By Professor Pennywise

The words "value" and "price" may seem awfully close to one another, but they are actually quite distinct. Learning the difference between them and applying it in your life can save—or make—you a bundle in the long run.

As a point of departure, let's take up higher education. The price and value of a college degree is something now discussed by everyone, it seems, from parents holding their heads in their hands at kitchen tables all the way to lawmakers in oak-paneled hearing rooms on Capitol Hill. "Is the value of a college education," people wonder, "really worth the price?"

It's a fair question. If price equaled value, then everyone would want their kid to go to Sarah Lawrence College, which now has the highest price tag for tuition, room, and board—at $55,788 a year, or $217,640 for four years of study. The other top five most expensive institutions are Landmark College, Georgetown University, New York University, and George Washington University.

But price does not correlate directly with quality. Not one of those campuses even made the 2010 lists of the top 10 universities and top 10 liberal-arts colleges compiled by U.S. News and World Report. Conversely, Harvard, Princeton, and Yale—ranked first, second, and third by U.S. News—do not appear anywhere in the list of the top 50 most expensive institutions of higher education in the country.

We can say that rankings and lists are absurd. We can inveigh against Useless News and World Distorts. But the bottom line is that if I were shelling out tuition for my child to go to Harvard, Princeton, or Yale, I would probably feel better about it—despite my populist dislike of the Ivies—than if I were cutting big checks to Sarah Lawrence College, NYU, or George Washington University. The price tag of an education is just not an exact gauge of value.

Conventional economists abandoned the labor theory of value in the 19th century, right around the time Marx picked it up from Ricardo. (That was not a coincidence.) Since then, the basic tendency in the field of economics has been to believe that price ultimately does correlate to value. An object or service's use-value, according to this view, is the foundation for its price or exchange-value. If people find something useful or meritorious, they will pay more for it. Demand, supply, and price are interrelated. Price will initially rise with demand (which is, in turn, driven by desire or value), leading to expansion of supply, thereby reducing price.

So goes the theory. The problem is that there are many cases in which price (exchange-value) and value (use-value) are at variance. Air and water are highly valued objects whose price is pretty cheap. As the Beatles put it, the best things in life are free. Economists call that "the paradox of value." In the world of higher education, the paradox of value is that a degree from Harvard, Yale, or Princeton may be the analogue of gold or diamonds—rare and desirable—but its price is lower than that of a Sarah Lawrence College degree.

A second way of framing this in a higher-education context is to say that if price really denoted value, there would be no such phrase as "overpaid fool." Surely someone on your campus comes to mind when you hear that word, yes?

So now you get it: Price is not value.

How, then, can you put the price-value distinction to your advantage in your own financial life?

One way is to lower the prices you pay on everyday purchases, ideally without sacrifice of quality. Alas, "value" in the world of consumer capitalism often denotes cheapness, another confusion of price and value. Flimsy, shoddy items sold at dollar stores are often designated "value" options for "value" shoppers. But generic products, thrift-store bargains, and deep sales discounts are not all poor in quality. You can find high-quality substitutes at below-market rates.

Consciousness of the price-value discrepancy can also form the basis of an investment philosophy. Under this rubric, you seek to buy assets—stocks, bonds, or real estate, perhaps—when their price falls below their value, then sell them in the reverse scenario. That means you strive to be a contrarian in regard to the cycles of euphoria and panic, since your aim is to buy when there is little demand for such assets and sell when there is much. As Warren Buffett once put it, be fearful when others are greedy and greedy when others are fearful.

That is, of course, much easier said than done. It requires a technical means for measuring the real value of the asset and a shrewd instinct for opportunity.

Watching out for fees is an even simpler way to reduce your costs. Fees are sneaky devils. They boost the price of the financial services you consume without adding any value whatsoever. They are often hidden.

Take a look, for example, at your credit cards. Credit-card companies provide a very useful service, and the value is optimal if the price is kept to zero. The highest-value credit cards will not charge an annual fee and will still pay you cash back or give you miles or points.

Turn off the "overdraft protection" default on your debit card, a hidden default fee often unannounced by banks. That is "protection" the mob would love; really it's the equivalent of a bounced-check fee. Better to just have the debit transaction refused if your account is empty than to have the payment go through with a fat charge tacked on.

In your retirement accounts, always buy no-load funds. Funds with a "load" make you pay an upfront fee just for buying. It's like a barber making you pay $3 at the door and then $15 for the haircut. No, thanks.

Finally, pay attention to the expense ratios on the funds in your retirement accounts. An expense ratio is the cost the fund company passes on to you for running the fund. If price denoted quality, you would think that the more a fund company charges for its management, the better it would be. Actually, high expenses drastically reduce your investments' performance.

Expense ratios are expressed in percentages. The average expense ratio is about 1.5 percent, but that's way too high. Expense ratios should be below 1 percent, and ideally below half a percent. Funds managed by full-service brokerage houses like Merrill Lynch are to the skies, in the range of 2 percent. Index funds sold by discount houses like Vanguard, Fidelity, and Schwab are more like 0.09 to 0.18 percent.

What difference does this make? Here is Pennywise's patented rule of thumb for judging expense ratios: Multiply them by $100 and pretend they represent the price of a really excellent steak dinner for you and your sweetheart, including a bottle of wine. You could pay $150 or $200 for that. Most fund investors do; they're the suckers at the overpriced funds. Or you could pay $35 for the exact same meal. That would be a bargain. But what if you paid $9? It would be a steal.

Lower the price for a higher value.

Professor Pennywise is a professor in the humanities who has taught from the Pac-10 to the Big Ten. He is merely a frugal academic, not a financial professional. Questions, comments, and suggestions may be sent to professorpennywise@yahoo.com.