The Dollar Rule

Submitted by George on Thu, 2008-08-21 03:51

Refining the Dollar Rule

Although we've applied the Dollar Rule to various example purchases (like the Nintendo Wii Fit, baby gear, and laptops), let's take a more critical look at the Dollar Rule itself.

In it's basic form, the Dollar Rule is a bit simplistic. It refers to the "use" of the product or service. But some things we buy or pay for are meant to save time so that we have more time to spend on something else. Common household appliances like microwaves, dishwashers, and (clothes) washing machines are typical time-savers that most people take for granted. But even things like a faster computer would save you time, ideally making you wait less and multi-task more. Or maybe it's as simple as paying someone to mow your lawn each month.

So or first refinement (version 1.1 if you will) of the Dollar Rule would be:

So if you are paying for something that saves you 5 hours of time, that could be viewed as being roughly equivalent to getting 5 hours of use out of it, since that's 5 hours you could be spending doing other things (hopefully wisely spent vs. just watching TV or something).

So our first refinement is how we're determining the use-value of a purchase, not just in time of use, but possibly in time saved. Not to complicate things, but the same purchase could qualify on both counts. Like a faster computer might be doubly-worthwhile if you are using it enough hours to hit your break-even (DRR 1.0) AND you are saving time that you would've otherwise spent waiting around for the computer.

Dollar Rule v1.2

Another problem with our original Dollar Rule is that yes, 1 hour equals 1 hour, but so far we've only been talking about one person. It doesn't consider that some purchases benefit not just one person, but multiple people. That car you buy doesn't just haul your rear-end around, it may haul around 3 or 4 other rear-ends. Or with our computer example, a whole family might use the computer throughout the day.

So we need to refine Dollar Rule to account for this. In which case each dollar spent might actually have provided several man-hours (or person-hours) of benefit. So here is Dollar Rule version 1.2:

So a $10 item can reach a DRR of 1.0 in just 10 days at 1 hour of use by one person. Or it can reach DRR of 1.0 in just 5 days, if 2 people are using it for 1 hour each every day. And so on.

So this is good news if you're wanting that new iPod, right? Start sharing the goods, and maybe you'll be justified in getting a new upgrade sooner. Still we're not trying to encourage reckless or needless spending, regardless of justification.

Reaching a DRR 1.0 is really just a minimum. Really you want a much higher DRR (i.e., far more than 1 person-hour per 1 dollar). Free or nearly free items will always give you an instant infinite or near-infinite DRR, so don't just settle for a paltry DRR 1.0.

Or put another way, as with our "account balance" view of the Dollar Rule. How much do your items "owe" you? If they owe, you need to collect. Being owed a lot is not good in our Dollar Rule context.

So with our Dollar Rule tweaked we will get to the more interesting part of applying the Dollar Rule to some real-world purchases.

» Next up: Dollar Rule vs. Your Stuff

 Tags:

• benefit
• definition
• dollar rule
• families
• ipod
• money
• time

 

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