THE MORE YOU KNOW, THE LESS YOU EARN

**Ed:** ‘Also, given a constant amount of Work, as your Knowledge increases, your Money decreases. I believe this is called ‘graduate school.”

NO, IT’S 177%

**Brian Holdren: **‘Wenyu has assumed that one case of wine will last for an entire year. Must be a magic case of wine! Anyway, Less is correct (as you assumed). Doing the calculation with Excel: 177.4579488% Internal Rate of Return.’

☞ I always assume Less is correct, but let humor get the better of me – I liked the headline.

**Ken Shirriff:** ‘My final answer is 177.46%. This is based on the assumption that you receive $10 each week to spend and if you have a credit line with an APR of $177.46%, you’ll break even buying bottles vs. charging the case. Happily, this answer matches Less’s, although it took me several tries to get all the details right, and I got values from 63% to 299% while working on this.’

**Mike Lyons:** ‘To do the calculation properly we need to focus on the cash flows, not on the mythical $1/week that you earn. Switching to the ‘cheaper by the case’ method and looking at the changes in our cash flow over a 12-week period, we see:

Week 1: -$98 (we spend $108 instead of $10)

Weeks 2-12: +$10 (we spend $0 instead of $10)

‘Excel’s IRR (Internal Rate of Return) function tells us that is a return of 1.9764% per week. To turn that into an annual return, we can use a formula for compounding returns:

((1+r)^p)-1, where r is the rate per period and p is the number of periods, so we get ((1+.019764)^52)-1) = 176.7%.’

**Bob Fyfe: **‘Instead of drinking a bottle once a week, drink one every night. Save $365 per year instead of only $52. Further, you mention saving even more money by switching to an $8 bottle. In actuality, you should be buying $20 bottles and drinking one every night. Since you earn such a high rate of return, you might as well “invest” as much as possible.’

**George F (who I thought at first was kidding):** ‘You are making the following assumptions:

- That you are able to provide the same or better quality storage of a case of wine as the store at the same or better price.
- That you do not break all the bottles in the case during transportation and storage.
- That you will not be tempted to drink more wine if you bought a case than if you bought individual bottles. Additionally drinking a case of wine could lead to a decline in your judgment, personal reputation, and balance, all of which could lead to grave additional costs.
- That the wine you are buying does not deteriorate during the 12 weeks of storage.
- That you will like the wine as much at the beginning of a 12 week cycle as the end.
- That the option to choose a different bottle of wine each week or no bottle at all (and spend the $10 on some other beverage) is of no value.
- That you experience no costs and inconveniences in transporting a case as opposed to individual bottles.

‘Assumptions 1-4 can result in actual cash losses. Assumptions 5-7 result in loses of value but not actual money. There is a saying ‘penny wise and pound foolish.’ Even Amy Dacyczczyn, author of *The Tightwad Gazette II* has a fairly negative view (page 97) of warehouse clubs and buying in bulk. She suggests a fairly detailed of costs and benefits to determine the true benefit of buying in bulk.

‘I put together a present value analysis of 119 weeks of buying cases (once every 12 weeks for $108 a case) vs. individual bottles (once a week for $10 a week). Assuming an interest rate of 5% on cash (and that I did everything right) you would need starting capital of $1,135.44 to buy 1 bottle of wine a week for 119 weeks. You would need $1027.18 if you bought cases instead. The savings is about $108 or 1 case. I personally do not feel that $108 is adequate compensation for the costs and risks. I can email the excel spread sheet if you like.’

☞ Ah, but you don’t need a starting capital of $1,027.18 to change from buying a bottle a week to buying a case every 12 weeks – you need $98. (Instead of spending $10 that first week for one bottle, you spend $108 for 12 bottles, which means you have to come up with $98 more. *That’s* the most capital you will ever need in order to save what would be $119 on wine over 119 weeks.

As to your other points, they are more or less valid and I appreciate your raising them. But don’t forget some counter-balancing points: Shopping in bulk means **fewer trips to the store** (saves time and transportation; less chance of getting killed in a car crash) . . . means you are **less likely ever to run out** at an awkward time (have to make a Sunday morning run for bathroom tissue, which is *never* on sale at the QuickyMart, just *moments *before little Timmy takes his first precious steps and you’re not there to see or videotape it) . . . and means you will be **better prepared** for a possible interruption in the supply chain, should there be a hurricane, flood, earthquake or red alert (and won’t you wish you had a case of wine *then!*)