Calculate the real price

By | November 17, 2015

This is another installment in my series “Habits that I don’t indulge in that you probably do that drain your net worth!” (The series title is still in beta). What am I asking you to give up now?

Your television set!

I know! I know! I see you shaking your head at me and saying that a television is a freaking necessity. I’m losing my credibility for even suggesting such a preposterous idea. I hear you! I love TV! I grew up on TV! I used my parent’s hand me down televisions for the first few years of my adult life without a thought. The first time this Want flit across my brain was several years ago after my fabulous roommate decided to try living alone and took her television set with her. I did what I do with any Want that tempts me. I scrutinized the crap out of it. Let me show you a hint of my derangement using two fictitious voices in my head.

Ainsley and Bowen both have $700 in hand and walk past this advertisement.

the antennae is just for show55″ Samsung! $699.99! You save $100! Free delivery! So many exclamation points!

Ainsley: Oh my! It’s a sign from the goddess of lava. This television is exactly the amount I have in my pocket.

Bowen: $700 is a fair price for the actual television set, but let me consider the true cost with all the additional expenses, opportunity costs and likely externalities. [Note: Bowen isn’t much fun at a party.]

Taxes: Everyone wants a cut here. The federal government imposes sales taxes on certain items and depending on where you live, the state, county and city taxes will increase the price of an item by as much as 10%.

Ainsley: Another $43.75. I can still afford that.

Bowen: The price just increased 6.25%.  I wish the amount advertised included taxes like it does in other countries. $743.75 for that television is still a reasonable price.

Usage costs: Unless you want to use the television as a very inappropriate paperweight, you have to pay to use the television.

Ainsley:  According to the Energy Guide sticker on the side of the television, my energy costs will only go up about $14/year.

Bowen: Well, according to the fine print on the Energy Guide Sticker, that $14 is calculated assuming 11 cents per kilowatt-hour and television usage of five hours a day. My energy company charges me 25 cents per kilowatt-hour. And after all the various fees and taxes, in reality, I’m actually paying closer to 36 cents per kilowatt-hour. That means my actual energy costs will rise about $46/year. 

Delivery: The television will not be built and assembled in Ainsley or Bowen’s apartment. Someone has to use a vehicle and compensate a person for his or her time to transport the television from where it is currently stored to Ainsley or Bowen’s place.

Ainsley: The seller generously offers free delivery on this promotion.* Suckers!

Bowen:  Presumably the cost of transport is built into the price of the television.

Ainsley decides to get more information from the salesperson, Constantine.

Upsells: 

Constantine is paid on commission and tries to entice Ainsley with even more “deals.”

Constantine: For an additional $79.95, the television comes with a “protection plan.” This means if anything happens to the television in the next two years, you’re covered!

Bowen: Well, it’s not free. It’s another $79.95. Come on, what are the odds this television is going to break in the next two years? And that “protection plan” (i.e. insurance or extended warranty) contract must be 4 pages long with loopholes galore. Who buys these? I actually did read this entire protection plan contract and my mouth was agape the entire time. The list of reasons the insurance company can deny your claim is long and arduous and covers seemingly every possibility from floods to terrorism to scratches to contact with any human or animal bodily fluids. I struggled mightily to come up with an argument to spend this additional $80 and failed miserably.

Constantine: Okay. It’s almost Father’s Day. Would you like to include a $50 gift card with your purchase?

This is where I told the voices in my head to shut up. For this article, I actually did go online and pluck out this example from a real website, but I despise shopping, so this was my limit.

This is not me.

This is not me.

I hate add-ons because I know that I’m susceptible to them. The research on decision-making and willpower finds that these two qualities are like muscles. The more willpower you exhibit early on, the less willpower you have for later decisions. The more decisions you have to make in a day means you are increasingly likely to make poor decisions or go with the default option. If you’ve already said no to the protection plan and the installation, you’re much more likely to indulge in the expedited or express shipping.

Just say no initially and walk away! Don’t tax your willpower.

Still not convinced? Okay, that’s completely fair. Maybe a television is the best way to spend your hard-earned cash. It might be again for me one day as well. But here’s how I answered the four questions from my previous post on shopping for myself.

1. Is this an item that I know to be useful or believe to be beautiful?

This is an easy yes. A television would allow me to watch Law & Order: SVU, which I do quite enjoy. That would be useful. And the screen is shiny, so that could be beautiful.

Buy buy buy!

2. What is the opportunity cost of using that money instead of buying more VTSAX?

If I bought only the television and resisted all the add-ons, the television would cost $743.75 in year 0 and $46 in energy usage a year.  If instead, I took that money and put it in a fund earning 7% per year, in 40 years, I would have almost $21k. This is also based on the unlikely assumption that I don’t upgrade the television ever and it lasts for 40 years. I also assume that I don’t succumb to the temptation of getting cable or a satellite dish and stick with free local TV.

Meh. An extra $21,000 in my 70s isn’t enough of an incentive to forgo buying something that is kind of a necessity.

Buy buy buy!

3. What are the externalities of that item?

Let me say first that this question three about externalities is all well and good and important to consider, but the exact same answers could be given about the laptop I’m currently typing on or the Kindle on the table next to me. This question is more to remind myself to consume LESS and make sure that Want is really worth it.

a. What are the environmental implications for the production and distribution of this product?

Producing a television is a complicated industrial process. From the mining of resources for various parts to the packaging to the fossil fuels used in all the vehicles along the process, our planet recoils.

Every single component in a television requires gutting the earth and polluting the skies and waters and making the future less hospitable.

b. What were the conditions for the person making this item?

