Yes, ladies and gentlemen, it is once again everyone’s favorite time of the year… Christmas shopping! Ok, so the stores have had decorations up since before Halloween and I’ve already seen more tinsel than I have any right to, but this giving time of year has me wondering about something… cost.
Its a topic I think that most of us do not think enough about. We find an item we want, we compare its price to our bank account (or credit card limit for some) and then decide if we can go on eating until pay day if we decide to make this purchase. The end of the logic train happens when we can get what we want and the amount of remaining funds is greater than or equal to zero. But there is so much more to it than that! So, lets look at some of the costs associated with a purchase, in light of a recent purchase of mine, which will be delivered tomorrow.
See, four years ago I was given a gift certificate from the manager I worked for at the time, as a a way of her saying ‘Thanks’ for doing a lot of extra work on her behalf. She wasn’t my manager, but I was helping out on her team and doing a lion’s share of work at the time. It was the grunt work, but given how much of it I did in relation to the rest of the team, I was more appreciative that my efforts did not go unnoticed than I was happy for the cash.
Still, that $50 went to me purchasing something I had wanted since college… a nice stereo system. My roommate had brought the nice one with him and we were one of the only rooms on campus with surround. It was a poor college student’s surround sound, but it was a far cry better than the tiny built-in speakers the rest of our friends had. So this $50 to Circuit City got me to purchase a $300 ($450 before discounts and gift certificate) Dolby DTX 5.1 receiver and speakers. Sweet!
The one downside was that my TV, a 25" Sanyo that had bee purchased years earlier when I was flat broke, was completely undersized for this setup. I now had a wonderful, mid-range sound system, which is perfect for my small living room, cozied up next to a Wal-Mart special. Movies sounded incredible… and looked like Brittney after the two kids and a fat bag of crack. Not a pretty sight.
So I started thinking about upgrading the TV to match the sound system. Four years later, I have finally purchased one. Its a respectable 32" LCD from Sharp. Not huge, but the largest my enclosure will house and its not something that takes up half the room. I’m not a huge TV watcher, I don’t even have or want cable, but I do tend to play a fair amount DVDs and have a growing collection of downloaded video content that I would like to be able to stream and play from my PC to the TV.
Its not that I couldn’t have purchased a TV at any time in the last four years, its just that the cost of doing so wasn’t one I was willing to pay. See, I knew that new LCD factories were coming online in Asia every month, and that eventually, there would be more supply of devices than there would be demand. When that happens, prices fall to their lowest, rock-bottom level and its a great time to go bargain hunting.
If you’ve been waiting for this like I have, then wait no longer. Prices have finally hit the floor and there will never be a time to buy like there is right now. All the economies of scale seem to have been reached, production is at its peak and prices have nowhere to go but up. To me, it was now or never to upgrade.
So, I spent some time looking around online, hitting review sites, looking through Froogle and trying to figure out from the many models available, which one I really wanted. I did not want to get some ultra-high model as it would be wasted on me. I also did not want a Wal-Mart special because I didn’t want to have to purchase another TV within a decade. I was looking for an upper mid-range set, and this next part is the key, at a rock bottom price. If I could get it for half off retail, I would be set.
I got close. It was $740 (including shipping) for a $1300 TV. Not too shabby.
So, back to our original subject… cost. I just spent a few, ok many, paragraphs talking in a round about way about the costs associated with this purchase of mine.
First, and most obvious, is the direct cost. I had to pay out of my pocket for this TV. Even if someone had given it to me for Christmas, it would have been a direct cost incurred from whoever purchased it for me. Even had Sharp just shown up out of the blue and dropped it on my door step at no cost to me, it still would have cost them something to manufacture and deliver it to my house. Direct costs are those that can be attributed to the purchase.
Now, what about indirect costs? My internet connection and my computer are prime examples here. I can’t directly attribute them to the sale, but they, along with the electricity I used while doing my search, added indirectly to my purchase. Even the amount of time I sat on the couch, wearing out the cushions and the pennies that ticked off my mortgage during the time are indirect costs. Sure, I could have searched from work, but the same indirect costs apply there, I simply am not paying or them. That assumes that my boss doesn’t catch me surfing the web for TVs when I should be working, and fires me for abusing company systems and neglecting my job. That would be a huge indirect cost, especially if it had happened right after I entered my credit card info and clicked 'submit’.
Another indirect cost would be the interest accrued for this purchase on my credit card, were I not to pay it off at the end of the month. As we all know about how high those rates are (my regular card has a 24.75% interest rate), not paying off that TV would mean that the purchase would only get bigger and costlier each and every month until it is paid off… probably about the time I need to purchase another new TV, were I to make the minimum payments.
Two costs down, but here comes the one I really want to talk about… opportunity cost. By purchasing the TV, I lose the ability to put that $740 towards some other purchase. I could also forego the purchase invest that money in my retirement and earn a lot from it. By choosing to purchase a TV, even one as economical and lasting as the one I purchased, I still have to give up the ability to do anything else with that money that took me so long to save.
While that is the traditional view of an opportunity cost, I think there are a few more, deeper ways that this purchase may impact me. By purchasing a new TV, I could reopen the door to me spending more time in front of it, and less time with my girlfriend, my friends, reading books or in whatever hobby that might interest me. That would be a deeply hidden cost that might not become obvious until years later in my life.
Also, that time I spent searching and thinking about buying a TV, I could have been using to solve the mysteries of the universe, to finding a cure for cancer or for writing in this all to infrequently updated blog. I lost the opportunity to do other things while I spent time thinking and searching for this piece of consumer hardware. I could have been working on my house, investing in it, but instead I sat in front of this very computer, staring at an LCD screen that does basically the same thing as the TV I just purchased.
But there is one opportunity cost that I did not incur when making this TV purchase… that of exercising my brain. All too often I see people making purchases they can’t afford or purchasing when uniformed. When you buy something that hurts you financially or ends up being not what you really needed/wanted, you really just threw your money away for no good reason, other than to satisfy your own ego by making a purchase.
No, I am not immune from this kind of behavior. I have done it before and I am sure I will do it again in the future. Thankfully, when I look back over my life, the biggest purchase I have ever made this mistake with is less than $1000 and most of these purchases less than $20. I tend to be fairly financially conservative with my cash, as I worked hard for it and don’t enjoy seeing it leave me quickly, but I know I am far from the norm in our society.
As with so many things in our country’s recent history, if we only had an honest and full understanding of the costs prior to diving in, we might just save ourselves from a lot of grief and heartache.
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