Jan. 18, 2015

Never Buy Retail

In light of a particularly aggressive savings plan this year, I've been thinking hard about every purchase I make. In doing so I think I've come up with a good way to tell how likely a particular purchase is to be a waste. For everything you buy, look at the amount of value you have to add yourself before it becomes useful. If you don't add anything of your own, and consume it immediately, this means it's been marked up the maximum possible amount, that is to say, you're spending the most amount of money to obtain it.

Let's look at food for example. On one end of the scale you can go to a nice restaurant. From the moment you walk in the door, you're whisked to a comfy table and several real, live human beings will run about, fetching anything you might desire, fully prepared and ready to eat. At the end of the meal, you've contributed nothing but consumption. The staff of course will clean up after you.

To step it down a notch, you can go to a slightly less fancy restaurant. You might have to go up to a counter and carry the food all by yourself to the table. It's not much, but it's something. Chances are you'll receive some minor compensation for this effort in the form of lower prices.

You can extend this concept all the way down the ahem food chain. TV dinners, fresh cooked meals, growing your own vegetables, etc. I'm not necessarily advocating that everyone start a farm in their back yard, but it's helpful to consider how you might trade a little effort for keeping some more of your money by bringing your own value to things you consume.

Another good example is housing. My own city, Washington, DC, has been going through a bit of a population boom over the past several years. As a result the real estate listing are littered with gems like this one. First, notice that the listing price is over $370,000 above Zillow's estimated value, based on the amounts comparable homes in the area have sold for. Scroll down a little more and you'll see the home last sold for nearly half the asking price, and that less than 3 months ago. Clicking through the pictures, it's plain to see the seller did an outstanding job renovating this place into a model of modern luxury. Of course, they expect to be compensated accordingly. All that value will be transferred from the buyer to the seller in the form of cold, hard cash. What's left then for the buyer? We all like to think of homes as investments, but in this case they've essentially just bought a product. All they can do is hope that people as rich as themselves keep flooding into the city to buy overpriced homes. There's no opportunity here to add value themselves.

This year, and beyond, I'm going to look for more opportunities to add my own value wherever possible. Buy more raw materials, fewer finished products. As a happy side effect I'll also get to learn new skills and get an end result that's customized to my exact specifications. Seems like a win all around to me.