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Sunday, July 19, 2015

What The Heck Is A Daily Consumption Rate?

When you think of how money is spent, there are two ways of looking at it. The obvious way is thinking of it in terms of how much money you spend directly when you pay for something. The other way is thinking of it in terms of how the the things you spend money on are consumed. The rate of consumption ultimately determines how much something actually costs.

Think of your consumption rate as an electric meter. Each and every second an amount of power is being consumed, and as a result the meter is turning and accounting for the consumption. In a given year you may pay an ultimate amount for the energy you use. But the cost is not in the total. The cost is in the rate of consumption. Paying attention to the rate of consumption is the key to understanding how far the money you ultimately spend will go. It is also the key to determining how you can slow down the rate of consumption. In other words, if you don't understand why something is costing more, you will never understand how to make something cost less.

The daily consumption rate is nothing more than a system of cost averaging. The trick is in keeping the average as low as possible. How do you that? If you take advantage of short term savings on the buying side, and pay attention to how you consume things, you will ultimately save money on the consumption side.

In the simplest of terms let's take a pound of pork to provide an example of what I am driving at. You can buy a pound of pork for $3.00 when you need it for a pork dinner. Or you can wait until a pound of pork is on sale for $2, and buy five pounds of it instead of just one, and freeze what you will not immediately consume. Your average cost of a pound of pork has been reduced by $1 per pound, and while the direct cost was more because you bought more, the actual cost considering time depreciation has reduced significantly the actual average cost you will pay for your pork over time.

How long you can make something you buy last, of course, also greatly impacts how much you ultimately spend on something. Let's take my 2001 Ford Explorer Sport Trac as an example. In 2003 I bought my truck for roughly $20,000 if you take into account the interest I paid for the loan I took out. If I would have kept my truck for just five years, my daily consumption rate would have been $10.96 per day. Because I have kept my truck for 12 years, my daily consumption rate for a vehicle has been reduced to $4.57 per day.

Granted, there are other costs associated with owning a vehicle to account for such as gas, insurance, and maintenance. But the simple concept behind the math remains the same. The overall cost of something is determined not just by how much you paid for it ultimately, but by how long you have made it last, or ultimately how you have consumed it over a specific time period.

Let's go back to that pork example for a moment, shall we? There is total consumption and partial consumption to account for.

If I buy a pound of pork for $2, and I eat only 3/4 of a pound of it, and throw away the other 1/4 pound, I have effectively increased the cost of my pork by 25%. My $2 pound of pork has now cost me, in effect, $2.50 per pound because throwing something away and not using it is the same as consuming it even if I did not eat it entirely, or use the leftover pork to incorporate it into another meal. I will have to buy more pork to make up the difference. Using the electric meter example, whether or not I am in a room to see the light, the meter will turn regardless and the cost of my lighting in a room I am occupying will cost me more. My daily consumption rate is being increased by how I am consuming my energy.

When you begin to think of money spent in terms of consumption rather than in terms of what you spend at the register, suddenly you find that money becomes more and more plentiful. And for those who like to make the argument that they cannot afford to save, perhaps what they are failing to pay attention to is their daily consumption rate. If you ate a pound of pork a day on sale, there alone you'd find you'd have saved $365 on pork in a year. Apply the daily consumption rate concept to everything you buy and consume, and the total savings become enormous.

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