In the field of economics, utility is a concept that is used to predict people’s economic behaviour. Utility is a quantitative means of measuring the relative satisfaction received through the consumption of a particular bundle of goods.

As individuals, we make choices every day – in economics it is generally assumed that individuals will always make rational choices in order to maximize their economic satisfaction. Imagine you visit McDonald’s for lunch twice a week – on Monday’s and Wednesday’s and you spend roughly $10 per visit. You could use your $10 to purchase three Big Macs or it could be used to purchase a ton of fries or maybe thirty chicken McNuggets. Some really smart economists have spent a lifetime developing the mathematical theories necessary to model what you know instinctually. On Monday, you will purchase a Big Mac combo and a deep-fried apple pie in order to maximize your satisfaction, but on Wednesday your satisfaction is maximized by spending your $10 on a McChicken, a side garden salad and an Oreo McFlurry.  Now it turns out that you are not a completely rational individual; you will often make irrational decisions. However the principles you instinctually apply to maximize the utility you obtain from your McDonald’s your McDonald’s consumption can, with a bit of reflection, be applied to make smarter decisions in your life, decisions that will allow you to maximize your savings and get more satisfaction from the money you spend. Let’s take three lessons to heart from our Big Mac purchase:  

1. One Big Mac combo and an apple pie will satisfy you more than three Big Macs

If you want to amass significant wealth, you will need to become proficient in maximizing both your earnings and your savings. However there is only so much marginal saving you can do before you will start to feel dissatisfied with life in general. If you’ve ever attempted to stretch your food budget by consuming only instant noodles and canned pasta products for a three week period, you should appreciate the sense of dissatisfaction that will quickly creep into your life.  You need to spend money to get satisfaction – at least to a certain extent. To get the most mileage out of your money, make sure you are spending your money on goods and services that maximize your satisfaction.

Let’s use a simple scenario that anyone who has lived through a contemporary, angst-ridden youth can relate to: If you are spending two thirds of your disposable income on beer, you are likely trying to numb the pain of poverty via alcohol intoxication. Try reallocating one third of your disposable income towards the purchase of boxed wine and consume both simultaneously – you can thank me in the morning!

2. On Monday you ordered a Big Mac, but on Tuesday you consumed a McChicken

At some point, you will find malaise creeping into your daily existence, regardless of the utility accumulated over the years from your decision to diversify into on boxed wine in college. Your first instinct may be to throw money at the problem: a BMW with a two-stage turbo motor, a blender sporting a cold-forged German blade (driven by a BMW two-stage turbo motor, of course) and more family dinners at the Gordon Ramsay’s Mailedin will likely give you some marginal satisfaction. At some point, however, this ever-accelerating consumption pattern will cause your wallet to explode, just as your heart would explode if you were to perpetually increase your rate of Big Mac consumption. Instead, grab that metaphorical McChicken. Drop the frequent restaurant visits and enrol in a cooking course at your local Gordon Ramsay cooking college. Rather than upsizing your compact BMW, consider keeping it another four years and spend the marginal savings on performance driving school. Your leisure time is not a dead-end job, so stop treating it like a burdensome routine – adding a bit of variety to your leisure time (and possibly your working time if the opportunity is there) will help banish the blues at low (or even negative) marginal monetary cost. 

3. You chose to consume an Oreo McFlurry and a side garden salad – what the heck were you thinking?

On the surface, this seems to be a bit of an irrational decision – particularly if you, like most individuals, do not substitute the fries for a garden salad habitually. If you are going to finish the lunch off with a McFlurry, it is unlikely that you are attempting to realize any long term health benefits. Fear not as your decision is still somewhat rational. It turns out that utility can be generated through psychological trickery in addition to economic consumption: the utility generated from the act of not consuming a good is just as legitimate as utility derived from consuming a good. With proper conditioning, you will gain satisfaction from saving money, even when you do not necessarily have an end goal – take advantage of this psychological trickery to build up a large capital base, opportunity may just eventually decide to knock on your door.

In a similar fashion, let’s apply the concept of utility to the activity of coupon clipping. You may scoff at your friends who are fastidious coupon-clippers, but they may be enjoying a double-dip in the utility vat: first, they gain utility from the psychological act of “saving money”; second, they can gain more utility from the economic consumption gained by spending those savings on consumption later on. On the other hand, if the coupon clippers are choosing to consume goods that they wouldn’t otherwise consume, the picture is murkier. The net utility gained from the double-dip must be weighed against the utility to be had given a consumption pattern in the absence of the coupon. Results will vary from individual-to-individual – thanks to reality television, we discovered a large sub-population of people who find complete fulfillment through competitive coupon clipping. You are likely not part of this population, so get real. Consider your purchasing decisions in the presence and absence of coupons and other promotional incentives (including Costco-type quantity discounts) and ask yourself if your cumulative utility is being harmed by thoughtless coupon-usage. There is no universally-correct answer. Results will vary by individual, so do your own analysis*.

This article has only scratched the surface of the utility concept, but you can now bravely venture onwards, confident in the knowledge now have a deeper understanding in how to bleed more satisfaction from each dollar you spend and each dollar you save.

*Proceed with caution. Performing excessive utility-cost calculations may be an inefficient use of your time.