Do you know the difference between price and value?

These words are often used interchangeably, though they're anything but the same - at least for those with some financial savvy

Attention sale shoppers: You may not be getting the deal you think you are, at least not if you’re only looking at price. Whether it’s 20 percent off, 50 percent off or slashed right down to “rock bottom” range, the price we pay for something is really only half the equation. The other half is value. If you’re confused, it’s no wonder; these terms are often used interchangeably in everyday language.

So what’s the difference? Billionaire investor Warren Buffett described it this way: “Price is what you pay, value is what you get.” Sounds simple enough, right? Actually, it is, at least once you get the hang of it. Here, we’ll take a look at what price and value mean, and how knowing the difference can help you in a few key financial situations.

Why price isn’t the only thing that matters?

Okay, so here’s the deal. In economic terms, price is largely determined by supply and demand. That’s part of the reason why a real designer purse costs way more than even the best Chinese knock-off; demand for the real thing is high, and supply is limited, while knock-offs are sold on street corners by the armload.
So what about value? Economists see this as a function of the price paid and the perceived value received. If all you value in a handbag is two handles and a zipper, the cheaper version might do just fine. If you value design, quality and a little admiration from others, you may feel the higher price tag is worth it. In other words, while the price of goods is largely out of your hands, value is personal. That means you can use it as a barometer to spend your money the way that best benefits you.

At the mall

Thinking about the value, or utility, of what we buy is a great way to prevent overspending or, perhaps the biggest enemy in personal finance, buying things we just don’t need. Indeed, it’s a lot easier to argue the value of a new sweater if you don’t already have 50 of them piled up in your closet! Unfortunately, this gets a little tricky with sale prices. So, while you might not be tempted to add another cardigan to your collection for $100 (after all, you don’t need one), if the price is slashed to $50, the old value radar may be subject to some interference, a sort of internal chorus of “that’s such a good deal!”
We’re all for sales, but the truth is that a lot of people get so caught up in a discount that they forget about what they’re still spending, and whether what they’re buying brings value to their lives. Clearly price matters, at least for your budget, but you have to weigh it against the value your purchase will provide. If you don’t need a new sweater or don’t have $50 to spend, you aren’t getting a deal. In fact, you’re just falling into a typical retail trap.

In the real estate market

Many homebuyers search not just for a home, but for “a deal.” Unfortunately, that’s often harder to come by than we imagine. Why? First, where you live and what kind of home you choose can provide a lot of value. It’ll affect the way you live, how long you have to commute and how comfortable and happy you are every day. That isn’t to say you need a large, luxurious or particularly expensive home to get the job done, but it does make it pretty hard to buy a house based on price alone.
Do you have to buy a house that fits your budget? Absolutely. But once you’re working within that range, you need to look at value and find the house that best fits your needs – not the one you can whittle down to the lowest price. After all, you could probably get a house for $5,000...somewhere. That doesn’t mean it’s somewhere you want to live.

In the stock market

In the stock market, the concepts of price and value couldn’t be more important, particularly for buy-and-hold investors. That’s because while even the most stable stock’s price fluctuates minute to minute, its value is something that runs much deeper.  That’s why value investors are less concerned about what a stock costs than what it’s worth in terms of its ability to produce solid returns for investors. Just look at Warren Buffett’s own company, Berkshire Hathaway. If you bought just one of its A shares, you’d pay somewhere around $170,000 for it. Now, before you get turned right off by that price, you should know that what you get for it is a company that’s grown and provided steady, dependable returns to investors for decades. It’s also a stock that has never underperformed the S&P 500 over a five-year period since 1964. Deep down, it has something going for it, something that allows it to continue to be profitable year after year. That’s its value. So, if its price takes a dive because the markets are weak or there’s bad news about the company, well, that’s just price (not to mention a great opportunity for investors). What that company’s really worth is a whole different story.

Of course, figuring out what a company’s worth is easier said than done, but most value investors use a process called fundamental analysis. You can learn more about how Buffett does it here.

Get your money’s worth

It’s easy to get hung up on what things cost; it’s what we see, it’s in our face. Digging down into how much value you’ll actually get for what you pay is hard and dirty work, because it often means facing up to the truth (you know how we all hate that!). So, the next time you’re looking to buy a home, a stock or a new pair of shoes, think about what you’re really getting for your money. That’ll help you determine whether you’re just spending your money or truly putting it to work.

From Goldengirlfinance.com/ Posted by Mags