Using the Law of Diminishing Marginal Return to Guide Our Spending

"Pay yourself first", "Have a budget" - these are financial advice all of us hear too often. I started off heeding these advice as well, setting aside money to be saved and money to be spent every month. While I am not about to write in detail the pros and cons of each of these systems, I would like to suggest an alternative method to guide our spending. 

Let me illustrate the method with a story.

An eatery serving local traditional fare like bak chor mee and laksa.

There is this eatery called EAT near my workplace. Every time I stand in queue waiting for my turn to place my order, I will be running through this thinking process to decide what I will eat:

1. One bowl of fishball noodles cost $4.20. One bowl of minced meat noodles cost $5.00. I am paying $0.80 more to change my fishballs for minced meat, some tiny pieces of mushroom, and one fried wanton skin. Is it worth it? Though I would very much prefer the latter option, I almost always choose to order fishball noodles instead.
2. The price quoted above is inclusive of a hot drink, either hot tea or hot coffee. On my first visit, not knowing better, I opted for a glass of iced water chestnut instead of the standard hot tea/coffee. I was expecting to top-up $0.50 for the change. But no. I was made to top-up $1.50. And then I asked: "How much does it cost to buy the cold drink on its own?". "$1.50" was the reply I got. WHAT?!?!?! My mind was blown. Since then, I will always take the default hot drink, no matter how warm the weather is.

So what went through my head?

First, I have to decide what's the marginal utility I gain from eating minced meat instead of fishball. For the benefit of those who does not know what that means, just answer these 2 questions:

On a scale of 1 to 10, what level of enjoyment do you derive from eating minced meat?

On the same scale, rate your enjoyment level from eating fishballs.

The difference between the two scores is the marginal utility you gain from eating minced meat instead of fishball.

Now, would you pay $0.80 more for that marginal utility?

I won't. I like minced meat more than fishball, but I don't like it that much more.

Next, apply the same principle to your choice of drink.

If I have a cup of hot tea/coffee, I am definitely not going to trade my cup of tea/coffee PLUS $1.50 for your glass of cold water chestnut. It's not a fair trade. You are taking advantage of me.

What blows my mind is that almost all my colleagues will go for the minced meat noodles and the cold drink!

And they tell me "don't need to save until like that lah!"

I suppose they have a budget for every meal, so as long as they do not exceed that budget, they are good with it.

But that's hardly the point.

Don't buy something just cause you can; Buy it because the utility gained exceeds the pain associated with parting with the money used (or the utility preserved by not parting with that money).

That, I guess to me, is the point.

Author : F4FF

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