What is the lifetime cost?
Lifetime cost is the total of all other expenses related to a property, such as a car or house, over the expected life of the product. The sum of the lifetime cost includes the amount paid to purchase the item.
Businesses frequently calculate the lifetime cost before making major expenses, upgrades and renovations. On the other hand, most people rarely estimate this cost before buying a house, boat, automobile or other expensive item. In addition to the basic purchase price, lifetime costs include:
- The cost of keeping the item in good or functional condition
- Insurance cost to protect the item
- Renovations or upgrades required by the product
Key points to remember
- The lifetime cost of a good or service refers to the total cost of owning a good during its lifetime, in addition to the initial purchase cost.
- The lifetime cost can include maintenance, upgrades, annual membership fees, as well as products like gas for a car or toner for a computer.
- A consumer should also consider what is lost when using the funds to purchase the item, rather than using it to reduce debt, save or invest in securities.
Another charge that could increase the lifetime cost is the alternative use of funds. In other words, there is an impact on a consumer’s resources if, instead of buying the item, the individual spent the amount differently.
For example, if a person purchased a fur coat, the lifetime cost would include the purchase price as well as the price to clean, store, insure and otherwise maintain the coat. Alternatively, the person could have invested this amount in a secure mutual fund or other security. Often the lifetime cost of an item may be higher than the original purchase price. It may be the origin of the saying that the definition of a boat is a hole in the water in which you throw money.
The lifetime cost of credit card debt is higher than most people think. According to Credit.com, the average borrower will pay more than $ 279,000 in interest on credit card purchases during their lifetime.
Lifetime cost of holding debt
The lifetime cost may also apply to debts. For example, the lifetime cost of debt held on a line of credit (LOC) will be much higher than the amount spent on property if it had been purchased in cash or with other available funds. Using a credit card or other loan will incur interest and fees, increasing the lifetime cost of the item.
The average amount it costs to own a car per year, according to the latest survey from the American Automobile Association; the number includes the cost of gasoline, maintenance, insurance, permits and registration, loan finance charges and depreciation charges.
Real example of lifetime cost
The main reason to buy a car for most people is transportation. They will often compare the price, the desired features and the different offers between the dealers before buying. However, the cost of the vehicle does not stop at the parking lot.
Consider the costs of weekly gas refills, periodic oil changes, insurance, permits and vehicle inspection fees. However, other fees may include roadside assistance, car washes and parking or garage rental. One can easily spend much more than the purchase value of the car. A consumer is wise to consider the impact of incurring the annual portion of the lifetime purchase cost before committing to purchase.