Let’s say you spend $1,000 to acquire film equipment (camera, microphones, and lights) to shoot YouTube videos. If you use this equipment to film and publish 2 videos, it means that each of those videos costs $500 to produce. If 100 videos are published, each of them cost $10. If all of these videos are able to generate $10 of revenue, then the entire cost of the initial investment was amortized.
The above is a severely gross simplification1, but the key point is that an investment left unused has a high associated cost. In the case above, if only two videos were to be produced, then it would have been a better idea to rent the equipment instead.
This simple heuristic of mapping the investment cost to its usage and upside, can be a potential rule of thumb in different scenarios.
- Apartment Rent
- You are renting an apartment for $1,000 per month. During the week you work in an office, on weekends you are sometimes out, and during the year you take sporadic vacations outside. Let’s say that, on average, you spend 14 hours per day on your apartment, including sleep → 14 hours * 30 days = 420 hours.
- This means that it costs costs about $33 per day to live in the apartment, or $2.3 per hour.
- Study → Work → Net Worth Gain
- You studied 30 hours per week for 3 years (30 hours per week * 52 weeks * 3 years = 4680 hours) to land a job that increases your net worth $10.000 every year (on average), for 30 years. A total of $300,000 of networth gains.
- This means that you will gain about $64 for each hour invested in studying, or $274 per day.
- You buy pair of trousers for $50, and wear them twice per month throughout for 2 years (24 months * 2 times per month = 48 times these were used).
- This means that it costs about $1 to wear them each time.
- By contrast, if these trousers were only used 7 times, it would cost about $7.14 to wear them each time.
- You buy a MacBook Pro 13” for $$1299, and use it 3 times per week for 2.5 hours per session, throughout 7 years (3 times per week * 2.5 hours * 52 weeks per year * 7 years = 2730 hours)
- This means that it costs $0.48 per hour of usage.
- Musical Instrument
- You buy a guitar for $100. You play the guitar once per week, for one hour, during 2 years. 52 weeks * 1 hour * 2 years = 104 hours.
- This means that each hour playing the guitar has a cost of $1.
- Video Streaming
- Audio Streaming
We could go on with further examples, as this simple heuristic could be applied to several scenarios, and the cost cost benefit analysis could have any perspective one so desires, but I would invite you to visit your storage and search for something you acquired long ago that got used less times than expected, and do a rough calculation of what was it’s relative cost / benefit. The same for any other investment you did in the past.
Was it a surprising result?
How did it stack up against your initial expectations?
This gross simplification is meant to keep the example simple, and does not take into account other direct and indirect costs, such as the computer needed to edit the videos, electricity costs, office space costs, labor costs. It also does not take into account the gained equity, this is, you could sell the equipment and get some of that investment back. This was not considered because if the equipment breaks its value is rendered to zero, and when / if it is sold, it would be for a fraction at the initial value, not only because its inherent value would likely decrease through the years, but also because of inflation.↩