A change of mind: The more expensive product can be cheaper in the long run.
Meaning that you can buy disposable cutlery for a few cents or buy proper cutlery for a few bucks and keep it for years and years on end. So when buying anything consider the cost of maintaining it (repairs, taxes, insurance, …) and of disposing it. The more expensive the item, the more thought you should give to this. My recommendations are housing and transportation.
Be careful with this advice if you’re clumsy or destructive or prone to losing things. A more expensive item only lasts longer under circumstances where it’s able to be used the whole time.
It should be noted that there’s a nonobvious opportunity cost here; specifically, money spent on the more expensive product can’t be invested.
For example, mechanical keyboards seem like something that costs more up front that’s cheaper in the long run. They cost about an order of magnitude more than membrane keyboards, but last about ten times longer, so you only need one mechanical keyboard to ten membrane keyboards, so the cost equals out in the end. Since the typing experience is much better on mechanical keyboards, by paying more up front, you essentially get a much-improved typing experience for free.
But, the extra money you spent on the nice keyboard could’ve been invested (or used to pay down debt) instead. If there’s a an annual real interest rate of 10%, then buying 10 membrane keyboards at $10 over 10 years and investing the money you didn’t spend nets $45, not counting re-investing (1). Note that these numbers are made up to make the math simple; in particular, the real real interest rate isn’t that high.
Also, the membrane keyboard you buy in year 10 isn’t going to be the membrane keyboard you buy in year 1.
(1) Using present value, in year 1, instead of paying $100 (cost of the mechanical keyboard, ten times the cost of the membrane keyboard), I pay $10 and invest $90 which, at 10%, yields $9. In year 2, you pull $10 out of the investment to buy the second membrane keyboard, so now you have $80 invested, yielding $8 returns. 9+8+...+1 = (9^2 + 9)/2 = 45.
Correct. But then again note that there is the seperate issue of depreciating and appreciating assets: I can resell the mechanical keyboard as it is usable even after years. I can not resell the membrane keyboard because it is worn out.
A more extreme example is cars: A new low-budget car loses about a third of its resale value immediately after you buy it. A used luxury car might even appreciate in value.
Definitely. I wanted to make that point because, until I read Varian, I accepted the naive argument and not everyone here has studied economics, and the less they know, the more this entire “financial effectiveness” post is aimed at them, and this is something I found completely nonintuitive before reading about it and transparently obvious afterwards.
A change of mind: The more expensive product can be cheaper in the long run.
Meaning that you can buy disposable cutlery for a few cents or buy proper cutlery for a few bucks and keep it for years and years on end. So when buying anything consider the cost of maintaining it (repairs, taxes, insurance, …) and of disposing it. The more expensive the item, the more thought you should give to this. My recommendations are housing and transportation.
Be careful with this advice if you’re clumsy or destructive or prone to losing things. A more expensive item only lasts longer under circumstances where it’s able to be used the whole time.
It should be noted that there’s a nonobvious opportunity cost here; specifically, money spent on the more expensive product can’t be invested.
For example, mechanical keyboards seem like something that costs more up front that’s cheaper in the long run. They cost about an order of magnitude more than membrane keyboards, but last about ten times longer, so you only need one mechanical keyboard to ten membrane keyboards, so the cost equals out in the end. Since the typing experience is much better on mechanical keyboards, by paying more up front, you essentially get a much-improved typing experience for free.
But, the extra money you spent on the nice keyboard could’ve been invested (or used to pay down debt) instead. If there’s a an annual real interest rate of 10%, then buying 10 membrane keyboards at $10 over 10 years and investing the money you didn’t spend nets $45, not counting re-investing (1). Note that these numbers are made up to make the math simple; in particular, the real real interest rate isn’t that high.
Also, the membrane keyboard you buy in year 10 isn’t going to be the membrane keyboard you buy in year 1.
(1) Using present value, in year 1, instead of paying $100 (cost of the mechanical keyboard, ten times the cost of the membrane keyboard), I pay $10 and invest $90 which, at 10%, yields $9. In year 2, you pull $10 out of the investment to buy the second membrane keyboard, so now you have $80 invested, yielding $8 returns. 9+8+...+1 = (9^2 + 9)/2 = 45.
Correct. But then again note that there is the seperate issue of depreciating and appreciating assets: I can resell the mechanical keyboard as it is usable even after years. I can not resell the membrane keyboard because it is worn out.
A more extreme example is cars: A new low-budget car loses about a third of its resale value immediately after you buy it. A used luxury car might even appreciate in value.
Definitely. I wanted to make that point because, until I read Varian, I accepted the naive argument and not everyone here has studied economics, and the less they know, the more this entire “financial effectiveness” post is aimed at them, and this is something I found completely nonintuitive before reading about it and transparently obvious afterwards.
Let’s get realistic. The current short-term real interest rates in the US are negative.
Well, if real interest rates are negative, everything reverses, and you should start favoring more expensive things now.
Also, it’s possible to be realistic and say things like “if 2 + 2 = 5, then 5 = 2(1+1) and therefore isn’t prime”.
At the moment, TIPS (US government securities that pay interest + whatever inflation turns out to be) trade at negative yield for maturities up to five years.
That’s the point of monetary stimulus, among other things.