The girl screams from the back seat. “Daaaaad, look. Puppies! Can I pet them?” The father pulls into the strip mall parking lot where a large metal cage rests on the lush green parking strip. The car door opens and the girl dashes to the cage.
“May I pet your puppies?” she asks the woman sitting in an old lawn chair next to the six Labrador retriever pups. “Sure sweetie, if it’s OK with your dad,” she responds.
He nods in approval, and the woman unlatches one door, pulls out an adorable puppy and hands in to the girl. For 10 minutes the father watches his daughter roll around as the pup licks her face and dances playfully around her legs.
“Our dog had this litter and we just don’t have the room to take care of them,” the woman confides in the father. “I could take them to the pound, but I’d much rather see them go to a good home.”
She glances at the father watching his little girl, now smitten with the tiny puppy. “She sure does seem to love that one. If she wants to take it home, it’s yours. They’re free.”
The girl looks up. “Dad, can I have this one? Please, please, please? I’ll take good care of it. And it’s free!”
The concept of total cost of ownership
“Free” is intended to convey that there’s no cost associated with something. But that’s almost never true. Like an iceberg whose tip sticks above the water, the totality of cost is often only barely visible on the surface. Let’s use the “free puppy” to illustrate. From the moment that father brings the puppy home, he’s committed to a dog’s lifetime of expenses and energy. Dogs need a leash, collar, food, bowl, treats, bones, bags for picking up poop, a bed and toys. If you don’t want a litter of your own, they need to be spayed or neutered, plus they need shots and a microchip. You may need to register the dog with the city or county. Vet visits will cost hundreds and probably thousands of dollars over the years. Many of these costs are regular expenses.
Aside from money, there’s time and energy on the line. Anyone who’s had a dog knows darn well the kids don’t really take care of it. Which means the father is going to be walking the dog twice a day. Where will it stay during the day when everyone’s gone? Does dad need to get a dog door installed? When the family goes on vacation, where does the dog go? How much is a kennel stay vs. having someone come to the house? Will that put an end to last-minute weekend trips? And what else is this family giving up by spending this money and energy on the dog, and what is it gaining?
This is called total cost of ownership (TCO), and it applies to everything we own. Understanding TCO is critical to making smart financial decisions.
Where else does total cost of ownership matter?
The more you look around, the more you’ll notice how many things have ongoing costs.
When comparing cars, the sticker price is just one aspect. What is the difference in insurance, reliability, repair costs, gas mileage, and resale value? These are all part of TCO, and the difference over a car’s lifetime can be tens of thousands of dollars. Buying a new printer? What’s the cost of the ink cartridge and how many pages of color and B&W does that model yield? If you save $40 on the printer but spend $10 more on ink cartridges that yield 20 fewer pages, you made a poor decision. You didn’t consider the TCO over the life of the printer.
Should you spend more up front on a higher-efficiency furnace and air conditioner to save more in the long run on energy costs? Is it better to buy an expensive LED lightbulb even if your incandescent lights are working just fine? (Hint: Very likely.)
As I said, not all TCO considerations are strictly monetary. If you buy a cheaper item and it’s more difficult to use or less reliable than a more expensive one, you’re sacrificing time, effort or mental health to save money. Purchasing a smaller water heater to save a few hundred bucks might feel good at first, right up until you realize it doesn’t hold enough hot water for both your morning shower and your partner’s. Now you’re sacrificing comfort or inviting drama at home (do we both take lukewarm or shorter showers, or does someone get stuck with a cold shower at the end?).
Rolling the dice on purchasing decisions
Another factor to consider in TCO is risk. Insurance is an obvious example of exchanging risk for money. You can always lower premiums by increasing deductibles or reducing coverage. But in the event of an insured incident, you will bear a higher cost in order to save that money up front. I live in in the Salt Lake Valley, which is built on a major faultline but has not seen a major earthquake in 1,300 years. However, geologists believe the fault is overdue for “the big one.” The vast majority of people in the valley don’t have earthquake insurance on their home. They save about $500 a year, but if a quake happens they are responsible for paying for any damage and possibly paying the lender the full mortgage for a house that is no longer habitable. That’s a decision about risk, and it’s part of the TCO on the house. (I have earthquake insurance. I can afford the $20,000 deductible should “the big one” hit, but paying my full mortgage for a totaled house is not in my budget.)
Risk presents itself in far less dire circumstances as well. Remember when high-definition DVDs were just taking off, and there was a battle between the Blu-Ray and HD-DVD formats? For quite a while, stores sold movies in both formats. Anyone who invested heavily in HD-DVDs found out the hard way how risk shows up in everyday purchases. That format and its players are no longer sold. Businesses that build their operations around certain software assume a risk because the developer may go out of business, leaving them stuck with an aging, unsupported product that can’t be upgraded. What risks are inherent in the decisions you make?
How to determine total cost of ownership
Before making any big purchase or decision with long-range consequences, take a moment to consider the following:
- Are there ongoing costs related to this item, and do I understand them?
- Could there be unintended consequences by choosing this item vs. a similar one?
- Am I accepting some form of risk with this purchase or decision, and am I OK with that risk?
- Now that I understand the total cost of ownership, is it a fair price to pay for the value I receive?
By building this habit, you’ll start to make smarter decisions and save your future self a lot of regret.