Sunday, January 11

Financial decision-making

*** To my readers, this is what's known as a green vegetable post. It's not terribly appetizing, but it's good for you. So while the subject matter may be a tad dry, just force it down. Dessert will be along soon enough. ***

I don't know a single person who likes being presented with choice. Don't get me wrong -- we like having options. We're often frustrated if we feel we don't have enough options.


But choice? Choosing implies that you are giving up one item for another. Choosing brings to mind trade-offfs and compromises. And, really, who wants to accept that if they don't absolutely have to?


Still, frugality is all about choices. It's about deciding what is a priority and what is not. As we all like to remind the rest of the world, being frugal isn't about depriving yourself. It's about choosing how and where you want to spend your money.


The angst of choice


When I started talking about choosing, I'm betting that at least a couple of you felt a quick hint of dread. Why wouldn't you? Choosing often means research and critical thinking. It's tiring and can lead to arguments, if two people have different priorities.


But lately it feels like all I have done is make choices about various things. Even items we end up not buying can require a conscious decision to abstain from purchase.


And all that can feel pretty onerous, until you realize that it's just a larger scale of what you already do automatically.


Making the choice


Decision making is actually a pretty simple process. It's the same steps, whether you're considering buying a house or just choosing between generic and name-brand canned fruit.


The stress of the choice is entirely added by us. And, sometimes, for good reason. Certainly, there are much bigger consequences to buying a house than choosing to spend 50 cents more for the name-brand peaches.


Still, it's good to remember that the complex emotions come solely from your own head. Because if you can step out of that momentarily and look at the facts in an unbiased way, you will often find the choice is a lot simpler.

  1. Identify pros and cons of each option
  2. Compare these to your priorities/needs
  3. Decide which one is closest to that need

It sounds simplistic, but it's true. If you are looking at the store-brand peaches vs Dole, you note the follow:


  • Dole is a known quantity (or, rather in this case, quality)
  • The generic is cheaper by 50 cents
  • You then consider any past experiences you've had with that store brand.

You then assess your goals:

  • To have a can of peaches to eat
  • To spend as little money as possible.
  • To have the peaches be something you enjoy (or you've wasted the purchase price)

Once you compare all that, you come to one of two conclusions:

  • The other store-brand items were perfectly tasty; you want to save fifty cents. You buy the generic.
  • The last store-brand item wasn't as good as the name-brand. You'll pay the extra fifty cents to ensure quality. You buy the name-brand peaches.

That's it. Those are the only steps you ever have to take to make a decision. The only variable is how many options you have and the pros/cons of each scenario.


Below, I go ahead and use an example of a real-life, more-than-two-options, decision. If you're already sick of financial decision-making talk, feel free to stop reading here. If you're curious to see just how my twisted lil mind works, read on. (Though in this case, it was a relatively straight-forward deal.)


On Thanksgiving, I had to make a decision about whether to take advantage of Black Friday computer sales.

Our computer was running increasingly slowly, thanks to a virus that we thought had been removed. (You get what you pay for, I suppose.) The computer refused to defrag, which is probably why it was running more and more slowly.


I had to decide whether to try to buy a new one, which would solve our computer problems but exacerbate our financial ones, or to try to stick it out with the old one, which might be fixable.

If we chose to buy, there were three choices: a laptop for $300 (after rebate), a desktop for $500, or just buy a new hard drive.


The pros of keeping the computer we had:

1. Not spending any money. This had a lot of weight.
2. We have some Microsoft support time, so there was a chance it could be fixed for free.
3. It has Windows 2000 on it, which Tim needs to play his Magic game online. None of the computers on sale offered anything but Vista


The cons of keeping the computer we had:

1. It was running like molasses, causing aggravation for Tim
2. It is already 4 years old, and who knows when it will choose to die completely.
3. Waiting until it dies might mean missing out on a good computer sale now.



