Every decision we make, whether we realize it or not, involves doing a quick cost-benefit analysis: is this thing I’m about to do or buy worth my time, money, or effort? In other words, is the cost worth the benefit?
The process is actually pretty intuitive. But it can be hard to avoid the sometimes-misleading influences of marketing and our own emotions. Mastering this process can make us wiser shoppers who’re less likely to waste our money, make bad investments, and regret we ever opened our wallets.
How it works
Often when we regret a purchase, it’s because we realize on some level that we didn’t do a good job of weighing the costs of an item against its benefits. And of course, the risk of regret is higher for bigger purchases, like homes, cars, expensive electronics, even a college education. To minimize this risk—no matter the dollar amount of your next purchase—do this mental exercise first:
- Think of all the benefits of the purchase, i.e. how it will help you, how you will enjoy it, how long you will use/enjoy it, if it will make your life easier, etc. In your mind, put all of these benefits on one side of a scale.
- Now think of all the costs of the purchase, not just its price tag. Think about associated costs, like gas and insurance for a car, any maintenance costs, the cost of your time if you’re purchasing something that requires a time investment, etc. Put these costs on the other side of the scale in your mind.
- Which side weighs more? Are there more and bigger costs than benefits? Whichever side “weighs” more wins. If it’s the benefits side, it will most likely be a smart purchase. If it’s the costs side, it may not be a wise purchase.
Do a with/without comparison
That last part of conducting a cost-benefit analysis is doing a with/without comparison. All this means is thinking about the pros and cons of not buying the item. The pros, or benefits, would be using the money on something else you want or need. The cons, or costs, of not making the purchase could be the extra time or effort involved in accomplishing a task without it—like hand washing dishes if you don’t buy a dishwasher.
To make the best purchasing decision, make sure the cons of not buying the item outweigh the pros of not buying it.
That may feel like a lot to think about when buying something, so here are some real-life examples to show you how you’re probably already doing a cost-benefit analysis without even thinking about it. And how there might be some hidden costs you haven’t considered before but should.
Moving apartments — Let’s say you want to move apartments to save money because you saw an advertisement for an apartment that would save you $200/month on rent. Before you start packing, you’ll want to consider all the costs and benefits of the move.
- Possible costs: A fee if you have to break your current lease early, additional commuting costs if it’s farther from work, new living fees—like a parking fee, club membership fee, trash fee—that your current apartment doesn’t charge or charges less for, fees for moving your cable/internet subscription, different costs of utilities, time investment of changing your address on all bills and various legal documents.
- Possible benefits: Shorter commute time if the new location is closer to work and family, fewer living fees, nicer apartment, safer area, closer to stores so you won’t drive as much.
Buying or leasing a vehicle — If you’re in the market for a different vehicle, you’ll want to weigh the costs and benefits of buying a new car, buying a used car, or leasing a car. You’ll also need to consider if good fuel economy of a smaller car is a bigger or smaller benefit than a larger car that can fit the whole family. And don’t forget the future costs of car maintenance, which can be higher for some foreign cars, and the cost of insurance.
As helpful as a cost-benefit analysis is when making a purchasing decision, it isn’t bullet proof, because we can’t always perfectly predict future costs and benefits. We have to do our best with approximations to make the best and most accurate decision. Often our own experiences and knowledge of our habits will help us predict future benefits and costs. For example, is it worth buying a brand-new treadmill when the last two gym equipment sets you bought are still sitting in your garage?
Take emotions out of the equation for best results
Emotions can often get us into trouble when making a purchasing decision. They move the focus from rational thinking and prioritizing budget to how we feel in the moment or how we imagine we’ll feel after we make the purchase. Sales, promotions, and marketing efforts are often based on manipulating emotions to influence your purchasing behavior and affect your cost-benefit analysis—making you think there are more benefits than costs or encouraging you to ignore current and future costs.
For best results when using a cost-benefit analysis to decide if a purchase is a good one, be sure to acknowledge and remove tricky influences like emotion and marketing schemes.Go to main navigation