Financial Geekery

the value curve

July 12, 2011

Last night, among other things, we talked about a fun little concept that’s pretty familiar to financial geeks: the Value Curve.

 

 

 

The idea is pretty straightforward. Imagine something you can spend money on, like buying clothes. You would start off on the far left part of the curve: you’ve spent no money, and gotten no value. (Oh, and you’re naked.) Moving up the curve, you could buy your clothes at Goodwill; not a lot of money, but a heck of a lot of value over being naked! But maybe the clothes you find don’t fit very well; in that case, you could move up a bit, go to a decent department store and get stuff that fits well. It costs more, but you get more value (unless you’re really good at shopping Goodwill!)

 

Then the curve starts flattening out. Those $200 designer jeans are doubtless better than a $20 pair from Old Navy…but you had to pay ten times the money to get it. And then you go way over to the far end, where you start seeing million-dollar diamond underwear from Victoria’s Secret. (No, I’m not making that up.) Then you start actually getting less value, ’cause it’s uncomfortable and you start having trouble sleeping at night, wondering if someone’s going to steal your undies!

 

Jokes aside, it’s easier to get to that far end than you might think. The nation’s economy revolves around getting us to buy Stuff, so it’s a natural consequence that, barring effort on our part, our lives will soon become filled with clutter. It distracts us, takes up room, not just in our houses but in our minds.

 

For some people, climbing this curve becomes likes an addiction; they have to spend more and more to achieve the same “high”. This is closely related (but perhaps not identical) to “lifestyle inflation“. In either case, you find yourself in a very peculiar place: you’re making a ton of money, and yet you still feel like you’re broke.

 

So the object of the game seems pretty obvious — we want to be on the left side of the curve, in that shaded part. The absolute ideal is right at the knee, right when it starts leveling off. (A friend of mine once got so specific as to tell me that you get there on $75,000 a year household income.) You don’t have to go all geeky and call it “the knee of the Value Curve”, though. You can just call it Enough, or Balance. The point is this: be aware that it exists. Strive for it. When you go to buy something, think about how much value it will get you. Better yet, think about it when you plan your budget, and create a system to help you carry out that plan.

 

You just might find yourself with a new problem: what to do with all the extra money!

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