The pros of the laptop:

1. It was much faster and nicer than our current model
2. It was very affordable
3. It would fill a need we had -- namely, a good working computer



The cons of the laptop:

1. We would have to put it on a credit card.
2. Laptops are harder to get fixed except by professionals
3. It was a limited-quantity item, which would mean getting to Staples at around 4 a.m.
4. It ran Vista and we weren't sure if there was an option for Windows 2000 to be installed instead.


The pros of the desktop:

1. Much faster and nicer than our current hardware.
2. Easier to fix than a laptop
3. Was available all day online
4. Came with an LCD monitor and a printer we could sell to off-set cost.


The cons of the desktop:

1. We'd still have to put it on the card
2. It cost more than the laptop, and we couldn't be sure the monitor & printer would sell
3. It also ran Vista and there was no way to request Windows 2000.



The pros of buying a new hard drive:

1. Much cheaper solution than the other two.
2. Would still get us a much better computer.
3. We could install Windows 2000 on it.


The cons of buying a new hard drive:

1. Still spending money
2. We were visiting the in-laws, so there was no way to know what would be compatible with our current hardware.


In order to compare more easily, I drew out a table because, yes, I am that nerdy. I made a category for cost (to buy or fix), the chance of getting Windows 2000, speed/memory space, and a few other points, such as potential resale value of the monitor and printer with the desktop.


In the end, I decided to risk waiting. I simply couldn't justify putting more money on the card without seeing if the computer could be saved. Also, with the economy in the shape it is, I figured there will be plenty of sales to take advantage of, if we do have to replace our desktop.


But until I sat down and compared, line-by-line the pros and cons of each scenario, I was unable to form a decision. Once they were written down, the choice was relatively clear. (I say relatively because it was very tempting to just get the desktop. So it was hard to not rationalize buying it.)


I hope this example helps you with future decisions. I know it's a little dry as subjects go, but it's an important one nonetheless.


In the end, I decided to wait and not put anything more on the cards. It took a few hours of staring at my table and comparing the different scenarios.


So that's it, folks. The veggies are done. So stop trying to feed them to the dog under the table. And I'll try to get some ice cream posts in soon!



******************************************************

If you need a nice palette-cleansing course, may I suggest checking out the Carnival Debt Reduction, which includes a piece of mine.

10 Comments:

Blogger The J said...

I kinda giggled at the opening paragraphs - my DH would be right with you. Me, I have a hard time dealing with having multiple options before me (and all the futures that attach to each of the options), I want to make decisions as quickly as I can responsibly do and get back to solid ground :P. There's some palpable tension in our house when there's a big decision coming up, I can tell you!

Glad a course of action became clear to you! Of course, I have to throw in the Mac option - got a used laptop for the price of a new bottom of the line PC laptop, and it's still going relatively strong (have to plug in an external monitor, because it was the first PowerBook design and the wire feeds through the hinges were stupid, but the computer part is great) - it was built in 2001.

January 12, 2009 at 4:56 AM

 
Blogger Abby said...

The J,

I'm glad you were able to find an affordable Mac. I'm always wary of buying used computers if I don't have to. But it's a personal preference, I suppose.

I definitely was having trouble with the multiple options, because the various pros and cons would ping-pong around in my head in no particular order! "Oh but the laptop is portable!" "Oh, but the desktop has a resellable monitor!" That's why I had to do the nerdy thing and just sit down and figure out what I was looking for in a computer and what extras each had and make a table accordingly. Then I could literally just go across and say: Cost? Ease of fixing? Windows 2000 possible?

I felt like the spreadsheet-geek that I am, but it worked. I think the nice thing about tables like that is then you *don't* have to hold all the futures (attached to each option) in your head at once. You can just say, "Okay, this one has the most of my priorities." But each person has to find his/her own way through the bog of options, I suppose.

Thanks for taking your daily dose of green veggies!

January 12, 2009 at 8:23 AM

 
Blogger Shevy said...

I had to make the computer decision when our condo was flooded in a sprinkler accident a couple of years ago (the folks upstairs knocked off a sprinkler head). The restoration people threw out the printer (which had water running out of it!) but for some bizarre reason thought the PC would be okay, even though it was sitting on the floor next to the printer.

