by Dr Nice

Created on: February 13, 2007   Last Updated: April 13, 2007

Buying power is an imaginary concept that has value only for estimating the average value of a given amount of capital. It is a fairly useless concept for everyday matters. The actual value of anything is determined only in a moment of exchange, and is not even fixed in that moment, except for that specific transaction. (And even then the transaction could be modified after the exchange has occurred, changing the value outcome, like when a store promises to refund the difference in the purchase price if you bring in a valid advertisement for the same item at a lower price then you paid from a competitor within a given time after you make a purchase.)

Let me site an example of how value is fixed at the moment of exchange: Let's imagine I want a new 20" LCD display for my computer. A local computer store offers a model that suits my needs for $250. I find an ad for the same display online for $185 including shipping anf handling. I print out the ad and go to the local computer store. and ask them if they will match the price. The clerk and I negotiate and finally settle on a price of $195, which I am happy with because even though I am paying a slightly higher price than optimum I won't have to wait for it to be shipped to me, and the store, though it makes a little less profit on this sale, makes a sale that would otherwise have gone to a competitor and leaves me favorably inclined towards making an impulse purchase while I am in the store.

So what was the real value of the LCD screen? For me, in the moment of purchase, it was $195. It will not be the same for the next person who makes the same purchase, even if they employ the same strategy, because they will likely be talking with a different clerk under slightly different circumstances and will have different negotiating skills than I have.

When you understand that the value of everything you wish to purchase is negotiable under the right circumstances then you will seek to employ strategies you can learn or think of to increase your buying power with the resources you currently hold. This is why buying power is an imaginary measurement.

One strategy I recommend is to NEVER buy a brand new car, because it loses a huge portion of it's value the moment you roll it off the lot. A car with 30,000 miles on it that has been taken care of will last just as long, look just as nice and give you a substantially higher return on investment ratio. In fact I never buy from a dealer and I always pay cash. If you want a nicer car, save up enough to buy one for cash. Include enough in your budget to hire a mechanic to check out a car before you buy it from an auction or private party if you are not mechanically inclined.

Car payments sink the financial ships of more people who are living on a marginal income than any other single expsense I am aware of. Better to pay $800 once a year to buy a clunker that you can drive till it drops a year later than to have a $100 a month car payment for 3 years on a car that is a little nicer and may last you a couple of years before it needs major work.

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