"Price is what you pay, value is what you get" - Warren Buffett.
This is one of the most famous quotes from legendary investor Warren Buffett and I find that it applies to everyday purchases as well as stocks. Given that we all have limited financial means and financial freedom is about maintaining a certain lifestyle, getting more value from what we buy is a good way of short cutting the journey to financial freedom.
We all like to think we are getting value every time we spend money, but what types of value are we getting? You can break down the value of a purchase into 4 broad categories:
This is one of the most famous quotes from legendary investor Warren Buffett and I find that it applies to everyday purchases as well as stocks. Given that we all have limited financial means and financial freedom is about maintaining a certain lifestyle, getting more value from what we buy is a good way of short cutting the journey to financial freedom.
We all like to think we are getting value every time we spend money, but what types of value are we getting? You can break down the value of a purchase into 4 broad categories:
Take for example the buying of a watch.
Functional value - this is the use you get out of the watch. The most obvious is it's ability to tell time. Less obvious would be things like the accuracy of the time, the mechanism to keep the watch running (battery, kinetic) etc. Also includes things like water resistance ability and warranty period, which help to extend the use of the watch.
Stored value - this is the value that you can sell the watch for after many years of using it or just keeping it around.
Anticipation value - this is the feeling you get before and during a purchase. The feeling of desire while you do your research, the feeling of joy as you imagine wearing the watching, the feeling of accomplishment as you pay for the watch, the feeling of impatience as you wait for the watch to be delivered or as you drive home after the purchase.
Boast value - this is what you perceive others will think of you due to your purchase.
Anticipation value disappears very quickly after you have purchased and started using the item. Ever felt a low the moment you start using a recent purchase? That's the anticipation value evaporating. Clever marketing by the brands have made us feel really good about purchasing their item.
Boast value is typically very misleading. Do you actually envy the person that drives a Ferrari around, or do you detest the loud noises they make? Are you usually jealous of someone who wears a Rolex, or do you usually feel nothing? Clever marketing by the brands have tricked us into thinking that the boast value of an item is different and a lot higher than it actually is.
Remember though, buying value doesn't mean buying cheap. There are many cheap items that deliver far less value due to cutting of corners that impact the functional or stored value. There are plenty of higher priced items that deliver much more value to the purchaser.
For example, a few years ago, I purchased a new king sized Sealy Posturepedic bed for $3,000. It might sound like a lot to pay for a bed, and the budget conscious among us might not have even considered this bed due to it being from a premium brand. Before we got to this bed, we had been shopping around and most pocketed spring (no disturbance), latex top (cooling and comfortable) king sized beds with a decent frame were going for $1,500 - $3,000. When I laid on the display bed, I felt that it was more cooling and supportive than the other beds we had tried and it was on 50% discount, so it was actually the same price as another King Coil bed we had been eyeing. Even though it was near the top of our price range, I made the decision that the functional value (comfort, technology, quality of materials, effectiveness of functionality) I was receiving was well worth the price and hence we bought it. Nowadays, the problem we have is when we are travelling, we always miss our home bed because the hotel beds are never as comfortable.
If we had just gone with a cheaper $1,500 bed, we might have ended up with poorer sleep quality, poorer back posture, basically a poorer quality of life.
Functional value - this is the use you get out of the watch. The most obvious is it's ability to tell time. Less obvious would be things like the accuracy of the time, the mechanism to keep the watch running (battery, kinetic) etc. Also includes things like water resistance ability and warranty period, which help to extend the use of the watch.
Stored value - this is the value that you can sell the watch for after many years of using it or just keeping it around.
Anticipation value - this is the feeling you get before and during a purchase. The feeling of desire while you do your research, the feeling of joy as you imagine wearing the watching, the feeling of accomplishment as you pay for the watch, the feeling of impatience as you wait for the watch to be delivered or as you drive home after the purchase.
Boast value - this is what you perceive others will think of you due to your purchase.
Anticipation value disappears very quickly after you have purchased and started using the item. Ever felt a low the moment you start using a recent purchase? That's the anticipation value evaporating. Clever marketing by the brands have made us feel really good about purchasing their item.
Boast value is typically very misleading. Do you actually envy the person that drives a Ferrari around, or do you detest the loud noises they make? Are you usually jealous of someone who wears a Rolex, or do you usually feel nothing? Clever marketing by the brands have tricked us into thinking that the boast value of an item is different and a lot higher than it actually is.
Remember though, buying value doesn't mean buying cheap. There are many cheap items that deliver far less value due to cutting of corners that impact the functional or stored value. There are plenty of higher priced items that deliver much more value to the purchaser.
