Understanding the Total Cost of Ownership 

By Bob Peters || March 8, 2024

A Total Cost of Ownership Mindset

In the blog post, Not All Net Worth Is Created Equal, we learned that Jane’s net worth was centered in an illiquid, depreciating asset (her car) while Marie’s was in liquid, appreciating assets (publicly traded investments). Jane’s car lost value through depreciation and Marie’s investments, over time, would likely increase in value. Both the car and the investments were assets but besides the difference in their liquidity (to turn a car into cash requires more time to advertise and consummate a sale vs. publicly traded investments which can be turned into cash in a couple of days) there is a material difference in the total cost of ownership. Embracing a total cost of ownership mindset will be helpful to your financial decision making.

The total cost of ownership of a car goes well beyond the cost of the initial car purchase (more on that later) while the cost of owning liquid publicly traded investments is essentially zero. This is not to suggest you should never own a car, rather, it is an example of how some assets have ongoing costs associated with them while others do not. A Total Cost of Ownership mindset will serve you well.

Before we dive further into examples of total cost of ownership, I am going to tell a personal story of where my dad gave me advice that has stuck with me.  Don’t fret, it won’t be long, and it will tie back to the total cost of ownership concept. 

One Suit a Year 

Very early in my career, it was expected, in my chosen profession, that men would wear a suit and tie to work every day.  Typically, the cost of a suit that I would wear was between $250-400.  You could buy suits for less and could easily spend more but I would say the sweet spot was in the $250-$400 range.  To give you some perspective of how inflation impacts the purchasing power of money over time, the equivalent range today would be $717-$1,148.  

When I first started a job that required suits, my annual pay might have been about $25,000.  Since you did not want to wear the same suit every day, you needed to build a wardrobe of between 3-5 suits.  This does not count the dress shirts, shoes and ties.  So, as a young person, it took a while to build up the clothing wardrobe that was needed.  One day I was complaining to my dad about the cost of purchasing work clothes and he said something to the effect of “Budget to buy one suit every year.  If you do this the cost won’t be overwhelming.  If you wait and all of your suits need to be replaced at the same time you may find yourself in a financial pickle”. Yep, in the early years I ended up wearing the same suit a few days a week. 

Tracking your monthly spending and making sure that you are accounting for future expenses that don’t occur every month is very important

Well, times have changed and there are few employers who expect their employees to wear suits but the concept of budgeting for things in the future overlaps with another important financial literacy concept; the Total Cost of Ownership. In the blog post, A Budget Will Give You A Path To Financial Security And Make You Feel Good, I touched on how a budget will give you a line of site to covering your Basic Needs, Investing Wisely and spending on Wants.  Tracking your monthly spending and making sure that you are accounting for future expenses that don’t occur every month is very important.

In my suit story above, there is a budgeting concept and a total cost of ownership concept.  My dad’s advice of buying a suit every year addressed the need to budget.  Now let’s tie in the concept of “cost of ownership”.  In this job example the “cost” of having my job (job is synonymous with owning an asset) included the cost of a wardrobe of suits that I needed to acquire and maintain.  Had I been able to wear my casual clothes and had the same job, my take-home pay would have been higher, and the costs associated with my job would have been lower. 

Let’s move on to a couple of other examples where the total cost of ownership can sometimes be less obvious.

Homeownership 

In the blog post, Homeownership: Values, Math and Financial Literacy, we covered some of the costs associated with owning a home above and beyond the purchase price and mortgage payment. Ownership expenses such as property taxes, homeowners’ insurance, repair and maintenance, higher utility expenses, furnishings, transaction costs when you buy and sell, etc.  I also included a link to a YouTube episode by Ben Felix, who does a nice job of comparing renting vs. owning. Many first-time homebuyers can easily overlook these costs that go beyond the monthly mortgage payment. 

Car ownership 

Unless you live and work near convenient public transportation or can safely walk between home and work, you will likely need car transportation.  Whether you own or rent; (think “ridesharing” like Uber or Lyft) is the question at hand.  This is where it makes sense to calculate the total cost of owning a vehicle vs renting transportation when you need it.  It may be more convenient to own a car but is the convenience worth the added cost?  Here is a link to an article and total cost of car ownership calculator that could be used to help make this decision. 