At least one part of that television, more likely than not, will be made by someone in a factory working interminably long hours in horrific conditions for an astonishingly small percentage of the $743.75 I fork over.

This was cutting edge once.

This was cutting edge once.

c. What will happen to that item once it is no longer useful or beautiful? 

Televisions lose their technological “edge” pretty quickly. I doubt many people will use the same television for the next 40 years and the odds are good the television will end up in a landfill. Electronic waste presents a special problem. Chemicals inside the television, like lead, often leak out of landfills contaminating the soil and water.

d. Does buying this item help someone else greatly? (externalities can be positive too)

It may help the economy in the short run to buy that television, boosting the bottom line of shareholders in Samsung and the box store I buy it from and ensuring that the workers who manufactured, assembled and sold it will have a job for one more day.

Consumerism is usually inherently destructive, but….television is a necessity. Buy buy buy.

4. Will buying this item make my life better or worse in the long run?

Personally, I found my answers to this question to be the most persuasive against owning a television.

A television might make my life better. I think flipping on the old boob tube is a nice and relaxing way to end the day, to shut your brain off before going to bed. I could potentially be less stressed from utilizing this outlet. I could save money on entertainment.

Sadly, I tend towards laziness and I can spend an embarrassing number of hours a day staring at the TV. I can waste entire weekends hanging out with only that box. I’m so much more productive and social when I don’t own a television. I also like myself better and feel healthier when I’m not a couch potato. Finally, I don’t see as many commercials and advertisements and my brain doesn’t ferment as many new Wants.

If I didn’t scrutinize every Want that made it onto my list, I would have bought a television without thought. I am so glad that I didn’t because the life I am currently living without a television is more in line with the life I want to live…..I’m also at a yoga retreat in the Caribbean, so hauling around a TV in my carry-on doesn’t appeal in the slightest.

Just think about it!

*Free delivery as long as you overcome the instant gratification impulse and don’t choose “expedited” or “express.”

5 thoughts on “Calculate the real price

  1. Wolf359

    Actually, I thought you were going to go another direction with this post, given that your blog is called “The Power of Thrift.”

    Ben Franklin said, “A penny saved is a penny earned.” If you’re still working, your calculations are more complicated. If you consider income tax, FICA, and Medicare, a penny saved is more like 1.55 pennies earned. Yes, I realize you early-retired, but that’s the whole point.

    Let’s use your previous income as an example. I don’t know how much you made, but you mentioned that your income excludes you from Roth IRAs. I’m assuming you were in the 28% tax bracket ($90,751 – $189,300 for singles). I also assume you paid 6.2% FICA and 1.45% for Medicare. (Not sure how it worked in Australia). Therefore, your tax rate was 28% + 6.2% + 1.45% equals 35.65% total. That means for every dollar you earn, you pay 35.65 cents in tax.

    Put another way, to pay $743.75 for that television, someone who is currently employed has to earn $1,155.79 in the US.

    The power of thrift is that by saving the money and avoiding the expense, you can save and invest the money, letting it compound. Capital gains are tax free until you realize them (and even then are only taxed long-term at 15%.) So you either buy a lesser tv or none while you’re in accumulation mode, utilizing your thrift powers until your nest egg is big enough to be self-supporting.

    Now that you are a capitalist (that is, someone who derives their income from their capital), your taxes are lower and your $743.75 television could actually cost $743.75. (If your income is low enough, your long-term capital gains are taxed at 0%, and you could also use tax loss harvesting and other tricks to minimize your tax rate.

    Thriftiness really is a power.

    Reply
  2. Joe

    I like your website!

    Ironically I had some amazon windows open and was about to buy 4 kindle books about early retirement and I decided not to after reading both this post and the one about books!

    Reply
  3. Gemma

    Another thing to bear in mind: do you have the space for it? I live in a smallish house and have managed to talk myself out of a few things with the “where are you going to put it?” argument (I don’t want to be like the acquaintance who, when househunting, said she and her husband needed a big house for “all their stuff”)…

    It’s lovely to read about a female early retiree (most of the blogs I’ve found on the subject are written by men- I was starting to wonder why).

    Reply
  4. Simon Kenton

    Well, it was back in ’82 I called the game warden and told him to get his .357. He thought we were going out to kill a calf elk that had impaled itself on a fence – game wardens get that call all the time. Instead I took him to the range, set up the family tv, and between us we put 6 from the .357 and 7 from my .45 right through the vacuum tube (they had tubes then). As Swift said, “you would hardly believe how it improved its appearance for the worse.” I didn’t do this to save money, although it did save quite a lot. I did it to keep from pouring swill into the minds of my children, and to recover for exercise and reading and analysis the time they would have spent on self-degeneration and snappish ill-temper. Choices propagate for good or ill down the generations, and none of them watches tv now. In my own life it has saved me at least a year of conversations about what each set of pixelated neanderthals has done to one another during the previous week.

    Your various examples of what Slacker A and Virtuous B and Saintly C have done in their economic lives are silent as to how the good ones actually deploy their savings, which might be a blog post. I am always seeing people who save a few dollars, sometimes by the exercise of insulting cheapness, but let it vaporize anyway, leaving only a residue of distaste. If, for instance, the people who stiff you for the tip and taxes in a restaurant actually increased their check to Vanguard next month by the $5.47 they stuck you with on the last meal you will ever share with them, it would make their behavior a little more palatable. It’s not enough to save it, you have to consciously send it in for investment, and I think few do.

    Reply

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