Do You Think About the Break-Even Point When You’re Spending Money?
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There is a lot of focus around the web about saving money. John writes about it, I write about it, and so do numerous other people. Saving money is the new thing!
Well, it’s a tried and true financial practice, but it’s making waves again as people are looking for more ways to save money. It makes sense, right? Saving money should be easier than making it, so why not focus on that part of the equation. I get it too, I used to just focus on saving money and not making more of it.
I just talked about the idea of buying new windows for your new home. We have been working hard to reduce the energy usage our home consumes and new windows sounded like a good idea. Our current windows are 28 years old, but haven’t been taken care of all that well. Since it’s incredibly easy to get an in-home consultation with a window company, I decided to do it. I admit I was sucked in by the presentation, but in the end, math won it for me! Here’s what I mean.
There is a point in basic mathematics where two lines converge. It’s called the break-even point. The two lines are typically based on business, like revenue and expenses. When your revenue equals your expenses, you are breaking even. It means you make nothing.
In personal finance, this break-even point can be used for other things. I’ve slowly learned to incorporate it into my big purchase decisions and the windows were fair game.
As I showed, the break-even point is simply calculated where your costs meet your revenue. I use this when I want to compare savings versus spending.
Let me explain.
Let’s say you want to buy a cell phone and switch to a cheap cell phone plan. Most people know unlocked, no-contract phones are more expensive. They aren’t subsidized by the carriers. This is why so many people aren’t on no-contract plans. The outright cost of a phone is unappealing. Considering the break even point just might make you change your mind.
I was on Verizon for years. For two lines, we were paying $150 a month. After research, I switched to Straight Talk. We took our overall bill down to $90. This was an instant savings of $60 per month! Unfortunately (or is it?), we decided to buy new phones and bring them to Straight Talk.
We got two Nexus phones costing $500 for both. Alright, here’s where the math comes into play. It’s nice to switch, but how long until I realize actual savings?
$500 upfront cost / $60 per month savings = 8.3 months until we break even.
So, even with an upfront cost of the phones, we were still able to break-even after eight months. In the 9th month, we were pocketing $60 per month. Many forget they aren’t truly saving anything when they have to pay something upfront. It’s a common thinking process, but we have to realize how long it takes us to pay for said product/service.
Should We Run the Numbers?
I’ve spoken with many people about the break-even point and I’ve realized it’s not something many people factor into their decision-making process. They want to see how much they can save, but not think about how much it costs to save that money.
With the windows, we would have had to pay nearly $10,000 to have them installed. By the time it was all said and done, it would have taken us over 38 years to break even on those windows. With a point so far out, it doesn’t make financial sense to purchase new windows. The break-even point is valuable. It keeps your emotions in check and puts you back on the right financial path.
I would always suggest you run the numbers. If you are considering spending money to save money, then you can easily calculate the break-even point. It’s not a hard equation and can be done in your head if you’re good with numbers. I was able to calculate the break-even point while the window salesman was running with spiel.
I didn’t talk to him about it, but before he was done, I was done with the process. I knew it didn’t make sense. Yes, new windows would have looked nice, but the expense of putting them in alongside the low savings rate just didn’t make it a worthwhile investment.
Running the numbers isn’t just about seeing if you can fit the expense in your budget. You need to make sure the expense is even justified. Don’t let a flashy salesman tell you how to spend your money. Remember, you’re in control. Figuring out the break-even point is a worthwhile exercise I think everyone should make part of their decision-making process, at least on big decisions. It’s easy, but it tells you exactly what you need to know in order to make an informed decision. A little math can go a long way when trying to save money!
Do you think about the break-even point when contemplating purchases? How do you decide whether or not a purchase is worth making? What’s something you’d be tempted to upgrade on your house?