The best example I heard distinguishing the two is that a person who is cheap will drive all over town looking to save a couple cents on a gallon of gas. A frugal person will make the best decision of what is available but realizes the long term impact of trying to 'save a few pennies'.
Value vs. Price
Many of you have heard this lesson taught over the years. There is a price to every item we buy and that is distinguished by the cost of it. However, all items have value to them. This is much different than the price. Cunning shoppers always seek to find items that have values which exceed their cost. This is what is termed a bargain.
Value is not dependent upon cost although there is often a correlation. The truth is that it is common for higher priced items to be a better value than lower priced ones. In essence, the more something costs the better value. This is because of a characteristic called quality. Quality costs money. People will often pay double or triple the cost of an item to gain the quality advantage.
Footwear is a prime example of where quality makes a difference. You can pick up a pair of sneakers for $9.99 from Wal Mart. This sounds like a terrific deal until you consider the fact that at this price the item will lack the quality of a decent shoe. To gain this advantage, you would need to spend at least 3 times the money. Thus, you might be better off with a $30.00 sneaker.
Why is this? To understand this concept we need to evaluate the 'usability' of the items. We will presume that we might get a year out of the cheap sneaker with just average wear. This is because we know the materials used are not designed for durability. When we look at the more expensive sneaker, we find that with average use, if it is a decent shoe, we might be able to get 4 years out of it. Thus, when we break down the cost per year, we see the more expensive shoe is a better value.
To go one step further, we might also be able to make the case for a $50 sneaker. Depending upon the quality of that product, we might get 6 or 7 years out of it. This again will come out far ahead of the $9.99 item while providing much better support on our feet (an added value).
Name Brands
We need to be mindful that this concept hits a ceiling where one ends up overpaying thus creating inferior value. Name brands are often an example of this. Many people will spend extra for a name brand item. These are priced higher than an off brand. While these products often provide the security of knowing what you are getting and will indeed have a higher standard of quality, this does not offset the increase in pricing. Much of the price of a name brand is made of up one expense: marketing. Major brands spend hundreds of millions of dollars in advertising. This cost is factored into each product sold.
Using our sneaker example, we will presume that we get a decent quality item for $39.99. This might have a name we recognize but isn't the top of the spectrum. Now, let us compare that with Nike Air Jordan's for $129.99. Are you going to tell me the Air Jordan's are 3+ times as good in terms of the quality? Will they provide a far greater degree of support to warrant this money? The answer is no. People who pay for these sneakers are making a statement. In essence, they are buying the name. Personally, I prefer to wear my sneakers instead of reading them so the name on the back matters none.
We see this across the board with names such as Izod, Nieman Marcus, and Nike. People are paying extra for the name at the expense of value. While they are terrific products offering quality, this does not compensate for the added cost. In other words, money is wasted. The price far exceeds the value.
Esteem
There is an old concept that is called 'keeping up with the Jonses". What this means is that people make decisions based upon the ideal of impressing someone else. This is a person who operates from a place of fear. Anyone who suffers from a low self esteem will fall into this trap. He or she is worried about what the others think. Thus, name brands are helpful in presenting an image that 'I am someone'. Of course, when it all comes down to it, does what is writen across one's chest really make a difference in his or her worth? And, if it does, is that a person someone you really wants to interact with?
The truth of the matter is that people who buy the name brands are often compensating for a lack within themselves. It is interesting to notice that oftentimes the people who are engaging in this behavior are not the ones who can truly afford it, but the ones who have to stretch to get there. They lack the income to comfortably shop in this arena but do so because it is a status symbol. The belief is that wearing a high priced item makes them important. Personally, if you are one who purchases something that you cannot afford because of the perceptions of others, you are a fool. Get your importance from within and stop worrying about what others think. I n the process you will save a whole lot of money.
It is always interesting to note how esteem enters into people's purchasing decisions and, often, to their own detriment. Here is a prime example. In the 1980s and 90s, Jaguar had a line of automobiles that had the reputation for being service intensive. Now, these are 'high end' automobiles that cost a lot of money to offer status. Sure they offered many other things in return for the high price tag but the trade off was the car was in the shop quite often.
Now we compare this to the high end Toyotas, Hondas, or, even Fords. I know a guy who would drive nothing but Ford Crown Victorias. Each car he brought was not retired until he put over 250,000 on it. And, I can say that he was not easy on a car. The aforementioned brands cost a lot less money then the Jaguar yet were substantially better in terms of the way they ran. Thus, the person who paid more for the Jag actually received less in terms of value.
This concept shows how having to buy something because of status is costly. Sometimes, the product that provides the status offers little else.
Freedom
What does this all have to do with freedom? Simple. Bad decisions create an environment where we are imprisoned. I often make the point on this blog that what you take in as an income is not important. The key factor is how much you send out on a regular basis. Paying too much is one surefire way to cut your cord to freedom. Most people spend their way into slavery. They volunteer for it with every purchase. It matters little how much you make...if you spend most of what you take in you will be left with nothing.
Does everyone run out and buy a Jaguar? Of course not. But I will tell you that I drive through many middle class neighborhood with new vehicles sitting in the driveway. These people all are carrying a car payment for the luxury of having a newer vehicle in the driveway. I will tell you $300-$400 a month adds up into some big money. Naturally, many compound the problem by having two new cars sitting in the driveway. In this instance, just double the chains around their necks.
Can you tell me the difference between a $6.99 hamburger for lunch and one that costs $9.99? When you get down to it, is there really any difference between the two? The answer is usually not. The dining experience might be a bit different but does that really matter when you are sitting on the toilet the next day eliminating that burger from your body. In the end, the difference was $3.
Again, freedom is given away with each financial decision that we make. I have a person very close to me who made over $100,000 each year for the past 30 years. Do you know how much he has to show for it? Not very much. He is closing in on 70 and still needs to keep working because even though he took in over $3 million, he sent out a similar figure. This man is not free. He is still operating as a slave because he lacks the financial wherewithal to spend his time as he chooses. Instead, he has to keep on working to support his lifestyle (i.e. spending).
Controlling your costs is paramount regardless of how much you take in. This is the key to being free. Those who cannot are destined to live long existences as slaves. The workplace is full of people like that. They earn decent incomes but must continue because they make poor decisions at every turn.
How much do you want freedom? This is a question that everyone much answer.
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