# Lifetime Cost: Definition, Examples, and How to Calculate

Lifetime cost is an estimate of how much an item, such as a car, a home, or a piece of industrial machinery, will cost to own over the expected useful life of that item. It also includes cost of purchasing the item in the first place.

### Key Takeaways

• The lifetime cost of an item represents its initial purchase price plus the cost of operating and maintaining it over its expected lifetime.
• Lifetime cost is also referred to as whole-life cost, life cycle cost, or total cost of ownership.
• Lifetime costs can greatly exceed an item's purchase price, making them important to consider in the purchasing decision.
• Opportunity cost refers to what a consumer or business might have gained by using the money for a different purpose, such as investing it.

## Understanding and Calculating Lifetime Cost

Businesses will frequently calculate lifetime cost before making large expenditures, upgrades, or renovations. For example, if they are buying a new piece of machinery, they will not only consider what it costs to buy initially but also what it is likely to cost to operate and maintain over its expected lifetime. Lifetime cost may also be referred to as whole-life cost, life cycle cost, or total cost of ownership.

Individual consumers can also find it useful to calculate lifetime cost before buying a home, boat, automobile, or other expensive item. Besides the initial purchase price, lifetime costs can include:

• The cost of maintaining the item in a good or functioning conditioning
• Cost of any insurance to protect the item
• Any renovations or upgrades likely to be required for the item

As a simple example, if a person bought a fur coat, the lifetime cost would include the purchase price as well as the expense of cleaning, storing, insuring, and otherwise maintaining the coat.

Often, the lifetime cost of an item may be far greater than the initial purchase price. Many boat owners, for example, will recognize the truth of the old saying that the definition of a boat is a hole in the water into which you throw money.

In addition to lifetime cost, it can also be useful to look at the opportunity cost of a particular expenditure. That refers to the potential benefits of spending the same amount of money in a different manner, such as investing it.

Lifetime cost can also include debt repayments. For example, the lifetime cost of an item financed through a credit card or line of credit (LOC) can be much greater than the purchase would have cost had it been paid for with cash. Unless the debt is paid off right away, the interest and fees on the credit card or credit line will add to the lifetime cost of the item.

The most dramatic example for most consumers would be the purchase of a home. For example, consider a $300,000 home purchased with a 20% down payment and a 30-year mortgage with an annual percentage rate of 7%. Assuming the homeowner keeps that home and mortgage for the next 30 years, by the time it is fully paid off, they will have paid about$335,445 in interest on the $240,000 they borrowed. Together with the$60,000 they put down initially, the repayment of the loan's $240,000 principal, and the$335,445 in interest, the $300,000 home will have cost them$635,445—or more than twice the original purchase price.

And that, of course, doesn't include all the other lifetime costs associated with a home, such as property taxes, homeowners insurance, and routine maintenance. Nor does it include the opportunity cost of using that money differently.

## What Is Depreciation?

Depreciation is an accounting method that is used to allocate the cost of a particular item over its useful lifetime. For example, a piece of office equipment that is expected to last for five years would lose 20% of its value every year until it has been fully depreciated. Depreciation is often taken into account in estimating the lifetime cost of an item.

## How Fast Do Cars Depreciate?

How fast a car depreciates can vary greatly from model to model. As a general rule, the lender Capital One says that a new car may lose 20% of its value in the first year and another 10% to 15% each year over the next five years.

## What Is Residual Value?

Residual value refers to what an asset is worth after it has been fully depreciated for accounting purposes. The item may still be saleable to another buyer, in which case the seller will recoup some of the item's expected lifetime cost. A car, for example, may still have some resale or trade-in value even if you've driven it for quite a few years.

## The Bottom Line

Lifetime cost is a useful way to estimate how much a particular item will cost to own and can be especially important in high-ticket purchasing decisions.

Article Sources
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1. Consumer Financial Protection Bureau. "Americans Pay \$120 Billion in Credit Card Interest and Fees Each Year."

2. American Automobile Association. "Average Annual Cost of New Vehicle Ownership."

3. Capitol One. "Is There a Standard Car Depreciation Formula?"