One of the key questions a business wrestles with is how to
expand into new markets or product lines. Should it build the product or
capabilities itself (make) or acquire them from outside sources (buy)? The
answer to this question can be the difference between success and failure.
There will be hundreds of other choices after the make
versus buy problem, but none of them will have as significant an impact on the
future direction of the business. If you evaluate the make versus buy problem
incorrectly, no amount of brilliant downstream decision-making will save you.
If you make it correctly, you can make tons of little mistakes and still have
The same is true in our personal lives. In a sense, your
ability to save money will come down to a series of make versus buy decisions.
If you get most of them right, you’ll effortlessly accumulate wealth; if you
get them wrong, it will seem impossible to save no matter how much you cut back
on daily expenses.
There’s no one correct strategy. Every choice is
context-dependent and relies on the options available to you. Like renting a
home versus buying one, the answer will be different for different places at
What does make versus buy mean in the context of personal
The make versus buy problem intuitively makes sense in
business. Let’s say I’m an ice cream company, and I’ve decided to expand my
product offerings to involve cakes. I can choose between two options:
I build the cake-making capabilities in-house, requiring
investment in ovens, kitchen upgrades, and staff training
I purchase the cakes from an outside source and sell
them to my customers at a markup
If I buy the cakes, I’ll have lower fixed costs (I’m only
paying my supplier for the cakes I’m selling), but lower profits on each cake
sold. If I build the capabilities to sell cakes by investing in more equipment
and training, my day-to-day costs go up, but I’ll become increasingly
profitable as I scale my cake business – the costs of these upgrades are the
same whether I sell 100 or 1,000 cakes.
If I choose the answer to this question correctly, the
decisions that follow will be less consequential. The types of cakes to sell or
the kind of oven to buy are essential but will have less impact on the
business’ bottom line.
In your life, you’ll face similar choices. Will you order
delivery or buy groceries to make dinner at home? Will you suggest a night out
with friends or offer to host a group at your apartment? Will you live in a
doorman building or a walkup?
These decisions can have a significant impact on your
financial results. Make versus buy decisions set the range of potential
outcomes – the downstream choices determine where you fall within the range. If
you make a pricey choice at the outset (e.g., night out with friends), your
cost range will be higher. It will be challenging to mitigate the cost
implications of that choice. However, if you make a lower-cost choice at the
make versus buy stage, you have leeway to make more expensive choices after
that while locking in cost savings.
The tricky part of the make versus buy decision is that
there’s no one answer for every situation. The key is to know where to make
versus buy. If you can master this choice, everything else will fall in line.
Where it makes sense to buy
In a business context, companies buy products or capabilities
that are outside their core competencies. These are things that would prove too
costly to make internally, or they don’t have the expertise to build
The same idea should apply to our financial decisions. You
should buy things of high-quality that you can’t produce:
- “Experience” meals at excellent restaurants
- Durable, high-quality clothing
- Entertainment items and experiences, e.g., books, concerts, and travel
- Things that bring you enjoyment or improve your work efficiency, e.g., noise-canceling headphones
- Healthcare items and medical care, e.g., prescriptions, SPF clothing, sunscreen, lotion, floss, doctor visits
This is far from a comprehensive list. The idea, though,
remains the same – you should buy items you can’t source otherwise, or that
would take vast amounts of time and energy to make on your own.
It also makes sense to buy things for infrequent
experiences. I had two unforgettable restaurant meals last year, on which I
spent a combined $500. About once every six months, I find myself having these
extraordinary dining experiences, and they’ve been worth it every time. I
attended twenty concerts in 2019, which puts me above the average person, but
those are still relatively infrequent – only one every eighteen days.
Related post: I blew over $5,000 in 2018. Here’s where it went.
You won’t dine at a Michelin star restaurant every night,
nor will you frequent Radio City Music Hall for concerts four times a week. But
these memorable experiences are worth the occasional indulgence.
Where you should make
The short answer is to make everything else. You should
“make” on things you use routinely or that are relatively easy to replicate on
your own. For example:
- Daily meals
- Weekly hangouts for family and friends
- Hobbies and pastimes
This is a shorter list but encompasses a broader range of
your daily and weekly activities. That means that you should make most of your
meals at home. The bulk of your fun times with family and friends should be
experiences you create rather than consume. Your hobbies and pastimes should be
opportunities to make shit rather than buy it.
