Total cost of ownership


For a long time now I’ve been trying to consider total cost of ownership when I acquire things. The first time I started paying attention was when I was thinking about why people buy homes and whether I thought it would be right for me. I decided it wouldn’t be right for me, at least for now—and since the mid-nineties.

In short, thinking this way is why I have the saying: It’s your dime or your time, but nothing’s ever free.

The total cost of ownership concept came up again when writing the January first, 2022 paycheck. The idea is similar to concepts in Your Money or your life.

Many of us start with the basic math approach. How much will this cost? How much return on the investment can I assume?

A candy bar is for sale at 2 USD. If the purpose is to consume it, is the nutrition and pleasure worth that 2 USD? How much time did it take for me to earn that 2 USD?

When I first started working I was paid minimum wage. Minimum wage at the time was a little over 4 USD per hour. The 2 USD candy bar was roughly 30 minutes of my life.

If I bought the candy bar to consume it, I would classify the candy bar as a use-asset.

I purchased it to use it in some way. Movies I watch. Art on my walls. Food. Clothing. Kitchen gear. And a lot more fall into the category of use-assets.

The equation changes if the purpose is to sell it at a later date.

When I was in primary school I used to buy candy in bulk and sell it to my classmates. Let’s say each candy bar cost 1 USD and I sold them for 2 USD. Some would say that’s doubling my money and that’s the simple math approach, however, it’s not a true reflection of return on investment.

I’d walk to the store where I purchased the candy. I should have factored that into the total cost of acquisition; how much is my time worth per hour?

Let’s consider something bigger, like a car.

Total cost of acquisition includes the sticker price, additional one-time fees and taxes, along with the time it takes for me to find the car, negotiate terms, and so on. This total cost of acquisition is how much if have invested in the car.

Total cost of maintenance includes all the time and money used in continuing to own the car in good working order. Fuel, oil, air filters, cleaning it, and so on. Not to mention taxes, insurance, and any potential car payments.

Total cost of ownership is the total in time and money spent in the acquisition and maintenance of the car over its useful life.

Using simple math, return on investment is usually calculated as total cost of acquisition minus total sale price. True return on investment, on the other hand, would take into consideration total savings in terms of time and money.

For the candy bars, using simple math, the return on investment would be 1 USD. The true return on investment actually turned out to be a loss; I wasn’t charging enough to pay myself even minimum wage for walking to the store, carrying the candy to school, and so on. If we want to get real geeky about it, we could argue that the loss was offset by the fact that I was going to be at the school anyway and I would also go to the stores regardless to get candy for myself.

For the car, simple match might look like this: Purchased the car for 20,000 USD and sold it for 10,000 USD; a loss of 10,000 USD. True return investment would include how much money the car allowed me to earn and the total cost of maintenance over the life of the car.

Now to look at the house example from the aforementioned paycheck.

Each component of a house (and nothing you own) has an estimated useful life. I use the depreciation tables used for tax purposes for most things.

The hot water heater in a house, for example, would have an estimated useful life of 8 to 20 years, depending on the type of hot water heater. Total cost of acquisition would be over 500 USD, which doesn’t include professional installation; let’s say total cost of acquisition was 1,000 USD to keep the math simple. Let’s the estimated life for the one I purchased was 10 years. I need to save 100 USD per year to have the 1,000 USD to replace the water heater using cash after 10 years. This assumes no inflation in the pricing. With inflation the estimated cost 10 years from now would be around 1,500 USD, which means I’d need to save 150 USD per year to prepare for replacing the hot water heater.

Do the same for the HVAC unit in the home. The plumbing as a whole or each toilet, sink, piping, and so on. How about insulation? The roof?

All of that starts to add up quickly. Looking at total cost of ownership compared to true return on investment is the basis of my acquisition and savings strategies.