Posted by Mike Smith :: September 4, 2008 @ 12:10 pm

Economies of scale occur when inputs get less expensive as you generate more output. More than just within the realm of big business, there are many ways we can use this principle in our own daily lives. Getting more for less is clearly beneficial to your personal finances.

One economy of scale we encounter all the time is the United States Postal Service. For all the criticism the USPS receives, it’s truly an amazing feat that it can transport a letter anywhere within the continental US for a mere 42 cents. Imagine what it would cost you to transport that same letter yourself. More than just transportation costs, all of the overhead – building and vehicle acquisition and maintenance, employee payroll, etc. – must also be paid for. In the case of the postal service, each letter can be transported so inexpensively precisely because of the tremendous volume of mail being delivered.

This phenomenon has likely entered your life in other ways, such as when you buy bulk items at a warehouse club. Larger quantities typically offer a substantially lower unit cost. As long as you use the entire amount of the product before it spoils or expires, you stand to save considerably when buying at a lower unit cost.

Economies of scale can be leveraged in simple ways too, such as by batching bills to reduce overhead. You can also imagine how the due diligence for researching and tracking your investments probably takes as long regardless of the amount in your portfolio. By building your positions, the hours of research and tracking per dollar gain from the investment is sure to go down.

One last point is that bigger isn’t always better. Paying careful attention to unit cost, efficiency of work, and required overhead can all help to illuminate cases where staying small is advantageous. But in many aspects of our lives, exploiting economies of scale can allow significant progress towards reaching our personal finance goals.