The Dollar Rule
Introduction
Financial advice is often rife with catch-phrases and guidlines that we repeatedly encounter: Invest. Reduce debt. Make budgets. Buy used. Don't lease. Buy stocks. Buy bonds. Diversify. Buy index funds. Buy and hold. Live below your means. Pay yourself first. Invest in companies you can understand. Good debt vs. bad debt. A penny saved is a penny earned. Compound interest rules. Never lose money. And so on.
But whatever mantras you live by (or wish you lived by) I give you yet one more, which I hope you will find to be rewarding and worth remembering:
- The Dollar Rule: A product or service you buy should return at least 1 hour of use for each dollar spent on it.
In other words if you buy a $400 gadget then get at least 400 hours of use out of it before you start salivating over the next smaller, faster, shinier gizmo that hits the market. The emphasis is on use and not just ownership. If you can't or won't get the appropriate number of hours of use from it -- don't buy it. It's as simple as that.
On the surface the Dollar Rule seems like another typical money-saving tip along the lines of "Use coupons" or "Avoid credit card debt". However the real utility of the Dollar Rule is when you apply it across all or most of your spending.
How? Let's talk about cars for a moment. There are many mine-is-bigger-than-yours metrics that car owners might use to see how their car stacks up to everyone else's: seconds-to-60mph, engine torque, number of seats, towing capacity, etc.
But of course in today's faltering economy, the only measurement that anyone talks about anymore is the very fiscally relevant miles-per-gallon (MPG). Do you know how many miles per gallon your car gets? In this age of high-priced gasoline many people are now painfully aware of just how bad their car's mileage is. Got a gas-guzzling 3-ton behemoth that gets 10 MPG? Or a hybrid that gets 49 MPG? If you don't know, your bank account surely does.
Just like MPG, the Dollar Rule is measuring the mileage you're getting out of money. Did you buy a new smartphone for $499 that you still can't figure out how to use even after 6 months? Or would the basic $79 phone been sufficient?
Or how about that monthly $40 fitness club fee that you use only 4 hours a month? Compare that to a $80 bicycle from Wal-Mart that you could ride a few miles every day for years. These may not be perfect apples-to-apples comparisions, but these questions should get you thinking about your spending habits.
The Dollar Rule won't give you all the answers, but it can steer you toward more efficient spending.
There's only 24 hours to spend each day. Why buy things that you or your family won't have time to use? If you buy only what you have time to use, you will naturally limit your spending as a result.As you can see, the Dollar Rule is meant to be simple enough to be understood by most anyone (even kids), but still provide benefits that everyone can appreciate. The more economics-minded reader might view the Dollar Rule as opportunity cost in action. Others might see it as the 80/20 rule (also know as the Pareto principle) for money. But there's no fancy theory behind the Dollar Rule. It's just a rule of thumb.
Not a Crash Diet
It's important to note that using the Dollar Rule does not imply that you always buy the cheapest items, whether it's shoes, a computer, or a car. The Dollar Rule also doesn't mean drastic spending cuts, giving up the things you love or extreme miserly conduct. In fact, in many instances the Dollar Rule may even prompt you to spend more. But the overall intent is to limit your total spending to just relevant purchases.
Still, if your spending is currently wildly out of control, you may feel like you're being shackled. But as various authors have well-demonstrated, planning your spending actually helps you save (see the books Millionaire Next Door and Debt-Proof Living).A spending plan is like making a grocery list before going grocery shopping. With a list in hand, you won't buy the impluse-grabbing "sale" items that happen to look tasty just because you're hungry. Instead you buy only the food you felt you needed when you made the list at home. If that box of cookies wasn't on the list when you made your list, don't buy it.
Simlarly, the Dollar Rule helps to keep the emotional and impulsive "hungry" spending in check, while still validating useful and necessary purchases. If you can't or won't plan out your spending (i.e., making a budget and spending plan), then at least let the Dollar Rule help do it for you.
» Next up: The Time = Money Equation and some Basic Dollar Rule examples.
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