What “True Cost to Own” Means and Why It Matters for Big Purchases
If you’ve ever purchased a new car, you’ve probably come across “true cost to own” calculators, such as this one at Edmunds. These tools help you figure out how much the car will cost you to buy and keep over several years. They factor in costs like gas, maintenance, repairs, insurance, and depreciation – the amount of value the car loses over time. Once you know all this, you can understand the true cost of ownership for that car – not just the sticker price.
However, people don’t often calculate the true cost to own with other kinds of purchases. For instance, when you buy a refrigerator, you don’t always think about how much energy it will use, or how costly it will be to repair it if it breaks. But all these factors can make a big difference. An expensive, inefficient fridge that breaks down often could end up costing you hundreds more than an efficient, inexpensive one that never needs repairs.
Figuring out the true cost to own before you buy is part of being a smart shopper. It helps you look past the number on the price tag and pick the product that will be the best deal for you in the long term.
Obviously, it’s not worth calculating the true cost of ownership for every single thing you buy. For example, when you go to the grocery store, you know that you’re only going to own that dozen eggs and that head of broccoli for as long as it takes to cook and eat them. The cost of owning these items is essentially the same as the cost of buying them.
However, it’s worth taking the trouble to calculate the true cost of ownership when you buy something if:
You only need to do the math on a purchase if it meets all three of these conditions. However, there are probably more items in this category than you think. Consider all the things it’s possible to spend large sums of money on – clothing, electronics, appliances – and you’ll find that most of them are long-term purchases with ongoing costs. That means that doing the math on true cost to own is a worthwhile endeavor nearly every time you make a large purchase.
True cost of ownership can include a wide variety of factors. For products that use energy, fuel cost is an issue. For other items, you need to think about the cost of maintenance, repairs, and cleaning.
It’s also important to consider how long you’ll be able to use the item. For example, a new mattress that will last you 10 years might cost more than one that will wear out after five. However, the more expensive mattress could be cheaper in the long run because you won’t have to replace it as soon.
A final factor to consider is that some purchases can actually save you money. For instance, if you replace an old, energy-guzzling fridge with a new, efficient one, the lower power use will reduce your utility bills. Likewise, if you buy a new tool and use it for DIY home repairs, you’ll spend less money on contractors. Savings like these help to offset the other costs of ownership and, in a few cases, can even bring your true cost to own down to zero.
The one type of product that’s most widely analyzed in terms of cost to own is a new car. A car’s true cost of ownership includes:
The cost-to-own calculators at KBB and Edmunds can show you at a glance how all these costs add up for a particular model of car. If you’re considering several different models, you can run the numbers separately on each model to see which vehicle would be the most expensive over its first five years.
In some ways, appliances are a lot like cars. A large appliance is a major purchase – it uses energy, and it occasionally needs repairs. Thus, a lot of the costs of owning an appliance are similar to the costs of owning a car. They include:
Adding up all these costs is the best way to get a realistic picture when comparing different appliances. It can also be useful for deciding whether you want to buy a new appliance in the first place. By calculating how much an old appliance costs each year for electricity and repairs, you can see how a new model would compare to your old one over the long term. Then you can make an informed choice about whether or not to repair or replace the old one.
When buying a computer, you have to consider not only the cost of the machine itself, but also the cost of the “ecosystem” that surrounds it. For instance, if you choose a Macintosh computer, you know it will work well with other Apple products, such as the iPhone, iTunes software, and the Siri digital assistant. Choosing a PC makes it easier to work with competing products, such as an Android phone, Spotify, and Amazon’s Alexa.
Here are some of the costs involved in owning a computer:
With cars, appliances, and computers, it makes sense to think about the true cost of ownership in terms of dollars per year. After all, these are things you’ll use all the time – at least once a week, if not every day.
Power tools are a different story. You could spend hundreds of dollars on a shiny new tool and then only pull it out once or twice a year. So, when you’re shopping for a power tool, it makes more sense to focus on the cost per use, not the cost per year.
Here’s what that cost includes:
Clothes, like tools, don’t get used every day. However, some get a lot more use than others. For example, you could wear the same winter coat every day throughout the winter – say, around 100 days out of the year. By contrast, a fancy evening dress might only get pulled out once or twice a year.
That’s why fashion experts talk about the true cost of ownership for clothes in terms of “cost per wear.” The cost per wear, or CPW, is simply the cost of the garment divided by the number of times you wear it. Using this formula, you can plainly see that a $100 pair of dress pants you wear 100 times – say, once a week for two years – is a much better buy than a $20 pair of flip-flops you only wear twice. Thinking about clothing this way encourages you to spend more on “investment” pieces – well-made classics you’ll wear for years – and less on cheap, trendy clothes that lose their appeal quickly.
Here’s how to calculate the cost per wear for a garment you’ve got your eye on:
Most of the time, it isn’t possible to figure out the true cost to own for a product exactly. There are just too many variables that are hard to calculate, such as repair costs or expected lifespan. You can get a rough idea of whether one product has a higher cost to own than another, but you can’t get a precise dollar amount.
But that’s okay, because a rough idea is all you really need. Even if you can only estimate the true cost to own in general terms, it still gives you a more accurate idea of a product’s cost than simply the number on the price tag. Whether you’re shopping for a car, a tool, or a computer, the true cost to own helps you compare different models accurately and get a clearer sense of which one is really the best buy.
On top of that, calculating the true cost to own can help you decide whether it’s a good idea to buy a new item at all. When you take a clear-eyed look at how much a new car will cost you and compare that to how much your old one is costing you right now, you might end up deciding that the car you already have offers the best value after all. That’s a decision that can save you really big money.
Can you think of any other products for which a “true cost to own” calculation would be useful?
Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.
What “True Cost to Own” Means and Why It Matters for Big Purchases
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