Monday, March 7, 2011

Doing the math

I am, if you haven't already noticed, a math person. And I think a lack of comfort with basic math is a source of financial trouble for a lot of people. I'm not saying that, presented with a math problem, that they can't do it. But they don't think in those terms, and they make a fuzzy (often very wrong) estimate or judgement rather than actually figuring out the true savings. For example, be a little cautious about the "per unit" pricing in grocery stores. I have occasionally seen one that was mispriced. If a one pound package of something is $1.29 (unit pricing shows as $.13 an ounce) and the one pound package of the same item next to it is $1.89 (unit pricing shows as $.11 an ounce), the first one should not cost more per ounce. At least not in this universe...

OK, double check the package weights, then pull out your handy calculator. The packages are one pound which is 16 ounces (I'm using typical US measures). You need to change the price from per pound to per ounce. So, $1.29 divided by 16 is $.0806, or eight cents an ounce. $1.89 divided by 16 is $.1181 or twelve cents an ounce. So, the first one was obviously calculated wrong. But it turns out that someone also creatively chose to round down on the second item. It may not look like much difference, but $.11 by 16 is actually $1.76, $.13 less per package, a noticeable difference.

To calculate which things are most worth doing to save money in purely practical terms, do the math on that as well. Figure out how long it takes to do or make the item, work out how much it costs you to make, then how many you could make in an hour to work out your "hourly" wage. 

For example, I can make my recycled jeans tote in about 15 minutes, probably less, so I could make 4 in an hour. The fabric is free, and I pay about $.50 for the strapping for the handle and maybe $.05 for the thread. I could probably sell one of these for at least $2.50. Subtract the cost of the materials, $.55, from $2.50, and I have $1.95 profit per bag left. Multiply by 4, and my "hourly" is $7.80. A reasonable return, and there's the pleasure I get in making them myself and the satisfaction of getting a little more out of that pair of jeans.

However, go further: if I bought a bag like this for $2.50, I'd have to pay sales tax (8.25% in my area), adding $.21 for $2.71. AND don't forget you're buying in after-tax dollars. The SS would be about $.22, and income tax in the 10% bracket would be about $.33, bringing us up to $3.26 in pre-tax income to buy that bag. This is the real cost you should calculate for your hourly "wage" in making the bags. You'd have to make more than $13.04 per hour to make the commercial bag "cheaper."

Whether this is worth it to you is, of course, relative. If you make $40 an hour and can get all the hours you want, this isn't worth your time purely as a money-saver. If you make less than this per hour or can only get a limited number of work hours, it's definitely worth your time, assuming you need the bag or can use it or gift it. If you're unemployed with limited prospects right now, this could be a small microbusiness, bringing you in a few dollars extra. And if you're a Bill Gates type, can I suggest that your time might be better spent thinking of ways to help CREATE jobs in the US, which would incidentally create more customers for you (still the biggest market in the world?) If the concept is confusing, call me, and I can explain in simple terms...
I'm blessed to come from a family in which I think everyone has a natural "feel" for basic arithmetic, including ones who seem to think that they aren't that sharp (they unfortunately compare themselves to members of the family rather than the general population). And in my family, math was practical: I sometimes think we got the idea of APPLYING math to the real world in our formula. If you weren't that fortunate, keep in mind that recognizing a weakness is the first step to finding a way to compensate or overcome it. For this purpose, what you need are basic arithmetic skills and the much-neglected ingredient, COMMON SENSE. If you're multiplying $2.28 by 3, and your answer isn't more than $6 (the first number of the price multiplied by 3), then you obviously need to check your math. If the first number is $8 or larger ($2 times 4), then you may need to check your math again since $2.28 is much closer to $2 than $3. If you know you aren't great with math, check yourself with a calculator. Twice. Or three times. And always carry a calculator into the store.


Ami said...

Reminds me of the story..

At the class reunion, the guy who couldn't do math was the wealthiest one. And when asked his secret, he said he'd figured out how to make something for a dollar and sell it for four dollars.

"And let me tell you," he said, "Those 4 percents really add up!"

We did consumer math in the grocery store with both kids.

Dawnfire said...

I've known people like that. Sometimes, ignorance is bliss :0