I finally got it back out of storage with the restoration company and it wouldn't boot up. So I had to decide whether to get a new desktop or a laptop.

We were living in a very small space and moving so the laptop made the most sense in the end. It was still far more powerful than my old desktop and I can take it with me when we go to our rural house. Plus, it wasn't out taking up space when we were showing the condo or living for a year in a 1 bedroom apartment.

I could have gotten a low end desktop that would have been 100% covered by the insurance, whereas I had to pay part of the cost of the laptop, but I really feel it was worth it.

But, yeah, it's a matter of how all your priorities intersect and sometimes that's hard to figure out.

January 12, 2009 at 1:32 PM

 
Blogger Michael said...

Making up the lists of pros and cons is a good way to think through a decision. Not that it gives a clear-cut answer, but it lets you see the plusses and minuses and, more important, makes you take time to consider them as you write them down and try to think of what else you may be missing; it helps one avoid an impulse purchase.

That said, it can only go so far. I once bought a tent for long hikes and agonized for a month over whether to spend $220 for the thing, putting off the decision until the sale price had almost expired before making the buy and, after getting it home, still agonizing over whether I'd done the right thing.

To justify the purchase, I decided to mentally amortize the cost per use. The first night I used it, I told my hiking buddy, "This tent is costing us $220 a night." The second night I said, "This tent is costing us $110 a night." On the third night we were surprised by a sudden storm. We got the tent up just as it hit. Throwing ourselves and backpacks inside, I began to open my mouth, "This tent is costing us..." and my friend interrupted.

"Shut up," he said as the rain pounded down on the sheltering dome and the wind whistled by the snuggly-zipped flap. "This tent just paid for itself."

If upgrading or getting a new machine saves you one crash, it will have paid for itself.

January 12, 2009 at 4:10 PM

 
Blogger Patrick said...

I like your approach to problem solving, and entertainingly written too.

What you've described happens a lot during all sorts of human decision making, from what to have for breakfast to what stocks to buy - I'm a neuroscientist so I'm interested in the biological aspects of human behavior with money and on the markets, so your post resonates.

I wrote an introduction to the biological aspects of how the brain reacts to situations like the market in my article The Stone Age Brain vs The Stock Market.

Anyway you found one of the best solutions - get it outside of your brain and onto paper.

-Patrick

January 12, 2009 at 4:38 PM

 
Blogger Christina said...

I think it is so important to really THINK about the decisions you are making, and writing all the pros and cons does help a lot!

I also find that I tend to write down my wish list and leave it alone for awhile... then I discover I didn't want/need the item as much as I thought!

January 12, 2009 at 6:07 PM

 
Blogger Abby said...

@Michael,

Great story! And an important moral for the tale.

In this case, we had a back-up computer, so it was worthwhile. But if our one and only computer were crashing, we'd have financed it somehow.

@Patrick,

Always nice to have the approval of a neuroscientist. Wish all my thought processes were so approvable.

@Cristina,

I can't agree more. Often time,s the longer you think about something, the more you realize you just don't need it.

January 12, 2009 at 6:33 PM

 
Blogger Fabulously Broke said...

That was pretty clear and straight forward.

Compare everything on an even playing field. I usually do it in an Excel spreadsheet with X's :)

Fabulously Broke in the City

"Just a girl trying to find a balance between being a Shopaholic and a Saver."

January 13, 2009 at 12:13 PM

 
Blogger Abby said...

@Fabulously Broke,

Oooooh, a spreadsheet geek after my own heart! Yeah, in retrospect I should've used a spreadsheet. But my MIL was on the computer playing games. So I had go all 1980s and use a pen and paper. (Shudder)

January 13, 2009 at 12:20 PM

 
Blogger - Marybeth I. said...

Good post - I do read your newsletters and I think that if you can afford one splure in the future a new computer would be the thing to splurge on. A computer can be a source of income and the more you can do on it, the more potential you have. that said, if you can't afford it you can't afford it. We need a new one too but are waiting until I can get one through my employer. My employer also has a discount program that I will be taking advantage of this year.

January 17, 2009 at 7:24 PM

 

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