Cost of Ownership

By Paul R. Ruedi, CFP®

When people buy goods, they often focus only on the purchase price when considering the financial implications. What takes a little more foresight is considering how much that thing will cost you in the future.

Mayer Amschel Rothschild, founder of the Rothschild banking dynasty, thought this was so important he told his sons one of the main reasons wealthy families lose all their money is simply because housekeeping and other expenses were not being considered. Suffice it to say, “cost of ownership” is very important to consider if you want to become wealthy and remain wealthy.

Suppose somebody was deciding between two cars they hope to have for 10 years, a newer car that cost $40,000, or an older car that costs $30,000. A frugal person would be tempted to say a car is a car and buy the one with a lower price, but that would ignore the cost of ownership.

Suppose the newer car only required $100 of maintenance each year to stay on the road, while the older car needs around $1500 per year. At the end of 10 years the person who bought the more expensive car will have paid $41,000 to drive that car for 10 years. The person who bought the “cheaper” car, will have paid a total of $45,000.

The example above ignored the fact that the cheaper car may die sooner, which brings up another lesson: the useful life of something – how many years it will last – is highly related to cost of ownership, as it spreads any up-front cost over more years. I remember picking out a car battery years ago and asking why one battery was twice as expensive as a different one. It turns out that the more expensive battery lasted three times as long and was actually less expensive from a cost of ownership standpoint.

Cost of ownership must be considered before purchasing any big-ticket item. Maybe you can afford the up-front cost of a boat right now, but will your budget accommodate spending 10% of the price in maintenance each year? The same goes for houses: bigger houses mean more things that can break and cost you money. Perhaps you can afford the money down and monthly payments, but is fixing an irrigation system, replacing an extra-large fence, maintaining a pool, or replacing air conditioners going to be a problem?

Moral of the story, you simply cannot make any important purchase without considering the true cost of ownership. You must make sure you are able to pay for anything you purchase both now and later.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.