What Is Lifetime Cost?
Lifetime cost is the total of all other expenses relating to a good, like a car or a home, over the expected life of the product. The sum of the lifetime cost includes the amount paid to purchase the item.
- The lifetime cost of a good or service refers to the total cost of owning it over its lifetime, in addition to the initial cost of purchase—in business, you may hear this referred to as TCO (total cost of ownership).
- Lifetime costs can include maintenance, upgrades, annual membership fees, as well as products like gas for a car or toner for a computer.
- A consumer must also consider what is lost by using the funds to purchase the item instead of cutting debt, saving, or investing in securities—often referred to as "opportunity costs."
Understanding Lifetime Cost
Businesses will frequently calculate the lifetime cost before making large expenditures, upgrades, and renovations. On the other hand, most individuals rarely estimate this cost before buying a home, boat, automobile, or other expensive items. Besides the base purchase price, lifetime costs include:
- The cost of maintaining the article in a good or functioning fashion
- Cost of insurance to protect the item
- Renovations or upgrades required by the product
Another charge that could add to the lifetime cost is the alternative use of funds. In other words, there is an impact on a consumer's resources, if instead of purchasing the item the individual spent the sum differently.
As an example, if a person bought a fur coat, lifetime cost would include the purchase price as well as the price to clean, store, insure, and otherwise maintain the coat. Alternatively, the individual could have invested that sum into a secure mutual fund or other security.
Often, the lifetime cost of an item may be more than the original purchase price. Perhaps, it is the origin of the saying that the definition of a boat is a hole in the water into which you throw money.
The lifetime cost of credit card debt is more than most people realize. According to Credit.com, the average borrower will pay over $279,000 in interest charges on their credit card purchases during their lifetime.
Lifetime Cost of Holding Debt
Lifetime cost may also apply to debts. For example, the lifetime cost of debt held on a line of credit (LOC) will be much more than the amount spent on goods had they been purchased with cash or other ready funds. The use of a credit card or other loan will incur interest and fees, adding to the lifetime cost of the object.
The average amount it costs to own and operate a car per year, according to the American Automobile Association's latest survey; the number includes the cost of gasoline, maintenance, insurance, license and registration, loan finance charges, and depreciation costs.
Real-World Example of Lifetime Cost
The primary reason to buy a car for most people is for transportation. They will often compare price, desired features, and different offers between dealers before buying. However, the cost of the vehicle does not end at the car lot.
Consider the costs involved with weekly gas fill-ups, periodic oil changes, insurance, licensing, and vehicle inspection fees. Still, other charges may include roadside assistance, car washes, and parking or garage rent. One can easily spend considerably more than the car's purchase value. A consumer is wise to examine the impact of incurring the annual portion of the lifetime cost of purchase before committing to buying.