How to Spend Money Wisely: Understanding Total Cost of Ownership

Total Cost of Ownership or TCO measures the full cost of owning something. It includes the original purchase price, consumables and running costs. TCO is often used in business, but we can adapt it to domestic purchases to help us decide how to spend our money. 

If you can sell the item when you have finished with it then you can deduct that cost, although you probably won't know that in advance. 

If the item will save you money - like energy saving lightbulbs, or growing your own vegetables - then you can deduct the savings. For some purchases you'll actually make a profit. 

To be get a full picture of the cost of an item you should really account for the loss of the interest you would have earned if you had saved the money rather than making the purchase. This only makes sense for non-essential purchases. 

To compare alternative items that last different amounts of time, we can compare TCO per year (or other time period.)

Depending on your circumstances, the total cost of ownership of a second car can be very high compared to the benefit gained.  

I don't drive. Instead I walk, use public transport and take occasional taxis. Now and then I'll take a taxi over a fairly long distance at a high cost. People are always shocked by my extravagance! When I compare my costs with their costs of running a second vehicle, they realize who is actually being extravagant ...

When working out the TCO of a second car you must consider:

• Cost of a car loan if needed (or loss of interest on savings)
• Depreciation in value
• Insurance and Tax (and any fines)
• Maintenance
• Parking (and parking tickets)
• Gas

You can use a lot of public transport and take a lot of taxis without coming anywhere close to the cost of running a second car. 

If you can organize your life so a second car isn't needed then you can save a lot of money. We have thousands of dollars more in our savings accounts because we didn't have a second car. Paying $100 for a taxi now and then makes financial sense. 

 I have two boys who are close in age and of a similar build. I've found that it's cheaper to buy expensive pants for them than cheap ones. 

If I buy a cheap pair of pants for my older son, the knees are pretty much worn through by the time he grows out of them. If I buy a more expensive pair then his brother gets to wear them too. And I can sell them on eBay afterwards too - good quality branded kids pants keep their value. Now most of my kids' pants come from Gap. 

Let's run the calculations:

So in this case the cheap pants worked out more expensive for two kids, and the kids get to wear better quality clothes. Even if I don't sell the pants on eBay, I break even and can donate a good quality item to a thrift store. Also because I know my strategy, I can try and think ahead and buy the GAP pants for the next season when they are on sale. 

At this point, you might be thinking, ooh I could do even better by buying the used GAP pants on eBay. That can make a lot of sense. For me with two boys, I know I'd rather have new pants and be sure they have plenty of wear in them. 

Of course this calculation will be different for different items. Sometime cheap items do work out cheaper. I don't actually do calculatations for most purchases, but I do try and think about these principles. 

One good way to reduce the TCO of an item is to sell it as soon as you are done with it (as we did with the kids' pants above.) This is a tactic we use regularly. I buy a high quality item, knowing that it will command a good used price once we are finished with it. 

You can also buy the item used to reduce your initial purchase price. If the item still has some life in it when you have finished with it you might be able to sell it again. 

This approach is very effective with a lot of baby and toddler equipment. I have sold strollers and baby toys. And I'm currently planning a clear out of reusable diapers, travel crib, baby carriers, high chairs and lots more. Items can be sold to friends and colleagues, at local baby sales or on eBay. 

Selling items to reduce TCO can also work well with expensive items that are only useful in the short term. Perhaps you buy a really good bike for a major trip, but afterwards you realize that you're not going to get good use out of your bike back at home and a much cheaper bike would be fine. Sell the expensive bike as soon as possible and buy a cheaper bike. 

When renovating our kitchen we needed a freestanding dishwasher temporarily. Having checked resale prices, we bought a good brand new and then sold it for a good price a few months later. We would have made a bigger loss on a cheaper dishwasher. 

Buying items that are likely to retain their value and have a good resale value can help you save money over the long term. This can be a good strategy if you're not certain that an item will get used. Will you really use that kitchen gadget or exercise machine? Make sure the item you pick will sell for a good price used if you're plans don't work out. 

There are some items that you can buy that will actually save you money over the long term if you use them regularly. For these items you need to factor in the money saving into the TCO. But don't forget the cost of consumables, electricity and any other costs you incur. And remember you actually have to use the items to save the money. Just buying a mini greenhouse won't help - you have to actually grow the tomatoes!

Examples include:

• Energy saving lightbulbs
• A mini greenhouse or hydroponics system for growing your own food - don't forget the cost of seeds, electricity and other extras
• A breadmaker for making your own bread 
• A vacuum bottle for taking coffee to work
• A Netflix subscription instead of buying DVDs (very worthwhile for us!)
• Putting solar panels on your roof

This article uses public domain images from Pixabay.