A Way to Value Expenditures

Milton Freidman proposed a way to think about behaviour based upon two vectors.  Who uses the product and whose money buys it.  There are four conditions.

  1. Buy for me with my money.  In this configuration, I will tend to be concerned about the product as to its serviceability, convenience, support and reputation.  I will comparison shop to get the best price.
  2. Buy for someone else with my money.  I will comparison shop for price, but will be less concerned about serviceability.
  3. Buy for me with someone else’s money.  High end serviceability, convenience, fashion even.  No concern with price.
  4. Buy for someone else with some other person’s money.  No concern for the price or the value received.

While these are the extreme conditions, it is worth thinking through.  Condition 1) is the intuitive idea we have and we apply it a little more often that we should.  It should maybe apply more in condition 2).  It probably would if we were buying a present for spouse or child.

Condition 3) is more common than we think.  Maybe not so much personally, but as a community.  Should we become a little profligate if we have a government grant to build a new arena?  It is our nature to do so, but it should not be so.  It is like overeating at a buffet.   A strict value for price assessment would make more value for all of us.

Condition 4) is the way government bureaucracies work.  The gesture of spending is their value.  Governments should have more rigorous oversight.  Spending as common sense should be the standard.  Accountability could be more transparent.  I doubt the army has ever paid $2,841 for a hammer.  I suspect that is their way to divert money to some project we are not supposed to know about.  No big problem there.

The bigger government problem is not so much the first bad decision but the continuity of programs that probably never worked.  Continuing them without a value assessment is both foolish and common.

We should examine our family spending with a view to classification as above.  There will be some interesting findings when you try to discover how the others valued your spending in condition 2) and to further assess ongoing expenditures that are automatic.

Discuss the family budget with all the players.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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