What is Lifetime Cost?
Lifetime cost is the sum total of all other expenses related to an item, such as a car or home, over the expected life time of the product. The sum of lifetime costs includes the amount paid to purchase the item.
- The lifetime cost of an item or service refers to its total cost of ownership over its entire 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 may include maintenance, upgrades, annual subscription fees, as well as products such as gas for a car or toner for a computer.
- A consumer should also consider what is lost by using money to purchase items rather than cutting debt, saving or investing in securities – often referred to as “opportunity costs.”
Understanding Lifetime Costs
Businesses will often calculate lifetime costs before making major expenses, upgrades, and refurbishments. On the other hand, most individuals rarely estimate this cost before purchasing a house, boat, automobile, or other expensive item. In addition to the base purchase price, lifetime costs include:
- the cost of maintaining the article in good working order
- cost of insurance to protect the item
- Required upgrades or upgrades to the product
Another fee that can add to the lifetime cost is the alternative use of funds. In other words, there is an impact on the consumer’s resources if the individual spends a different amount of money instead of buying the commodity.
For example, if a person purchased a fur coat, the lifetime cost would include the purchase price as well as the cost to clean, store, insure, and otherwise maintain the coat. Alternatively, the individual could invest that amount in a secured mutual fund or other security.
Often, the lifetime cost of an item can exceed the original purchase price. Perhaps, this 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 higher than most people realize. According to Credit.com, the average borrower will pay more than $279,002 in interest charges on purchases with their credit cards during their lifetime.
lifetime cost of holding the loan
Lifetime cost may also apply to loans. For example, the lifetime cost of a loan placed on a line of credit (LOC) would be much higher than the amount spent on the goods they purchased with cash or other ready funds. Use of a credit card or other loan will incur interest and fees, increasing the lifetime cost of the item.
According to the latest survey from the American Automobile Association, the average amount spent to own and operate a car per year; The numbers include the cost of gasoline, maintenance, insurance, license and registration, debt finance fees, and depreciation costs.
Real-world example of lifetime cost
Transportation is the primary reason for most people to buy a car. They will often compare price, desired features and various offers between dealers before buying. However, the price of the vehicle does not end at the car lot.
Consider the costs associated with weekly gas fillings, periodic oil changes, insurance, licensing and vehicle inspection fees. Still, other charges may include roadside assistance, car wash, and parking or garage rentals. One can easily spend much more than the purchase price of the car. It is wise to examine the impact of the annual portion of the lifetime cost of the purchase before a consumer commits to making a purchase.