Are You Measuring the Utility of Your Spending?

99 bottles of wine on the wall, 99 bottles of wine…

“Enjoy life. There’s plenty of time to be dead.”
― Hans Christian Andersen

The traditional definition of an investment is one which you put money into something and you get more money out of it than you put into it. That money can be in the form of income – a stream of payments – or it can be appreciation – you can sell that something for more than you bought it for. In some cases (small businesses, rental properties, dividend paying stocks), you might get both.

However, it’s time that we expand out the meaning of the term investment. Every time we spend money, we’re investing it. It might not be an investment in the traditional sense in that, if you go to McDonald’s and hand the cashier over a buck oh five (because freedom isn’t free), you’re not going to get $1.10 in return at some time in the future. Instead, we should be thinking about how much true value in our lives we’re getting out of the money that we’re voluntarily spending.

Yes, there are a few expenses which you have no control over. Actually, there’s one. It’s taxes. Unless you enjoy having IRS agents paying you a visit and taking you away to spend time at the feet of Bernie Madoff, you must pay your taxes. Everything else is optional. Sure, you think that you have to buy food, clothing, and shelter, but you don’t. You have a choice. It’s not a particularly delectable one. The contrast is stark: you could buy food or you could dumpster dive. You could pay for lodging or you could live under a bridge. You get the point. Every time you spend money, you’re making a choice.

When you spend that money, though, are you actually thinking about just how much joy you’re going to get out of that spending, and, furthermore, are you maximizing the joy per dollar spent?

Let me propose a metric that, while you shouldn’t obsess over in every single spending decision, is one that you should keep in the back of your mind. Perhaps you could post it in a yellow sticky note on the front of Monkey Brain’s cage, right next to the DO NOT FEED THE ANIMALS sign.

Return on money spent = Utility / $

What is utility? you ask. Daniel Bernoulli was the first to discuss the utility of spending back in 1738. Utility is, in its simplest form, the satisfaction that you get from using a good or a service. If you really enjoy watching movies but really hate mowing the grass, then the utility of watching a movie will be significantly higher than the utility of mowing grass.

While tenured academics earn their paychecks in their ivory towers trying to come up with formulae for utility involving mu and beta and square roots, the reality is that, for all of us in the real world, we’re never going to spend time trying to calculate the utility of everything that we spend money on. Can you imagine how difficult it would be to come up with a rank order of how much you value chicken cooked at home with no spices versus fried chicken at a restaurant versus watching a movie versus watching the World Cup live versus on and on and on?

Neither does Monkey Brain. He doesn’t want to go through all of that math. In Monkey Brain’s world, math stinks. There’s only one number he knows: not enough. If it’s something that he wants, then you don’t have enough of it to satisfy him. He’s going to tell you that he needs whatever it is that is grabbing his attention at the current moment. If you’re not on top of your game, you’re going to give in to his petulant banana peel throwing and buy whatever it is that he wants just to shut him up.

Those of you who are reading who have children know this exact feeling.

I’m not about to propose that you come up with the definitive list of everything in the world that you could possibly spend money on and determine a utility score for each item. You’d die trying. I’m not even asking you to come up with a formula that you could use to determine a utility score on the fly. After all, how many variables would go into figuring out a formula for putting some number on your enjoyment? By the time that you actually went through the process of calculating that number, you’d be so disgusted that you wouldn’t derive any real pleasure from whatever it was that you were purchasing.

It is possible, after all, to obsess too much over how much you’re going to spend on something.

Instead, what I want you to consider is the relative merits of what you’re about to purchase compared to an alternative.

This is best described with an example.

My wife and I really enjoy wine. However, we’re nowhere near the sophisticated palettes that oenophiles are. I can’t discern a hint of saffron mixed with a frisky bouquet of dandelion on the nose combined with a scintillating rush of chili powder on the back of the tongue when I taste a wine.

For me, it’s almost binary. I either like a wine or I don’t. Yes, there are wines that I like more than others, and a few wines that I really enjoy. Beyond that, I don’t have a strong opinion one way or the other.

Therefore, when I’m buying a wine, I do a very quick calculation in my head. Let’s say that there are two wines which I’ll enjoy. One is $10 and one is $20. Will I enjoy the $20 wine twice as much as the $10 wine? Probably not. Thus, I purchase the $10 wine. Even though I would probably enjoy the $20 wine more than the $10 wine, I don’t get twice the utility, and it’s not like I’m buying the grape version of old vinegar when I’m buying the $10 wine. I’ll enjoy the $10 wine well enough, and that’s how I justify the purchase.

