I was reading the thread on LBYM about iPods and saw a response that expressed a sentiment that I'd seen before: Don't just think about the purchase price right now, think about what it could grow to. I'll admit, I usually don't follow this philosophy. I've never cared much what that amount might hypothetically grow to. But I started thinking that maybe these people were on to something. I should think about prices at different points in time. Right now I'm thinking about getting an iPod shuffle to go along with my 60 gb iPod. The shuffle costs $79, which I think is worth it to me. However, that $79 would hypothetically grow to about $795 in today's dollars if the market returns an inflation-adjusted 8% over the next 30 years. Holy crap, there's no way the shuffle is worth that much to me. So I decided not to get it.Then I started thinking some more. That 8% number is hypothetical - I can't count on that. I prefer to base my decisions on knowns rather than unknowns. So I decided to reframe the problem. I remember buying a pair of generic shoes (IIRC, they were Adidas knock-offs with 4 stripes instead of 3) in early 1980. They were $35 cheaper than the Adidas. With this new way of looking at things, I figure I'd prefer having an iPod right now to having the real Adidas in 1980. So I looked up the value-weighted market return since 1/1/1980. It turns out that the $35 I saved on those shoes in 1980, invested in the market, has grown to roughly $799 by the end of 2005. So now the decision is easy. I could buy 10 iPods right now for the present value savings on those shoes! This is a really great decision-making process. I've been trying to convince my wife to buy a Nintendo Wii. They're around $650 for a bundle that includes games. That's a little more than I can get approval for. Or should I say "more than I could have gotten approval for"? It turns out that the $650 is in "today's dollars". When I remind my wife that a $1 invested in January 1974 was worth $37.55 at the end of last year, the price is only around $17 in "birth year dollars". What a bargain! We'll probably get one for each tv.I never would have guessed how smart it would be to look at things this way. I'll be honest - it makes the money I paid for her engagement ring look pretty trivial. I just think in terms of my grandfather receiving a dollar on the day he was born. Who could complain about an engagement ring costing a dollar?
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