For example, let’s envision a typical Friday night in New
York. If your friends are like mine, there’s usually momentum to go out to a
bar for some happy hour drinks, then maybe stop in and grab some dinner at a
mid-priced restaurant in the neighborhood, then perhaps a nightcap somewhere
That’s an enjoyable and full evening by any standard. The
total for an evening with a small group of friends might look something like
Happy hour drinks: $90 – 5 people drinking at happy
hour prices, two drinks each plus tip
Restaurant meal: $200 – a standard, tasty meal
with an appetizer and a round of drinks for the table
Nightcap: $50 – a round of drinks at full price
This night out cost $340 or $68 per person. If you went to
the cheapest happy hour spot you could find, a fast-casual dining restaurant,
and for a lower-priced nightcap, you might be able to knock $140 off the price,
lowering the cost of the night to $40 per person. That’s the range for the
“buy” option in this scenario.
Now let’s look at the “make” option. What if you hosted four
friends at your apartment, luring them with excellent wine, craft beer, and a
delicious home-cooked meal?
I’ve made incredible meals for five for less than $50, using
healthy, delicious store-bought ingredients. You can pick up two great bottles
of wine for about $50 more, and purchase a couple of six-packs of fantastic
microbrews for $25, even in New York.
The total tab for the evening is $125, and there’s way more
to go around – both food and drink – for the price.
Now let’s say I wanted to level up the ingredients and make
an elaborate meal or spring for a top-tier bottle of fine wine. I could double
my ingredient cost AND turn one of the bottles of wine into something special
for only $100 more.
That puts our fanciest “make” scenario at $225, well below
the cost for an average night out and only slightly pricier than the bare bones
night out option. More importantly, the night in with that special bottle of
wine and a meal made from the finest ingredients is likely to be much more
memorable than an average night out.
What would you rather have?
A great home-cooked meal paired with fancy drinks: $25-$45
Regular drinks at a happy hour spot followed by an average
dinner at a neighborhood restaurant and a nightcap around the corner: $40-$68
This choice, made weekly, has enormous financial
implications. The gap between the average “make” and “buy” options is $43 per
week. Over ten years, the difference between make versus buy rises to over
$32,000, to say nothing of the happiness gap between the two options.
That’s a surprising number, and there are similar savings to
be had in other areas of life. How about something you do daily, like deciding
whether to make dinner or buy it from Seamless?
Let’s say the average Seamless meal costs around $15, and
you could make an equivalently delicious home-cooked one for $6. Coming home
from work on a regular Wednesday and ordering in is a routine choice among my
friends and colleagues. If you buy food five nights a week rather than making
it, you’ll spend an extra $45 per week. That Seamless habit will cost you
nearly $35,000 over a decade.
By switching your default setting on just these two habits
to make rather than buy, you could reasonably save $70,000 in the next ten
years, cutting years off your mandatory working career.
That’s the power of making the correct choice in a make
versus buy decision. If you set up your system correctly, you will print money.
If you make a poor choice, you’ll have to fight to save.
Pay close attention to the make versus buy decisions in
Given how vital a handful of make versus buy decisions are
in determining your long-term financial outcomes, it makes sense to do some
underwriting of the areas in your life where you currently buy rather than
make. Are the things and experiences you buy worth the costs in foregone
savings and happiness? Could you create them yourself?
But that’s not the only angle worth examining. Within your
“make” decisions, are you being cheaper than you need to? Often the “make”
decision has already created 80% of the savings for you, and your additional
struggle to save the last 20% isn’t worth the effort.
For example, I used to buy groceries from one of the
crappiest grocery stores in New York, which happens to be the closest one to my
apartment. The savings from shopping there are notable, but the food is of
lower quality and spoils quickly. In recent months, I’ve started getting my
groceries delivered from a fancy grocery store to combat this.
Surprisingly, a few items are cheaper than the versions I
bought at my crappy local grocery store. More importantly, the produce and
meats are of higher quality and last much longer.
Related post: How to make the most of your grocery shopping
Grocery delivery is a luxury, but I’ve found that I pay
relatively little for it. Buying ingredients to make meals at home is way more
than half of the savings battle. I could spend double what I do on groceries
and still save wads of money relative to Seamless and restaurant meals.
For about 15% more, I can make my grocery shopping more efficient
and convenient. I’d be silly not to. The make versus buy decision did the heavy
lifting for me. By upgrading my “make” decision slightly, I’m increasing my
happiness and sacrificing little in return.
There are probably areas where this logic holds for you,
too. If you’ve locked in the correct make versus buy decision, there’s no need
to squeeze every dollar of savings out of it. Much like eating at a lousy
restaurant because it’s cheap doesn’t bring joy, squeezing your good habits to
make them as financially efficient as possible will grind happiness out of life
rather than increasing it.
Over time, the right top-level decision will effortlessly
deliver positive financial outcomes. Focus your energy on getting the big
Related post: Get the big things right
Once you’ve structured your life for success, feel free to
indulge in the little things. It won’t have much impact on your bottom line,
but it will make all the difference in how happy and prosperous you feel.