Recently, perhaps in light of the economic downturn, we’ve been talking more about our spending habits. We had the realization that our day-to-day “living” expenses were not very high in comparison to our combined salaries - what drives our high credit card bills are big, one-time purchases.

We don’t think that this challenge is unique to us - it’s probably fairly common for a dual-income professional couple with no kids. We’ve started experimenting with amortization in order to address this issue. This is an accounting concept used by companies to inform capital expenditures (in other words, big one-time purchases) — companies will allocate the cost of a capital expenditure over the expected life of a product and consider it as a monthly cost instead of a one-time expense. For example, if new computer equipment costs $12,000 and is expected to be used for 2 years, this would count as spending $500/month for the following 24 months.

This helps companies have a better understanding of what a purchases costs relative to the income it generates. When sitting in accounting class, this concept might put some people to sleep - it’s not all that complicated, and it is a bit dull. We’ve found, however, that amortization is a fun and useful technique for understanding personal expenses.

A recent example is the Sony Playstation 3. Many people think that it’s pretty expensive - and at $400, they’re not wrong. But, a Playstation is actually has a lot of useful features - a Blu-Ray player, media streaming (so we can view online content that we’ve downloaded), and of course the ability to play games. Brooke bought a Playstation for Toby for his birthday (a fast way to a man’s heart).

We believe that we’ll use the Playstation for 2 years - that translates into about $16 per month. All of the sudden, it didn’t seem so expensive - especially given that many people (including ourselves) don’t blink an eye at paying $100 per month for cable. We actually have found that the Playstation is better than cable for us - we rent TV shows and Blu-Ray movies via mail through Blockbuster ($20 per month), download free content, and play games. Just ask Brooke about her favorite game, Ratchet and Clank - the Pixar of video games. She plays the game more than Toby does.

We decided to cancel cable - we essentially traded cable bills of $100 per month for a Sony Playstation for $36 per month ($16 per month for the equipment and $20 per month for a Blockbuster subscription). Of course, if these large upfront purchases are made with a credit card and not paid off in full immediately, the purchase price increases significantly.

Ever sense we’ve started thinking about amortization, that’s the first thing we consider when talking about big purchases. We’ve both noticed our credit card bills declining over the last couple of months - a good sign that it’s working.

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