Lending Club Blog

Hedging an Expense

Optional expenses can be delayed or eliminated, but even necessary ones can be hedged through alternatives. Doing so allows you to pay less now in the hopes of avoiding the greater expense until much later.

I ran into this scenario lately when my cordless would no longer take a charge. I use my drill regularly and it allows me to fix a lot of things around the house that would otherwise cost a lot more to have repaired by someone else. To me, this makes having a working drill a necessity, or at least a want worth indulging. Since cutting back on my expenses is more important of late and I hadn’t planned on buying a new drill, I decided to hedge the expense. A simple diagnosis with a multi-meter told me that the drill and battery were fine, but that the charger was defective. Rather than replace the drill, I simply ordered a replacement charger. For a $5 fix, I eliminated the need to spend much more on a full replacement. It may end up that this course of action costs me more in the long run if the charger doesn’t solve the problem as I expect it to, but it is still worth the risk to me because of the relatively low cost compared to replacing the whole drill.

Many of us hedge expenses all the time. A classic case is repairing an older car that is dying a slow death. With each repair, we weigh the cost versus the amount of additional use it should allow. Eventually, putting more money into the car becomes the more expensive route. Buying a replacement car isn’t cheap either, but it will get us more use for our money.

Though this technique may simply seem like delaying the inevitable, it actually can save you money. By looking at the replacement cost and the new product’s expected lifetime, you can determine whether the time bought by hedging the expense makes financial sense.

When has hedging an expense been the right (or wrong) move for you?

Tuesday, March 24th, 2009 at 7:51 am

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