Thursday, August 21, 2008

Economic Utility

Economic utility is an interesting concept that I have studied on a couple different occasions, but have not truly appreciated until recently. When I was young and broke, it was easy to see that an increase in spending (consumption) would provide an amount of utility (pleasure). The choices I made then were pretty simple and amounted to chasing skirts or outdoors pursuits. I would spend as much as I could and had a zero savings rate. I did make choices on what spending would provide the most incremental utility, but they were always small sums of money.

As I progressed beyond living hand to mouth, I started to have slightly more disposable income, but fewer financially straining outlets. I already had most of my sports toys and progressing into a committed relationship, I was not spending as much money out on the town. Interestingly there was not any extra utility to be had by increased spending. While one could always want a larger living space, faster car or the latest and greatest technology gadgets, this stage in my life was not marked by that.

Being married and starting a family has recently pushed this issue to the forefront. Initially my disposable income increased as we were sharing expenses. This led me to pursue interests in coin collecting and play a little more poker. I should clarify that I am a net losing poker player and treat poker as an expense and not a source of income. Recently my disposable income has decreased as a result of tax issues and increased family expenses such as day care. Combined with my increased hobby set, I found my savings rate begin to fall into negative territory.
With some cash flow changes (paying off the car and student loan), I was back in the black, but forced once again to consider economic utility.

Would I rather play poker or have a maid come by?
Would I rather go out for lunch or go to the pool for a swim workout?
Would I rather collect coins or save money for a new bicycle?

It is interesting that the recent choices were all non-essential and had various durations from short term to longer term. I was not in a situation to choose between eating or taking medications as some of the population is faced with.

I was also hit by an expenditure that was interesting to place on the utility curve. I had a dental issue and while the pleasure to be gained by being able to chew food far outweighed any other spending choice, it felt like I was already able to do that and should not have to pay $XXXX to continue to do so. It is kind of like paying off the car and then requiring a new transmission. It is more of a slap in the face than anything else.

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