malfunction, you should look at other options.
• Trust your experience. Perhaps you've owned other items from a particular brand and have developed some trust in that brand's products.

When you've assessed quality, you're able to make a judgement about how long your purchase may last. Factoring this back into a cost over time calculation will allow you to identify potential savings. A higher quality item will often be more expensive, but it will save you money in the long run.

Returning to my backpack. No matter what, as long as I'm able to move around, I will need to own a backpack because they are my favorite way to carry things around. The backpack I purchased is still used every day and will be for years to come. Imagine for a second though that I had purchased a different backpack that wasn't as well made.

For example, it would have been very easy for me to go out and find a backpack of similar appearance and size for $25. Let's also assume that the less expensive backpack was not as well made and only lasted 2 years before needing to be replaced. Had I purchased said backpack, I would have saved $35 in upfront costs, but let's calculate the true cost of my decision over a period of 10 years:

My MEC Brio: (1 x $60) / 10 yrs = $6 / yr
Lower quality backpack: (5 x $25) / 10 yrs = $12.50 / yr

I think you get the idea. By purchasing a higher quality item, I've saved myself a pile of money in the long run, even though the upfront cost I incurred was far greater.

I've applied this lesson to countless purchases since my tough little backpack first showed me the savings that longevity can bring. Quality makes a difference and should likely be pursued whenever you need to purchase an item that you will use frequently and over a long period of time.

When you consider quality and make purchases with your long term needs in mind, you'll be freeing up future money to spend on investments and other things you can use to build your total wealth. I have every reason to believe that my backpack will last at least another 10 years and probably much longer. If it lasts me just 10 more years, it will have cost me just $0.007 / day to own and will have freed up lots of cash I may have otherwise spent on replacement backpacks.

Exceptions

I could have ended this post in the last paragraph, but I predict there are people who will contest my points on certain grounds, so I want to add a short corollary about exceptions to the above. Let me summarize the above into a simple rule of thumb: quality matters most for items that will be used a lot over a long period of time. If this rule doesn't apply to what you're purchasing, you should consider the item more on a basis of cost rather than cost over time.

Exception 1: Limited Use

My argument for quality does not stand for items that will experience limited use. If you're only going to need to use an item once, buy the cheapest one that will do the job and then get on with your life. Better yet, find a way to rent the item that you need. Things like special tools and disposable items fall into this category. A quality item will only save you money if you actually are utilizing the longevity of the item in the first place.

Exception 2: You're Good at Investing

My argument also fails if you're a person who is already really good at investing money. The spend now to save later mentality that I am promoting doesn't apply to people who are already very good at making their money work for them. If I, for example, could have used the $35 I would have saved by buying a cheaper backpack into $25 of new money every two years, the point of buying the quality backpack is completely moot. Saving money in the long term is only useful up to the point where it gets in the way of other growth.

Edit - 2012-02-25:

Hello everyone. Thanks for reading. FYI, I wrote a followup post to this entry with information on how further savings can be achieved.