Let me give you a scenario:
You have a car that gets 15 miles to the gallon. The cost of gasoline is $3/gallon. Your favorite grocery store is 7 miles away and it takes you 15 minutes to get there. You go to the grocery store, buy a bunch of stuff then drive home. When you get home you realize one of your items, let’s say it’s a loaf of bread, is green and moldy. The bread cost you $2.15.
What do you do?
- A.) Drive back to the grocery store and demand a refund or new loaf of bread
- B.) Call it a loss and wait till your next grocery trip to buy a new loaf and double check it’s not expired
My experience when talking to most people, including the person who told me this story, is that they will choose option A. and drive back to the store, yell at the manager, get a new loaf and drive back home.
In my opinion, that is the wrong choice and I’ll tell you why.
First, the total cost of the grocery trip was offset by buying ALL the groceries not just the loaf of bread. Second, by going back for a new loaf that cost $2.15 but spending $3.00 (fuel) to do so is a money losing proposition. These amounts may seem trivial but add a few zeros so that it’s now $21,500 and $30,000. Would you spend $30,000 to recover $21,500? It always helps me to add zeros and magnify the issue to look at it more clearly. There is no way I would spend 30k to recover 21.5k so why do it for $2.15?
Third, the losses here aren’t simply the cost of the loaf and gas, there is a component of lost time. In this case, it’s 30 minutes of lost time. How would you factor this cost? Most people will use what they get paid as a guide and if the median salary in the U.S. is $56k or $27/hr then the loaf of bread is now absurdly expensive. Time is far more valuable to me these days which is why I use Amazon, Instacart, Uber Eats and other services to do work for me and deliver stuff to my home. and it is part of my outsourcing process.
So what poor decision making do I think I made?
My wife and I spent a great deal of money on education for our kids. They went to private schools from K-12 then went to private colleges. We spent at least $500k on education for the kids. In retrospect, I could have bought two 250k homes back in the late 1990s, rented them out, and let them appreciate and they’d be worth about $1 million dollars today. This doesn’t include rental income and it assumes the homes appreciated but at this point, where are there homes that didn’t appreciate in value like crazy the last 24 years?
The kids could have gone to public schools and perhaps they would be a little dumber but they’d also start life out without any debt and a $500k home paid off. At the time, we thought we were doing the right thing but now I am not so sure. Most people don’t even use their college degrees in their field and end up doing something completely different and our kids seem to be headed that way now.
My whole life now centers around making prudent financial decisions that have a hard calculable return on investment. If the return is nebulous, I’m not interested in funding or financing it.
Conclusion
When dealing with a financial decision DO try to make a mountain out of a molehill so you can see it better. Try looking at the problem from all angles and always include the cost of your time because you won’t ever get that time back.
I am definitely a person that would have gone back to the store. This personality trait is changing over time, a little bit, and slowly. I think I’m penny wise and pound foolish. I have the micro view instead of the macro view. In a way, I think it has helped me get to where I am. Having the micro view helped me to “build my house one brick at a time” (to borrow your phrase). But having mostly built my “house”, I’m starting to find value in the macro view. Thanks for a thought inspiring article.