In everyday language, we consider these two words to be interchangeable. I could describe a Rolex watch as expensive or I could describe it as valuable; either way, you’d interpret the two statements to mean the exact same thing. But in fact, these two concepts–expense and value–are actually completely unrelated. The subtle difference between the two often runs counter to our expectations.
Whether or not something is expensive is determined entirely by its price tag. Expensiveness is based on cost, which is a fixed, objective measurement. Whether or not something is valuable, however, is a subjective matter. Value changes all the time, from person to person, depending on the circumstances. A Rolex watch will always be expensive, but it might not always be valuable. What it is truly worth depends on whether you already own a watch. If you own a cellphone with a built-in clock, you probably don’t need a Rolex, aside from the social status a luxury watch would confer.
Maybe I’m belaboring the obvious. But keep in mind that most financial decisions aren’t based on logic. We are irrational people, and we shop out of our emotions. We often judge an item’s worth based solely on its price:
Because a Rolex watch is expensive, it must be good. Following a similar logic, a $200 pair of tennis shoes must be valuable. That high price reflects higher quality, better design, and greater comfort. It must certainly be better than a pair of sneakers priced at $19.95.
Once our brains start to associate price with value, we become easy to manipulate. If a pair of shoes costs $200, it must be worth $200, whether we need it or not. So when a special sale comes around — say 50% off for a limited time only — we assume we’re getting a bargain. Same value, but lower price: what a steal.
Perhaps this is why we love bargains so much. We go extraordinary lengths to clip coupons, browse yard sales, and attend liquidation events. We’ll camp out all week for Black Friday if we have to. These are all opportunities to buy
valuable stuff at lower prices. Some of us enjoy bragging about all the money we
Of course, most of what we buy is just deadweight. That antique lamp from the yard sale is on sale precisely because its former owner has no use for it.
How can we get a real estimate of an item’s value? I like to ask myself,
If this item disappeared, how much would I pay to get it back?
Sometimes I wouldn’t even notice its absence. I’ve had closets filled with junk I didn’t even realize existed. I was reminded that most of what I had purchase had absolutely no value. It didn’t matter how great of a bargain I got–if it was of no value to me, it wasn’t worth purchasing.
In many ways, price tags are unreliable indicators of value. An item’s price reflects what others are willing to pay, not necessarily what it’s worth to you. It may be hard to separate the two, but it makes all the difference between a valuable lesson and an expensive mistake.