The Dollar Rule

Submitted by George on Wed, 2008-06-11 23:03

Genesis of The Dollar Rule

As mentioned in the introduction to the Dollar Rule concept, it has some similarities to existing concepts such as opportunity cost from economics, or the 80/20 Rule which is a favorite amongst time and life management folks.

However, the specific formula of the Dollar Rule only occurred to me after yet another discussion of buying toys for the kids. In short, "How many toys are enough?" The retort is of course, "There's never enough!" Didn't they just get a toy last week? Shouldn't this toy be a Christmas or birthday wish-list toy? And so on.

If you have any kids older than say 3 years old, you know exactly what I'm talking about. It doesn't matter if there's a room full of toys already, each of which was The Toy at some point in time. Some toy is the most desireable one in the world right this second -- usually the one that is in the hands of another child. Yes, these are distinctly first-world problems, sad to say. Woody, Buzz and company never had it so bad in the dreamland of Pixar.

Toys come in all shapes and sizes, and more significantly they come with all sorts of price tags -- from pennies to jaw-dropping and eyebrow-raising. Rhetorical question: If it's more than $50 is it really a toy anymore?. So how do you keep purchases under control? One age-old obvious idea is to set a budget through an allowance. Okay, brilliant. Who needs the Dollar Rule when you can set an allowance. The recommended amount varies, but a dollar per year of age each month (but spread out weekly) is typical. That makes sense from the adult point of view. You get a certain number of dollars: save up to buy fewer big things or spend more frequently and buy more cheaper things.

vs.
Optimus vs. Elephant Happy Meal Toy

But logic has no place here. This is kids we're talking about. To kids a toy is usually just a toy, regardless of price. Until they are a bit older they generally don't have any appreciation of how much a toy really costs. They may know something is "10 dollars" vs. "30 dollars" but until they're earning a paycheck and seeing a third of it sucked away by Uncle Sam, that's still an extremely vague concept to them. It might as well be 10 M&Ms vs. 30 M&Ms. A $1 Happy Meal toy is often times just as fun and desirable as that $35 Transformer robot. At least it often seems that way.

So there had to be a better way to measure and compare the relative worth of buying a particular toy. Otherwise why should I spend $35 on a gee-whiz toy if a $1 cheapie toy would do just as well? A lot of factors determine price, to be sure. The exclusivity (like a licensed comic-book character action figure), build quality, game play, teaching ability, safety, etc. are all criteria, but hard to measure objectively and quantitatively.

Why bother with these vague criteria when they're far too subjective. Let's just measure the actual result of all of the criteria combined. In other words, why take the vitals (blood pressure, heartrate, lung capacity, etc.) of 10,000 marathon runners to determine who is best? Just see who crosses the finish line first. Being results-based, makes it a lot easier. (The saying, "Don't tell me how hard you work, tell me how much you get done." sums it up pretty well.)

For the Dollar Rule the result we measure is usage time (which we'll refine a little later on). How useful or good the item is, will be largely proportional to how much time we keep using it. If the more expensive items don't win the usage comparison, then you might reconsider why you really are buying these things. In other words if the $75 camera gets a lot more use than the $1000 camera, you need some help from the Dollar Rule.

Fortunately, the Dollar Rule idea isn't just for toys. It's a rule of thumb for most purchases, big or small, frequent or infrequent. Like any financial advice, if you choose to ignore it, of course it won't work. But I think you'll find the Dollar Rule to be easy enough and clear enough to apply constantly and consistently through your daily life, starting right now.

Use the Dollar Rule as another money-saving tactic (i.e., tool) to help you with your overall money strategy, since you will need multiple tactics in the end. Even if you have the same goals as many people, everyone will use differing tactics. For example:

• Save money (strategy) by using automatic payroll deductions (tactic) for your 401k.
• Save money (strategy) by packing a lunch instead of eating out.
• Reduce debt (strategy) by paying an extra $100 on your lowest-balance credit card (tactic).
• Reduce debt (strategy) by using the Dollar Rule

While there's no expectation that you'll get rich purely because of the Dollar Rule, I hope you find it to be a worthy addition to your financial toolbox.

» Next up: A slightly more useful Dollar Rule example.

 Tags:

• kids
• money
• tactics
• time

 

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