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Understanding Total Cost of Ownership

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The concept of Total Cost of Ownership is not a new one but it’s one that some people don’t consider when they’re making a new purchase. Total Cost of Ownership is the purchase price plus the additional costs of operation. The easiest TCO calculations are for cars, so we’ll take a look at those for now, but they can be performed on anything you purchase. When comparing cars, usually the only financial aspect of them folks compare is fuel efficiency because it’s easily quantifiable given the cost of fuel. But when it comes to cars, maintenance is a much bigger issue and knowing how often your car will be in the shop, the cost of the work and similar things is more important.

TCO is important because let’s say you can buy Car A for $10,000 and you can buy Car B for $12,000. Car A and Car B have identical specs and perform on the road identically. Knowing all that, 99.99% of all consumers would probably purchase Car A because you’re getting the same car for less money.

Let’s say we told you that throughout the life of the car, ignoring discounting the future value of money (i.e. knowing you have to pay $1,000 next year doesn’t mean it costs you $1,000 now… it costs you some amount less than that depending on inflation), Car A will require $8,000 to keep on the road and Car B will require only $6,000. In that case, the total cost of ownership for both cars is the same and you could buy either one. (Aside: Granted, most would prefer to only have to bring Car B into the shop for $6,000 of work instead of Car A’s $8,000 over the life of the car, but we’ll ignore that)

So do you know why TCO is so important to consider? Let’s say you find out that Car A actually will require $10,000 to keep on the road – that puts Car A about $2,000 more expensive than Car B. TCO statistics aren’t in most dealer showrooms for a reason! It’s like signing up for future debt without knowing what it actually is! Luckily with historical car data, many sites like Edmunds.com (They call it True Cost to Own) will have TCO estimators to help you make a decision on which is a better car.

I drive a 2003 Toyota Celica with a TCO of $28,986, or $0.39 a mile (15,000 miles a year); my girlfriend drives a 2005 Honda Civic EX and that has a TCO of $30,059, or $0.40 a mile. Now remember, this includes purchase price as well so any deal you get on a car will decrease TCO significantly. This also makes some broad assumptions but I think it’s a great tool to have when you’re trying to buy a car.

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