In an earlier time, under the influence of the traditional Christian ethic, virtue assumed a divine quality. Among these principles was thrift, honored for its own sake. I recall a popular tale about the wife of a man of extremely modest means whose food shopping consisted of selecting the lowest priced items from numerous markets. Naturally she walked from store to store¾ or perhaps "trudged," to add a touch of pathos. In any event, the story served its purpose. It illustrated a frugality next to godliness, with no limit to the exaltation experienced in such behavior.
Things have changed. A recent report reveals that over half a group surveyed refuses to pick up a penny on the ground. Speaking for myself, I’ll never pass one by. Perhaps it relates to my recollections as a teen-aged bowling alley pin setter earning a dime a line. A penny represents resetting of ten wooden pins and returning two 16-pound balls. To this day that cent signifies a reward for services rendered. Are my experiences unique? It’s hard to say whether this attitude is generational or individual. Regardless, there is more to the wise use of money than mere bargain hunting. A personal consideration transcends the ordinary analysis of value¾ I call it marginal benefits of economy. Let me explain.
There is a term taught in first year Economics known as marginal utility of money. The principle is easily illustrated. Consider the case of Bea Reft, annual salary $25,000, who receives a $5,000 increase. Her life is measurably improved. She can now eat out a little more often, join the neighborhood health club and buy that pair of unaffordable black Amalfi pumps. Contrast that with Greta Gotrocks, earning $150,000 per year, who likewise receives a $5,000 pay increase. Compared with her standard of living before, that relatively small additional amount is meaningless. The likelihood is Greta will never notice the difference.
In concept, marginal benefits of economy is akin to marginal utility of money in that the perceived benefit from an expenditure relates to financial status. Several factors, foremost among them cash flow and net worth, interact to determine the relative value of parsimony. The more prosperous a person becomes, the less meaningful the benefit from a cost-conscious economic decision. If the 9-month old car radio of Elizabeth F. Rugle, a housekeeper earning $500 per week, malfunctions, she should invoke her warranty despite the fact that she must do without for the four weeks it will take for the radio to be reinstalled. However, if the same misfortune befalls Sylvia P. Rosperous, a $170,000 per year title company executive, she may ignore the warranty, buy a new car radio for $200 and install it at once. The pleasure of listening to the radio for those four weeks provides a greater marginal benefit to her than the price she pays. Similarly, at the extreme, Michael Bloomberg is fully justified in spending sixty million dollars for the pleasure of becoming mayor of New York. There is probably no way he might spend discretionary dollars more enjoyably.
Finally, consider another principle that runs counter to our marginal benefits principle, that of diminishing returns. Although the actual law of diminishing returns formulated in the eighteenth century pertained to a relationship between input and output of productive resources, the concept can be expanded to relate to an individual###s personal expenditures. As an illustration, a pair of stereo speakers faithfully reproducing sound over the frequency range 30 to 16,000 hertz (cycles per second) costs $250. By employing the ultimate in design and manufacturing techniques, this expands to the range of the human ear, 20 to 20,000 hertz, but the sales price increases to $2,500. As the difference in listening quality is slight at best, the extra price paid for the more expensive pair is clearly an example of diminishing returns.
In short, your conduct as a consumer relates to what you find important in life. With limited resources, but aspirations for the future, base your choices on thrift and discipline. As the years pass and net worth increases, modify your conduct accordingly, but keep in mind that these must be deliberate choices. Do not let advertising pressures or market manipulators preempt these decisions.
Author Al Jacobs has been an entrepreneur for forty years. His business experience ranges from property management and securities investment to appraisal, civil engineering, and the operation of a private trust company. In his book, Nobody###s Fool - A Skeptic###s Guide to Prosperity, Al presents his Ten Ground Rules for Success for achieving wealth and a prosperous life by outlining a philosophy for spending, borrowing, making sound investments, and how to avoid being victimized by America###s many intimidating institutions. Visit Al at www.accessingyourwealth.com.