If you want to be smart about personal finance you have to understand the difference between cheap, quality, and luxury in order to make wise purchasing decisions.
On the surface, this seems easy. But it takes some skill.
I’ve been labeled as a cheapskate, to the unaided eye.
But cheap people don’t buy $100 hiking shoes, $1,000 bikes, or $1,200 computers. Cheap people buy $30 hiking shoes, $150 bikes, and $300 computers.
Now, that’s not bragging about spending more on things. There’s nothing inherently wrong with buying a product that is less expensive. In many cases, it might actually deliver a better return on investment. But a cheap person buys the $30 hiking shoes, $150 bikes, and $300 computers precisely because they are the lowest priced items in that category.
I would never advocate that someone buy an item of questionable quality just because it has the lowest sticker price. Lets say you’re in the market for a commuter bike. You jump on a $150 big box store bike and minutes later jumped on a high quality $1,500 local bike shop bike to test them both out. Odds are you would be hard pressed to turn down the $1,500 bike. The fact that you can buy 10X of the heavy, slow, clunky, painful, poorly tuned bikes that sit in your basement because they result in a miserable biking experience versus just one good one that you’ll cherish for the next decade or two doesn’t make it a better purchase. Just the opposite.
You could make a similar comparison in many product/service categories:
- The $7 chef’s knife with the hollow handle that presents a struggle with every meal vs. the quality $35 one that seems effortless.
- The $20 backpack with poor stitching and no padding that falls apart after a year vs. the quality $75 one that lasts a decade or more and is super comfortable the entire time.
- The $1 toothbrush that leaves your teeth feeling grimy vs. the $20 electric toothbrush that makes them feel like you just had a dental cleaning after every brush.
- The $500 asphalt driveway that falls apart and needs re-surfacing every 3 years vs. the $2,000 concrete driveway that lasts 3 decades.
- The $3 per pound pink slime vs. the $10 grass-fed organic steak.
There comes a point, however, where value or return is greatly diminished. In fact, there is an entire category of products and services where the actual purpose is to market a product/service where the actual material value received is insignificant in comparison to the inflated price. This is what most refer to as “luxury”.
Quality vs. luxury:
The $10 bottle of wine bought in a supermarket vs. the $75 “bottle service” in an upscale restaurant.- The $100 watch that keeps perfect time vs. the $5,000 watch that does the same, but with a fancy name.
- The $10,000 3-year old sedan vs. the brand new luxury sedan for $60,000.
- The $1 bagel bought at the cafe around the corner vs. the $10 bagel brought to your room on a tray.
- The perfectly functional, high quality $50 purse vs. the $500 designer purse.
- The $20 pair of eyeglasses bought online vs. the $500 designer pair.
Luxury is a high price on a scarce object or service, often with a prestigious brand name stamped on it. The goal of the high price is to drive lesser class individuals out of the market. To separate the haves from the have-nots. So, really, the goal of making the purchase is to enhance one’s perceived status. In other words: inflate ones ego. A shallow, hollow, and fleeting effort, indeed.
So here’s the deal for the wise purchaser extraordinaire:
When comparing cheap vs. quality: buy whichever you predict will produce the best return for your investment. This is easy if there’s a small quality gap and large price gap (buy cheap) and when there’s a large quality gap and small price gap (buy quality). In all other shades of grey, you’ll need some help. Ask around, compare reviews, find out where it is made, what it is made from, buy from retailers with a generous return policy, go to an actual brick/mortar store and test out the products in person, wait for quality to go on sale – do whatever you can to reduce risk and shift the investment in your favor. Oh, and buy less stuff – that makes it super easy!
When comparing quality vs. luxury: there’s often a noticeable gap between the two in price. It’s there for a reason (otherwise, it wouldn’t be luxury, after all). Don’t confuse quality with luxury. Quality is about function. Luxury is about status. You’re better than getting into the status game – go for function over status.
What factors do you take in to consideration when comparing goods/services to one another?
When do you justify paying more for quality or luxury?
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Finally! I have been making this argument to my friends for years and no one seems to understand. They think they are justified in buying a $300 pair of jeans because it is higher quality, but how much higher quality can they be over a $75 pair? It’s insane!