For example, a few years ago, I purchased a new king sized Sealy Posturepedic bed for $3,000. It might sound like a lot to pay for a bed, and the budget conscious among us might not have even considered this bed due to it being from a premium brand. Before we got to this bed, we had been shopping around and most pocketed spring (no disturbance), latex top (cooling and comfortable) king sized beds with a decent frame were going for $1,500 - $3,000. When I laid on the display bed, I felt that it was more cooling and supportive than the other beds we had tried and it was on 50% discount, so it was actually the same price as another King Coil bed we had been eyeing. Even though it was near the top of our price range, I made the decision that the functional value (comfort, technology, quality of materials, effectiveness of functionality) I was receiving was well worth the price and hence we bought it. Nowadays, the problem we have is when we are travelling, we always miss our home bed because the hotel beds are never as comfortable.
If we had just gone with a cheaper $1,500 bed, we might have ended up with poorer sleep quality, poorer back posture, basically a poorer quality of life.
Why this works
By concisely differentiating the different types of value you are paying for, you can prevent yourself from being tricked by marketers into paying a much higher price than the value you are getting.
This method also prevents you from falling into the trap of thinking everything higher priced is bad and going for the lower priced items, at a cost of receiving lesser value. What you want is to receive as much value as you can for the price you paid, rather than trying to pay as little as possible and receiving even less value.
This method also prevents you from falling into the trap of thinking everything higher priced is bad and going for the lower priced items, at a cost of receiving lesser value. What you want is to receive as much value as you can for the price you paid, rather than trying to pay as little as possible and receiving even less value.
How-to guide
Before purchasing an item, analyze the item and your own feelings and figure out what value you are actually paying for. Don't waste money paying for anticipation value, as the feelings are very short lived. Be careful when paying for boast values, as the impact an item has on your image is typically not what you think it is. Look to pay for long term functional value and stored value, both of which can help to lead you towards a better lifestyle in the long run.
Anticipation value
To prevent paying for anticipation value, before you buy an item, imagine yourself having already purchased the item and start using it in your mind. Try to imagine the feelings you would have when actually using the purchase. This helps you to skip past all the euphoria you feel when buying an item. If your feelings of happiness dissipates during this imagined scenario, you know you are paying for anticipation value.
I have used this method to great effect when thinking of which computer games to buy. Typically, the marketers would show exciting and engaging game play or nice movies with intriguing story lines to entice us to buy the game. Imagining myself playing the game sometimes helps me to realize I don't even like games in that genre.
I have used this method to great effect when thinking of which computer games to buy. Typically, the marketers would show exciting and engaging game play or nice movies with intriguing story lines to entice us to buy the game. Imagining myself playing the game sometimes helps me to realize I don't even like games in that genre.
Boast value
The recommendation is not to prevent paying for boast value, but to make sure that you are actually getting the boast value you are looking for. As shallow as that sounds, humans are social creatures and need external validation to boost our self confidence and live a productive live.
Instead of imagining what others might think of you after you have purchased the item, try to imagine the scenario where you found out one of your friends had purchased this item. What feelings would those trigger in you? You would typically realise that what you think others might feel is quite different from what you would feel. The former is influenced by marketers stroking your ego, while the latter is closer to reality. Do you want those same feelings triggered in your friends? How much is generating those feelings worth to you? Is the price you are paying to generate those feelings worth it?
Instead of imagining what others might think of you after you have purchased the item, try to imagine the scenario where you found out one of your friends had purchased this item. What feelings would those trigger in you? You would typically realise that what you think others might feel is quite different from what you would feel. The former is influenced by marketers stroking your ego, while the latter is closer to reality. Do you want those same feelings triggered in your friends? How much is generating those feelings worth to you? Is the price you are paying to generate those feelings worth it?
Functional value
Most people already know how to analyze the functional value of an item. Look at online reviews, but be careful of the agenda of the source of the information. If possible, test out the item before purchasing.
Stored value
Stored value applies to items that can be resold after a period of ownership, for example, a watch, a car, property etc. Estimating stored value accurately is not easy. Many watch sellers would say their brand would hold it's value or increase in value over the years, though the sellers of an item would be the worst people to take advice on how to estimate the stored value.
The easiest way is to see how much people are willing to pay for such an item now on the secondary market. If you can't find any sellers, it could mean that there is no market to sell the item, so the stored value might effectively be zero. If you find many sellers, be wary of the same level of competition when you eventually get around to selling your item.
The easiest way is to see how much people are willing to pay for such an item now on the secondary market. If you can't find any sellers, it could mean that there is no market to sell the item, so the stored value might effectively be zero. If you find many sellers, be wary of the same level of competition when you eventually get around to selling your item.