What is the true cost of [insert item]?

Is purchasing a $20 item versus purchasing a $400 item a wise financial decision? Possibly, but not necessarilly. I don’t think that the actual cost of an item is a good indicator of the actual cost of an item or service. I think that we should break things down to an hourly rate.

It’s like comparing the unit price of an item versus the actual price of an item in a grocery store. You don’t know exactly how much you are paying per ounce/lb/etc unless you know the unit price. You also don’t know how much you are spending per hour on other items or activities. If you break it down, you can accurately compare whether something is worth the cost.

Calculating hourly rate

It’s really simple to calculate the approximate hourly rate of an item. Simply divide the cost of the item by the estimated hours which you use an item.

For instance, let’s look at my car. I paid $17,200 for a Toyota Corolla. I drive about 25 minutes to work and 25 minutes home each day. Weekends often have similar driving times. I will add 10 minutes per day for unexpected things like running errands. This gives us about 1 hour of driving per day or 365 hours per year. I plan on keeping this car for at least 10 years. That gives me 3,650 total expected hours of use. I divide $17,200 by 3,650 hours to get an hourly rate of $4.70/hr. $4.70 per hour isn’t too bad in my opinion and since my wife and I currently carpool, you could even argue that it costs each of us $2.35/hr.

Now lets look at how much it costs to go to the movie theater on Friday night. It costs us $8.50 per person to see a movie and I obviously almost always go with my wife, so we are at $17. Then you got to get snacks. We have a “souvenier cup” which grants us $1 refills. 2 of those puts us at $19. A large popcorn costs around $3.50 and a candy costs $2.50. Now we are at $25 for a movie. An average movie is about 2 hours. This gives us a cost of $12.50 per hour or each of us pay $6.25/hr. So it’s cheaper per hour to pay $17,200 than to pay $25.

Now remember that I didn’t include things like Insurance, Gas and Registration into the car costs so it should go up, but this gives an idea of the difference. If you buy a car every 5 years instead of 10, then it would cost twice as much for the car. It depends on how much you use an item.

More examples

Here are some different hourly rates for things I’ve purchased in the past:

• Cable TV - $8/hr
• Netflix - $.56/hr
• Nintendo Wii (plus games & accessories) - $10/hr so far over 1 year
• 65″ Big Screen TV - $.42/hr so far over 5 years
• Computer - $.50/hr so far over 2 years
• Drive In Theater - $.63/hr
• Bed - $.56/hr
• iPod - $2/hr so far over 6 months

Now note that some things will be less per hour over time. For instance, the XBox I owned before the Nintendo Wii, I had for about 6 years. The XBox is probably around $1/hr when you include the price of games. I expect the Wii will get close to that over time.

Apply to money savings

You can apply this very same theory the time it takes for you to get a particular saving on an item. For instance, I spent 15 or so minutes trying to find a better price on insurance. I was able to get a savings of about $70 per month in those 15 minutes. Over the course of a year, I will save $840. I effectively made $210/hr for the first year. That was WELL worth it.

I spent about 12 hours looking for a good price on my Toyota Corolla. I did research and got quotes from different dealers for different vehicles. I ended up saving about $1100 compared to what others were paying according to Edmunds.com. This netted me about $92/hr. Also definitely worth it.

There are many areas where you can compare how much you are saving on an hourly basis. If the number gets close to around $15-$25/hr, you may want to judge whether it’s even worth it. You may be able to make more money by spending that same time working more especially if you own your own business or work based off of commissions.

Don’t pay more than you have to

Just like you should check unit pricing to make sure you aren’t paying more than you need to, you should check the unit pricing of purchasing items or time spent trying to save money.