Whether running a business or a household budget, there are a multitude of purchasing and investment decisions that we are faced with.
Business decisions can include whether to buy or rent a business location, investment decisions in infrastructure such as IT and people, and what form of marketing to invest in for the business.
Household decisions range from the house that we might choose to buy, how purchases like houses and cars will be funded, all the way down to the which laundry detergent we choose to take home from the supermarket.
Of course, these decisions are not just a simple case of finding the cheapest option in order to minimise the cost now. Other factors include the quality and lifespan of the product, and the ongoing costs of ownership and maintenance.
Take for example, the purchase of shoes. While this might seem like a relatively mundane purchase, one of the factors to consider other than the sticker price is total life-cycle cost.
A cheaper pair of male dress shoes can be purchased for $100 or less, however these shoes are unlikely to last as long as a quality pair and are also unlikely to be able to be resoled.
The more expensive pairs, while costing more initially, are usually able to be resoled, and therefore will last longer which reduces the overall cost of shoes over their lifespan.
So, is it a False Economy to purchase cheaper shoes in the belief that you are saving money?
The same can be said for issues such as house and car maintenance, as well as business investments such as IT infrastructure. By attempting to save money in the shorter term by choosing the lower cost option, is this merely setting you up for a longer term cost which erodes your wealth and the return on your investment?
Spending money on capital items like IT infrastructure is a false economy if you don’t then pay for it to be set up properly. The extra time spent resolving issues and lost productivity from down time will far outweigh any monetary savings from not getting the proper advice and assistance on installation.
In most cases, the value of advice far outweighs the cost of obtaining it, or the cost of implementing the advice given.
How do I make sure I operate True Economy?
When making purchasing decisions, you need to consider a number of factors:
- initial investment/purchasing costs
- Ongoing life-cycle costs such as financing, repairs, insurance
- Replacement cost
- Comparative benefits of the various options
- Return on investment over the life of the purchase/investment
The key thing to remember is the balancing of the long term-impact of taking a short term benefit. This is not to say that taking the more expensive option will always be better, however taking the cheapest option does not always work out to be the best long-term option.
Always keep your long-term objectives in mind when making purchasing and investment decisions, as this will guide you to the best outcome – from the perspective of both pricing and benefits.
Footnote:
In a survey conducted by Thomas J. Stanley, author of The Millionaire Next Door and The Millionaire Mind, he found that 70% of millionaires have their shoes resoled or repaired. He estimates the number is actually higher because 20% are retired millionaires who have given up their “dress uniform”.
