Before you shop, consider the externalities

By | October 27, 2015

I pick on stuff, things, consumer goods, junk, as a personal finance geek because I know that much of a person’s budget (and debt) comes from these items and because these expenses are usually not recurring, necessary or fixed and thus easier to cut. The average American easily owns more consumer goods than any society in the history of the world, so I know most people can find items to eliminate. Spending your money on depreciating assets will never make you rich and I think most depreciating assets give you the least bang for your happiness buck.

Two years ago, I published an article on how I think about shopping. Every week or so, I used to write out a Needs list and a Wants list. I would take my Needs List, go to the (usually grocery) store and buy only those items. I would then take my Wants List and analyze the hell out of each Want.

Questions to ask yourself before you buy something

  1. Is this an item that I know to be useful or believe to be beautiful?
  2. Will buying this item make my life better or worse in the long run?
  3. What is the opportunity cost of using that money instead of buying more VTSAX?
  4. What are the externalities of that item?

My undergraduate degree was in economics and these really were the questions I asked myself.  For people who don’t think in jargon, let me explain what I mean by item #4. accident-151668_640An externality is an additional cost (or benefit) that is not imposed on the person causing the externality. For example, let’s say two cars on the freeway three miles ahead of you crash and cause a traffic jam. As a result of this, you’re stuck in traffic limbo and lose an hour’s worth of work. Even though those two cars caused that additional cost to you, they won’t bear the cost.

Pollution is another example. When people drive, they pay a certain amount at the gas station. That cost includes the cost to extract, refine and deliver the gasoline to the gas station. It also includes the price of labor for the gas station, rent and profit for everyone involved. It almost certainly does not take into account the true adverse cost to the environment and future generations though. That harm is borne by the entirety of the world and the future through the resulting climate change. Those costs are nebulous and uncertain, therefore difficult to calculate and almost never added to the sticker price. As humans, we are quick to reap the benefits, but slow to comprehend the costs.

The first three questions listed above force me to consider what buying that particular item would mean to me. The fourth question makes me consider the costs to people who aren’t Thriftygal.

Questions to ask yourself before you buy something continued…

  1. *What are the environmental implications for the production and distribution of this product?
  2. **What were the conditions for the person making this item?
  3. ***What will happen to that item once it is no longer useful or beautiful?
  4. ****Does buying this item help someone else greatly? (externalities can be positive too)

After doing this for a while, I began to realize that almost nothing was worth the actual price. I focus on the financial impact of consumerism with my posts, but adopting fewer and fewer of these habits not only pads your net worth, but is also arguably better for the world. Today, I still have a Wants list, but it’s more of a reminder than anything because I pretty much buy whatever I want.

The key is: I just don’t want that much. One of the many reasons I dislike shopping and don’t buy much stuff is because I can take nearly any item on my Wants list, calculate the price with the externalities included and decide it is most certainly not worth the what the sticker suggests. My personal finance avatar consults my environmental geek and appeals to my humanity and I usually end up not wanting the item in the end.

*(or 4a if I knew how to change the numbering)

**(4b)

***(4c)

****(4d)

2 thoughts on “Before you shop, consider the externalities

  1. Teeka

    This is an excellent article. It is a truly unique way to look at spending. Thank you for taking the time to share this idea.

    Reply
  2. TJ

    Love this. I’ve never been much of an environmentalist, I probably eat way too much meat, but I go through so many of these steps when analyzing purchases that I almost end up purchasing nothing like you. The only physical thing I was purchasing over the years was music compact discs, but with online downloads, it’s almost unnecessary now. it’s a great feeling when you have the nest egg and can’t fathom what you would spend it on. I look forward to meeting you in the “enough” stage. At the moment it looks like my PPI is roughly 1/2 of my expenses. (Love those graphs BTW, thank you for sharing.)

    Reply

Say something!