The Dollar Rule Ratio
We're going to do a little math now. But I promise it'll be simple. This is probably as mathematical as we're going to get with the Dollar Rule.
Because every purchase involves different prices and time of use, the break-even point varies a lot from item to item. It's hard to compare the break-even point of a toaster to a video game, or lawn service to basketball tickets.
If all we were talking about was gas mileage we'd have a handy standard of comparison, namely mile-per-gallon (MPG). But for most other things there's no such handy measure -- until maybe now.
In the few example purchases we discussed before, we always talk about the break-even point, which is how long it takes to use an item 1 hour per dollar that it cost. So we know that a $100 item takes 100 hours to reach break-even. What we don't really know from that is how far we are to reaching that break-even point, while we are working towards it.
However with just some basic math we can calculate your on-going measurement of how well you're reaching your break-even point. We'll call this the Dollar Rule Ratio (DRR). The DRR is the ratio of usage-hours vs. the item's cost:
| DRR | = |
Hours of Use
---------- Dollars Spent |
So let's revisit our $4.00 coffee mug example. If you use the mug for 2 hours, then the DDR is 0.5:
| DRR | = |
2 hours of Use
---------- 4 Dollars Spent |
= | 0.5 |
Using the DRR kind of gives you a hint (or "score" if you prefer) at how you're doing so far in your spending. At only 0.5, you've still a little behind. But if you use the mug for 4 hours, we reach the break-even point or DRR of 1.0:
| DRR | = |
4 hours of Use
---------- 4 Dollars Spent |
= | 1.0 |
Now let's say you use it for 12 hours, then you're at a DRR of 3.0, which means you're doing great:
| DRR | = |
12 hours of Use
---------- 4 Dollars Spent |
= | 3.0 |
DRR values of less than 1.0 means a purchase hasn't reached the break-even point yet. The item may have been on the expensive side or not enough time has passed for you to make use of it fully yet. So in this sense, you're getting a negative return-on-investement (ROI) on your money so far.
Bigger DRR values are good. It means you're getting more use out of your purchases and spending your money more efficiently.
The DRR value provides a clear unitless metric to tells us if we're at or below the break-even point. By using a ratio, it's easy to compare the DR break-even points of different purchases.
| DRR Value | Translated into English |
|---|---|
| <1.0 | Haven't broken even yet |
| 1.0 | Right at break-even point |
| >1.0 | Past break-even |
Armed with the DRR you can you can quickly get an idea of what all in your house is eating up your wallet needlessly and what's actually being useful.
-
That nifty pressure cooker you bought from an infomercial for $99 seemed like a steal at the time (late night TV and infomercial hosts with British accents can do that to you). But if it's only been used for 3 or 4 hours, was it still a good deal?
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The DVD you bought for $18 that you've only watched once? That comes to a paltry DRR of (2 hrs / $18) = 0.11. The Dollar Rule might've steered you towards a used copy or at least one that was on sale after the movie had been out for a while. For DVDs I've always been limited myself to only buying movies I know I will watch at least yearly, if not more frequently. Matrix Trilogy, Lord of the Rings Trilogy, Star Wars, and so on.
So what's the bestDRR value you think you could reach on a given item? 10? 1000? A million? How does ∞ (infinity) sound?
Do you have to use the item an infinite number of hours? Well, theoretically I suppose so. But of course that's not feasible. No, it's much easier than that. If you remember our ratio, the dollars is the denominator (bottom number).
If the numerator (top number, hours of use) stays constant, as the denominator (cost) gets smaller, the DRR value goes UP (which is good). If the denominator gets so small as to reach zero, your DRR will naturally go to infinity.
| DRR | = |
1 hours of Use
---------- 1 Dollars Spent |
= | 1 |
| DRR | = |
1 hours of Use
---------- 0.01 Dollars Spent |
= | 100 |
| DRR | = |
1 hours of Use
---------- 0.000001 Dollars Spent |
= | 1,000,000 |
| DRR | = |
1 hours of Use
---------- 0 Dollars Spent |
= | ∞ |
So what this mumbo-jumbo means is that if you get an item for free, your DRR will always be a good value. In more practical terms with our DVD example, if your library or a friend has the movie already, just borrow it and watch it for free. That probably sounds blatantly obvious, but then again, how many people still ignore this simple fact and buy movies they only watch once? If you truly love the movie and will watch it repeated, then sure go buy it.
A scenario I purposely didn't cover yet is that of movie rentals, which is somewhere in between an outright purchase and borrowing for free. We'll see how services like NetFlix or Blockbuster stack up later in our "Dollar Rule vs." series.
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