Executive Summary
We often find great value and pride in owning things - yet the reality is that in many situations, we actually don't get a lot of use out of much of what we own. Which starts to beg the question - maybe we should spend more time renting stuff we want to use (loanership) when we want to use it, rather than buying it (ownership).
The inspiration for today's discussion comes from a few recent articles that I've read that have made me think further about how we value, and get value from, the things that we own. For instance, yesterday I was reading through a blog post from Personal Finance By The Book that I saw thanks to a tweet from financial planner Jim Ludwick (follow him at @jfludwick), discussing the concept of "cost per use" - in other words, to convert the price of what we buy from the total price of the item to the cost of the item per time that we use it. For instance, if I buy a $500 winter overcoat but use it 150 days a year for 5 years, my effective cost is $0.67 per use; on the other hand, if I buy a $20 t-shirt but only ever wear it a few times, my cost per use for only wearing the t-shirt 5 times would be $4 per use. Consequently, as the analysis reveals, maybe I'm actually getting far more value at a "lower cost" (per use) for a $500 overcoat than a $20 t-shirt. (Of course, in reality this is an example from the aforementioned blog post; I still never wear a winter jacket, to the ongoing distress of my mother.)
The analysis was further extended from there to other services and buying decisions that we sometimes face. If you were thinking about spending an extra $5,000 to go from the 5-passenger car to the 7-passenger mini-van to fit the extended family for a big vacation once a year, but only really fill the van one or two weeks a year, perhaps it would be better to just get the smaller vehicle and rent a mini-van when you need it; if the van rental costs $500/week, anything less than 10 weeks of use makes the smaller-car-plus-rental route cheaper. Alternatively, look at a service like NetFlix; if you're paying $5/month to get 2 movies per month (again, per the aforementioned blog post), you're effectively paying $2.50 per movie to view. If you were thinking of just buying your DVDs instead, at $2.50 per use, you actually have to watch the movie 6 times just to break even. So if you don't regularly (re-)watch movies that much, perhaps you should stop buying DVDs and start renting what you want to watch.
I find the latter examples striking because they relate back to another popular issue of recent years - not just should you rent or buy your DVDs, but should you rent or buy your home. Of course, the cost per use calculation isn't directly applicable, since you're ostensibly going to use the home virtually every day of the year, but underlying principle is still the same: is it more cost effective to buy, or to rent what you need. An article earlier this year from Kiplinger made the point that if the cost to buy is significantly higher than the cost to rent (which, indirectly, is an indicator of the valuation of homes in your area and whether they are under- or over-priced at least relative to the local rental market), maybe it really is a better deal to just rent, notwithstanding the general viewpoint that home ownership is a great way to build wealth.
Of course, there are many inputs that go into the decision about whether to buy or rent a home beyond the "mere" financial aspects, but for many other buying decisions, it probably is easier to boil it down to a loanership versus ownership decision. The DVD example from NetFlix above is a good one; for many living in a major city, arguably the decision to buy a car versus just renting cars and/or taking taxis as needed is another good case in point, supported by services like ZipCar. As access to "stuff" via rental/loaner becomes easier in today's world of improved logistics management and interconnectivity - from DVDs to cars to computing power - the decision seems to me to become more and more relevant. In the coming months I plan to move much of my personal email and data storage from my home computer onto "the cloud" because I find that the cost to use a small sliver of Google's services is far less expensive than buying the hardware, software, and managing the security, backups, and other things necessary to keep my data safe and secure. In the end, it's the same principle - the cost of loanership use of Google's hardware and software services is far less expensive than buying/owning/doing it all myself. And given the reality that the cost of hardware and software is otherwise "lost" (as its value quickly declines to $0 in just a few years), as is the depreciating value of most of the "stuff" that we buy - making good ownership/loanership decisions represents the possibility of significant savings and enhanced wealth over the span of many years.
So what do you think? Is the loanership versus ownership dynamic relevant in the buying decisions your clients make? What about the business decisions you make in your planning practice? And are you finding access to loanership services (from NetFlix to ZipCar to cloud computing) to be changing how you consume and manage your use of products and services?
There is another aspect of the own vs. rent decision. Ownership is a two way street. When you own something, it can incur both a physical and psychic drag.
For example, when you own it, you need a place to store it (i.e., bigger home) and you need to maintain it.
Psychically, you will also feel guilty if you don’t use it (e.g., think of unused exercise equipment) and it may be hard to finally let go of it even after its useful life has ended (try getting a child to give up a toy they haven’t played with in years).
These aspects are rarely taken into account when making the buy/rent decision.
Great article. This is a great way for us to add value to client decisions. Regarding the “Cloud”, you are dead on – and not having to be an IT expert maintaining all that crap is a great thing, too. Google is dirt cheap – some of our industry specific cloud providers better beware.