Money Hacks: The 20% above average rule

Kristia van Heerden Latest, Money hacks

Affordability is a difficult nut to crack because it’s deeply subjective. When we have very little income, we can often only afford the cheapest version of whatever we need. As our net worth increases, we have more choices. Does that mean we should buy the most expensive version of what we can afford? 

A Twitter user had the following advice:

“Figure out the average price, look 10-20% above that and compare features/requirements. I usually end up with something on the upper end of mid range, with the reliability of the higher end, but none of the ‘it’s the best’ tax. Cost per use is the other dominant factor.”

Where does affordability come in?

It is not always true that the cheapest version of a product is the worst and the most expensive is the best. That said, manufacturing a sturdy, long-lasting product generally costs money. As a rule of thumb, you want to buy something only once. If you have to replace a broken product, the true price you paid is the cost of the replacement plus the cost of the broken product, immediately increasing your cost per use.

However, buying the most expensive product might not be the answer either. Some products are expensive because of brand-recognition. That means the cost of marketing that product is included in the price, which has nothing to do with the manufacturing standard.

Applying a rule like this forces you to slow down and think about your decision. It stops you from being motivated by either price or brand recognition and forces you to focus on the practical aspects of the purchase. Which features matter to you?

Why does this matter?

The real difficulty of financial management lies in the little choices we make daily. It might seem counter-intuitive, but your ability to set money aside means much more for your financial future than choosing the right investment. Even the perfect investment will only benefit you if you have money to invest. 

Let’s say you and your best friend earn exactly the same salary. Come payday, your friend spends R200 on a haircut and you don’t. You’ll be R200 better off by doing nothing at all. If you really want to flex you can put that R200 towards your emergency fund. When you and your friend each have a R200 emergency, your friend will take on R200 debt, while you’ll be able to stay out of debt. You don’t need to know anything about the stock market to make a good choice here. All you need to know is not to get a haircut.

It’s not possible to avoid spending money if you hope to have any sort of quality of life. Since most of us have to make purchasing choices daily or weekly, it’s worth thinking about buying well.

Does it have to be 20%?

The percentage you use doesn’t matter at all. In fact, you can have a completely different approach, as long as it helps you think through a decision to land on a product you won’t have to replace within a few years. Your goal is to spend only once. How you get there is up to you.

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