A wise consumer finds the optimal spot between price and quality and avoids luxury wherever possible.
I will definitely be blogging about this on my own blog soon and I will certainly include this article as a reference!
Thanks for the post – I generally agree with you but I do have one minor bone to pick with regards to the grass fed organic steak (pun somewhat intended).
I would absolutely classify an organic diet as a luxury for a few specific reasons.
Firstly, there are many people throughout the world, including within North America, who do not have the luxury of refusing food based on its method of production – since their only alternative is starvation. There is also a large slice of the population who simply can’t afford to eat organic, because doing so would mean sacrificing money required for other living expenses.
Secondly, there are no solid, peer reviewed studies that suggest organic food is healthier than non-organic food. In the case of some fortified GMO’s, the exact opposite may be true.
Certainly some people would suggest there are ethical/moral/environmental reasons for eating an organic diet, but again making a choice based on ideal signifies luxury rather than quality. Further, in some cases, a non-organic diet may have both a smaller environmental footprint and less marketing baggage attached to it.
This is not to deride anyone from choosing to eat organic – living by any set of standards is admirable – but in fairness to the existing science and to the people who don’t have the ability to make such a choice, I think it’s important to recognize eating organic as a luxury choice that many do not have.
Thanks again for the post! And for what it’s worth, most of the beef I eat comes from a small family farm (non-organic) and is grass fed.
If you purchase organic, in bulk, from Costco – it can be as cheap or cheaper than non-organic, non-bulk bought at places like Kroger, Meijer, etc.
So I don’t know that I would put it in “luxury” status since we’re not talking about a huge variance in price – but some might see it as such, and you make a good point.
But…..
How does it compare to non-organic bought in bulk at Costco? Have to stay Costco apple to Costco apple
I vote its pretty clear it’s a luxury also
I agree with you Mike about the organic issue. Otherwise, I think his examples are spot-on.
Research your brands! I have learned over the years that often a lot of items are often made by the same manufacturer with the different labels. So sometimes you can find an expensive name brand appliance with a different label and a lower price .Consumer Reports has helped us find the “best buy” but we spend a lot of time looking through reviews before making any major purchases. I’ve always shopped this way. Also, look for your quality items at the best price!
I know not everyone agrees with me, but inexpensive boxed store clothes work great for kids, they grow out of them so fast it seems silly to spend $25 on pants that they will wear for one season. Kids put holes in jeans just as easily with expensive name brands as inexpensive store brands. Now as an adult who is mostly able to maintain my size it is worth it to go for the quality jeans (not luxury, unless you can afford it I guess) since I will definitely wear them until they need replacing.
I definitely agree. You just need to look at the big picture when you make purchases to decide if you should go with “quality”, “cheap”, or something in between. A lot of times the total cost of a quality item will actually be less than the cheap item if you take into account the total life span of use before replacement, maintenance needs, and the opportunity cost of time taken if the cheap items needs to be fixed often, returned back to the store, etc.
The determination often will vary person to person, though. The cheaper backpack might be the better choice if you know you’ll just do a few day hikes each year versus regular backpacking. The $1200 computer would be an unnecessary luxury if all I’m going to do is surf the web.
I had this same argument with coworkers this week. They argued that buying a luxury brand purse was an “investment” because it was higher quality and could potentially be sold in the future for profit (only sometimes true). Their stance bypasses the middle ground between cheap and luxury.
I definitely commented on this post, and now it’s gone. Be honest, Miller, did you censor me?
Nope – spam filter has been wack lately.
I guess it happens.. Oh well.
As promised, I wrote that post inspired by this article. A topic I have been meaning to write about for years. I take a slightly different approach:
The Cheap, Value and Luxury Spectrum:
http://thelearnsomethingnew.com/2013/10/20/shop-smart-the-cheap-value-luxury-spectrum/
I definitely agree, and have been changing my own purchasing style accordingly.
I mean, really – why should I ever buy another pot or pan? A good set of cast iron should not go bad. It’s cast iron. It requires you to make smarter choices, and be an educated consumer, and really think about your needs… and the payoff really adds up.
One tip – For my wife, birthday’s and such, I save up and go with “luxury” gifts along with “experiences”. In that case, I *do* treat it as an investment!