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Value for Money: What Does it Really Mean?
Value for Money: What Does it Really Mean?
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Value for Money: What Does it Really Mean?

Money254
Eunniah Mbabazi
June 11, 2021

At one time in your life, you have probably held a Ksh1,000 note in your hand and wondered how best to spend it, and get value while at it? Buy pizza? Take yourself out for breakfast? Buy shoes? Lend it to a friend? Or stash it into your savings account?

Have you been stuck at whether to sell an item right now, at a cheaper price, or wait a little bit longer, until when demand is higher, and sell it at a higher price?

If you answered yes to any or all of the above questions, then it boils down to you always looking for value for your money, even in hindsight.

Value for money means the most advantageous combination of cost, quality and sustainability to meet one's requirements. It is based not only on the minimum purchase price (economy), but also on the maximum efficiency and effectiveness of the purchase.

The Three Es Value for Money

Economy - this seeks to minimize the cost of resources for an activity (‘doing things at a low price')

Efficiency – getting the most from your money ('doing things the right way')

Effectiveness – getting expected results ('doing the right things)

Time Value of Money

Time value of money is the idea that money you have right now is worth more than the same amount in the future because of its likely earning capacity. This means that provided money can earn interest, any amount of money is worth more the sooner it is received.

For example, if you have Ksh10,000 today and deposited into a fixed savings account, it could earn a certain amount of interest by 2022 - see the interest rates available for savings accounts in Kenya here

This will be more than now getting Ksh10,000 in 2022. Alternatively, the KSh10,000 received today can be invested, say in a business or Sacco, and will be worth more in 2022

You could also consider the common occurrence of lending to friends. If you lent a friend some Ksh5,000 and they repaid it in a day or two, you would want to ask for anything in return. But if they were unable to repay within a month, two or three, you would want to ask for an additional Ksh500 for the loss of your money for that period - that is the time value of money. 

It is, among other factors, determined by opportunity cost and interest rates. 

Opportunity Cost and the Time Value of Money

Opportunity cost is the difference between the value of one spending option and another option. For example, you have invested Ksh30,000 in the stock market with the hope that you would be able to get at least a 10% return on your investment. You also had the option to invest the amount in a fixed deposit that offered interest at 8% p.a., but you went for the first option. 

At the end of the year, you find that due to volatile market conditions, the value of your investments has grown by just 5% to earn Ksh1,500. Now, if you had invested Ksh30,000 in a fixed deposit account, you could have made Ksh2,400. So, the difference of Ksh900 is the opportunity cost of money.

Every time you spend on something, you are taking away money from something else. So, you have to really decide what is more important. This is with the knowledge that oftentimes, in investment, there is no assurance of certainty - meaning that every investment is a risk. 

But even then, you can take some time to determine what risks you are worth taking and make peace with the fact that you may forego some options that may prove more successful than what you have chosen in the future. 

Time Value of Money and Personal Finance

In terms of personal money management, the time value of money concept is helpful as a warning or rather, a realisation that whatever you spend today will impact your ability to save up for a bigger and/or better future - whatever that better future means - including a bigger (or better quality purchase) or more savings to fund a longer-term investment.

People with a low Time Value of Money have an easier time saving. Whether they purchase something today or tomorrow does not make a very big difference in their satisfaction levels. It is easier for them to put off purchases.

Every time one puts off a purchase for later, they have a little bit more money in their bank account today. Putting off purchases for long enough generally means a larger bank account, and the ability to make something big out of their money thanks to delayed gratification. 

On the flip side, people who have a high Time Value of Money have a harder time saving. Even though they know minimizing spending leads to more (probably better) options, it is harder to give up purchasing smaller things today.

In terms of business, while it can be conservatively said that every business owner and employees have an abundance of ideas about the quickest way to make profit, resources available to actualise these ideas are always limited. The Time Value of Money approach then dictates that resources be best allocated to the strategy that offers the best long-term outcome, even when this means waiting to accumulate enough to launch a dream product inexpensively. 

Spending on What You Value Most

Talking about value - how do you get the best value for every dime you spend every single time. You work hard for your money, how best to reward yourself than to spend that sweat-stained money on things that you value most?

You set up your budget in a way that allows you to put your cash towards achieving your set goals intentionally.

After your basic needs are met, the question of what meets the definition of value gets personal. One person might consider travel to be very valuable,  another spending quality time with family, someone else acquiring some luxury items.

Spending on whatever you value most, however unconventional, is theoretically seen as the most sure route to achieving utmost satisfaction in life and a boost to the drive to get the best out of yourself in terms of efforts in income creation.  

Start with why. Thinking about your why should help you control your spending. Why do I want to buy this TV set? Why do I want to travel to the Maldives? Why do I want to pay for a gym membership? Etc.

If you cannot find reason enough to spend on something, you are better off saving the money, for example, in a fixed deposit account to accrue interest.

Wrapping Up

Sometimes, it could get difficult to decide which thing will exactly guarantee your value for money. However, with this knowledge, especially the time value for money, then one can make an informed decision.

Sometimes, postponing instant gratification to achieve the most valuable goals, budgeting to account for valuable passions/interests, investing to have more to spend later on what you value most could be your options.

Eunniah is an experienced business writer and editor. She is also a published author with two titles under her belt; Breaking Down and If My Bones Could Speak. You can find Eunniah on Twitter @Eunnyversal

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