The older the vehicle the higher the repair and maintenance costs will be. Gas powered cars may start out needing not much more than an oil change every 3-5,000 miles but after 60,000 miles you start incurring other, often times, more expensive repair and maintenance costs like replacing timing belts, brakes, tires, fuel injectors, servicing transmission, water & fuel pumps, etc. Electric cars that don’t have costs associated with a combustion engine have high costs to repair sensors more common on these vehicles compared to traditional combustion engines as well as a very expensive battery.

Insurance is another big-ticket item that really hits new cars and/or more expensive cars. You will want to get an estimate of the cost of insurance before you buy a car so you can add this to your budget. Before purchasing your next car, you can find reliable sources (Consumer Reports, AAA or Edmonds) that will give you some help in determining the typical total cost of owning a particular model and vintage car.

Boat ownership 

Many people own boats and are happy with this choice. It’s exciting to think of all the fun you, your family and friends would have on the water. Great memories. There is also a common phrase amongst former boat owners that the best two days of having a boat were “the day you bought it and the day you sold it”. There are insurance, repairs and maintenance which can be astoundingly high. Additionally, you might need to pay for storage if the boat can’t be parked where you live. 

Maintenance costs associated with boats, particularly those with engines and complicated electronic, navigation, plumbing systems, tend to be higher than those of a car (something about water and engines/electronics that don’t go well together). You can be very happy owning a boat if you enjoy all of the aspects of boating, but ownership does come with costs beyond the purchase price (financial and time) that need to be considered before taking the plunge. Pun intended. 

Vacations 

Vacations are not assets like houses, cars, boats, etc. that you initially purchase and have ongoing costs of ownership, although owning a vacation property is an asset with ongoing expenses. However, a version of the total cost of ownership concept can be applied to experiences like vacations. If I’m trying to budget a vacation, I can look at the big-ticket items (airfare, hotel, car rental) and underestimate other costs like uber to and from the airport, parking, drinks, food, entertainment, gratuities, etc. It’s easy to spend more than you originally budget unless you are on the lookout for these less obvious costs. 

Timeshares 

I’m going to come clean with my personal bias. I believe timeshares are not good value and I would strongly encourage against considering a timeshare.  While I understand that everyone has different values, interests, wants, etc. I believe that the cost of timeshares is often much higher (and more limiting) than the cost of renting, but this is often hidden from site when you are under the hot lights of the marketing team.  The timeshare industry pays high commissions to salespeople who are trained to give you a very convincing and high-pressure sales pitch. 

Yearly repair and maintenance costs are not locked in forever and the cost of maintaining properties 5, 10, 20 years in the future are often much higher than originally discussed by the sales representative.  The initial loss of the purchase price (think time value of money) and out-of-your-control ongoing fees for property management are just two big strikes against timeshares.  There are a lot of well-meaning folks that make a living in the timeshare industry (developers, agents, lawyers, financing sources, property managers) but you, the consumer, can get a similar “vacation” for less money, lower stress and no long-term commitment if your priorities and values change in the future.  Timeshares are not an investment.  Check out the Federal Trade Commission article, Timeshares, Vacation Clubs and Related Scams before further consideration. 

Comparing two jobs 

Comparing two jobs is not exactly like comparing whether you should own or rent transportation or own or rent a home, but it’s possible to use a version of this total cost to own concept to think through the merit of two different jobs.  Let’s say that Job A offers a lower total compensation but less ongoing costs; no expensive work clothes requirement, short commute, more flexible schedule. Job B pays more but the commute and hours worked are longer. There are a lot of additional factors that would influence selecting a job than these costs. Job A may have more limited opportunities to increase earnings and may not give as much job satisfaction as Job B. It’s not as simple as comparing short-term costs and earnings in what would be 40 plus years of a working career. To each his/her own but you get the drift here.

Conclusion 

In the blog post, Better Decision Making Improves Your Life, the concept of using probability in decision making was discussed. Essentially, how can probability be used to increase the likelihood that you will achieve your desired outcome? 

This blog post is similar in a way. There are ways to think through the total cost of owning an asset like a car, a house or a boat. There are also many other ways that a total cost of ownership mindset can be used to help improve financial decision making. Have a great day.