Budgeting, Personal Finance, Saving Money, Shopping

Purchase Price Vs. Cost of Ownership

When we shop, most of us are heavily influenced by the purchase price. For example, we see an iPhone in the store and think, “Oh, it’s $300. I have that much in my account, I can afford it.” What we think about less often is the true cost of ownership for that item. The true cost of ownership for something is very seldom the same as the purchase price. The cost of ownership of an item is what it costs you to own that item for its (or your) life span.

Take the iPhone example above. The phone itself may be $300. But you need a cell phone plan to go with it. That may be $100 per month. Then you probably want a case for it and maybe a bluetooth headset. And don’t forget the apps, games, and music you can buy for it. By the time you’re ready to get rid of the phone, you will have paid far more than the $300 purchase price. Thousands more.

It’s the same for almost everything you buy. You can get the best possible purchase price on a car and feel great. But your cost of ownership for that car will far exceed the $20,000 you paid for it. You’ll have to pay for insurance and taxes. The kind of car you get will influence how much you’ll pay for gas and maintenance. And don’t forget the money you’ll spend on car washing products, accessories, inspection fees, and tags. Houses are the same way. You have to pay for taxes, insurance, maintenance, lawn care, furniture, and all the things that make a house a home. The cost of owning your home far exceeds the purchase price. An expensive piece of jewelry or art requires extra insurance to protect it from loss, theft or damage. Even something seemingly insignificant such as a shirt has a cost of ownership. If it has to be dry cleaned, that will add to your costs. Even if it can be cleaned at home, you’ll still have to pay for water, electricity and detergent to wash it.

The cost of ownership for an item rarely occurs to us. We may think about it when we make a big purchase like a house or a car. In those cases we’re likely to make some calls to find out about insurance and tax rates to see if we can afford those in addition to the purchase price. But for most of our everyday purchases, we rarely give the cost of ownership a second thought and this is a mistake because it’s often the cost of ownership that gets you into trouble. You may have the $300 in your account today to buy that iPhone, but do you have the $100+ dollars required every month to keep it running? You may have the $50 needed to buy that shirt, but do you have the $10 week in and week out to keep it dry cleaned, especially when you consider the other garments you already have that need to be cleaned? If you buy too many things that come with a high cost of ownership you’ll quickly find your expenses exceeding a comfortable level.

Very few things only cost their purchase price. Almost everything requires some accessories or resources to keep it running. You can even argue that simply having to store the item adds to its cost of ownership because you are paying for space in your home or apartment to store the thing (and it adds to your insurance bill because the more stuff you have, the more coverage you need). You certainly don’t have to be obsessive about calculating the cost of ownership for everything you buy, but it is wise to at least be aware of and consider the extra costs you’ll likely incur with the items you buy. That can prevent you from owning too many things that carry high ownership costs. High ownership costs can quickly dwarf the purchase price of an item and wreak havoc on your budget.

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