Let’s not confuse the issue of buying something I wouldn’t enjoy just because it’s cheaper. If it’s a choice between a $10 bottle of wine that tastes like a mix of quinine and arsenic versus a $20 bottle of wine that tastes good, I’m buying the $20 wine, no questions asked.

There’s pressure to get bigger and better everywhere we turn, and sometimes the cost isn’t even linear. If you look at a 60” flat screen TV versus a 27” flat screen TV, it usually costs more per square inch for the bigger TV than for the smaller TV. Undoubtedly, some of it is due to more bells and whistles that the bigger TV will have that the smaller TV doesn’t, but if you reduce television watching down to its basic premise, it’s watching a show or a game or news or whatever. The 60” TV may be a little clearer, but, before you buy the enormous television, you have to ask yourself.

Will I get that much more enjoyment out of a 60” TV than a 27” TV to justify the increased cost?

If you will, then go for it! Buy the big TV. Invite me over. I’ll bring the $10 wine!

I’m not advocating always going for the cheaper option. Far from it. I’m advocating going for the option which gives you the highest utility for your dollar spent. That’s going to be the best deal for you in the long run, and you’ll find that you are spending more money on things which are more important to you if you think about your purchases this way.

I also don’t mean your everyday, day-to-day expenses. I mean every expense. It’s particularly important that you apply this thinking for your biggest expenses. You’d hate to find yourself thinking to yourself one day “is this mortgage payment really worth what I’m paying for?”

Have you ever gone bigger and found out it wasn’t better? Skimped on something and regretted being so cheap? Tell us about your experiences in the comments below!

Around a year ago, I interviewed small business attorney Patrick Asplin to determine when you really need to engage a lawyer in your entrepreneurial affairs. If you haven’t seen the interview, go check it out!

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

4 thoughts on “Are You Measuring the Utility of Your Spending?

  1. Great post. I completely agree with this. So many times in life, people go for the more expensive choice because they will “like it more”. This goes to the extent of spending an extra $100,000 on a slightly larger house because you will enjoy the space. You won’t ever enjoy the space.

    And if you do enjoy the extra space that you don’t need or use, you certainly won’t enjoy the house by the factor of the increased expenses.

    1. Thanks for commenting!

      Oh how we fell for that specific example! We, a childless couple, bought a 5/2.5 house right after I graduated from grad school. Fortunately, it was a builder’s fire sale because he was on the verge of bankruptcy, so we certainly made our money on the purchase. That part was a win. However, despite having only two of us (this was even pre-dog years), we felt like we needed to fill the entire house with furniture. Ugh. Not only that, but instead of taking a road trip to IKEA to buy said furniture, we took a road trip to High Point, North Carolina – the home of nice furniture stores – just to shop for furniture.

      Buying new furniture is like buying a new car. The moment it comes off the lot, the value plummets.

      We now have a folding table as our dining room table. I have to admit, it’s a bone of contention between me and my wife. She wants a nicer table. I’m perfectly happy with what we have, and I can’t, in my mind, justify spending more on a table when I will get no additional enjoyment out of it. Of course, in the bigger picture, there are some battles not worth undertaking! 😉

  2. I love this, Jason, and resonate with on so many points. I think the utility score habit is a lot like counting calories. In the beginning it is tedious. But after awhile, it becomes an internalized knowledge, even if sometimes approximated, that just helps determine the decision to buy or not to.

    I also think setting the budget percentage for impulse items, even like coffee, helps. If I tell myself I have $50 per month (allowance), which both my husband and I do, then I know ifi get one coffee drink a week out of that, I have spent a third of my allowance on that. So, usually I don’t do it. And, the internal calorie counter I have established kicks in there too, and usually helps put that brake pedal to the floor.

    Life is for living, yes, but we are stewards, and we end up enjoying life more without the guilt of being an immature steward.

    1. Excellent comment, Marjorie! You are dead on in that it takes time to get internally calibrated to the value of spending (and the value of calories). I actually used the MyFitnessPal app for several weeks meticulously documenting everything I ate to get a sense of both calories and protein, as I always try to max out protein/calorie ratios, except on my cheat day. Now, I can eyeball the numbers and be close enough.

      We also use the concept of a no repercussions budget line item for each of us. As long as it’s not illegal, immoral, or unethical, we can buy whatever we want with that money. It has saved me from a lot of resentment. When we didn’t have that line item, I’d be resentful that my wife was buying things that women buy – clothes, makeup, etc. Once we established the guilt-free, no-holds-barred line item, all of that went away, because I no longer cared, as it wasn’t “our” money being spent. Hmm…fodder for another article!

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