Lifetime Cost: Meaning, Example, Calculation

What Is Lifetime Cost?

Lifetime cost is an estimate of how much an item, such as a car, a home, or a piece of industrial machinery, will cost to own over the expected useful life of that item. It also includes cost of purchasing the item in the first place.

Understanding and Calculating Lifetime Cost

Businesses will frequently calculate lifetime costs before making large expenditures, upgrades, or renovations. For example, if they are buying a new piece of machinery, they will not only consider what it costs to buy initially but also what it's likely to cost to operate and maintain over its expected lifetime. Lifetime cost may also be referred to as whole-life cost, life cycle cost, or total cost of ownership.

Individual consumers can also find it useful to calculate the lifetime cost before buying a home, boat, automobile, or other expensive item. Besides the initial purchase price, lifetime costs can include:

• The cost of maintaining the item in a good or functioning condition
• Cost of any insurance to protect the item
• Any renovations or upgrades likely to be required for the item

As a simple example, if a person bought a fur coat, the lifetime cost would include the purchase price as well as the expense of cleaning, storing, insuring, and otherwise maintaining the coat.

Often, the lifetime cost of an item may be far greater than the initial purchase price. Many boat owners, for example, will recognize the truth of the old saying that the definition of a boat is a hole in the water into which you throw money.

In addition to lifetime cost, it can also be useful to look at the opportunity cost of a particular expenditure. That refers to the potential benefits of spending the same amount of money in a different manner, such as investing it.

How Debt Adds to Lifetime Cost

Lifetime costs can also include debt repayments. For example, the lifetime cost of an item financed through a credit card or line of credit (LOC) can be much greater than the purchase would have cost had it been paid for with cash. Unless the debt is paid off right away, the interest and fees on the credit card or credit line will add to the lifetime cost of the item.

The most dramatic example for most consumers would be the purchase of a home. For example, consider a $300,000 home purchased with a 20% down payment and a 30-year mortgage with an annual percentage rate of 7%.

Assuming the homeowner keeps that home and mortgage for the next 30 years, by the time it is fully paid off, they will have paid about $335,445 in interest on the $240,000 they borrowed. Together with the $60,000 they put down initially, the repayment of the loan's $240,000 principal, and the $335,445 in interest, the $300,000 home will have cost them $635,445—more than twice the original purchase price.

And that, of course, doesn't include all the other lifetime costs associated with a home, such as property taxes, homeowners insurance, and routine maintenance. Nor does it include the opportunity cost of using that money differently.

Real-World Example of Lifetime Cost

A car buyer will often compare makes and models, prices, desired features, and different dealers' financing offers before making their purchase. However, the cost of the vehicle does not end at the car lot.

Consider the costs involved with weekly gas fill-ups, periodic oil changes, auto insurance, as well as licensing and vehicle inspection fees. Other expenses may include a roadside assistance plan, car washes, and parking or garage rent.

So, for budgeting purposes, it makes sense to look not just at the vehicle's initial price but at what it will cost on an ongoing basis. Not only are some cars cheaper than others, but some may also be less expensive to maintain. It can also be the case that a car that's initially more expensive will be less costly on an annual basis, making it a better buy in the long run. The U.S. Department of Energy has an online Vehicle Cost Calculator that allows users to compare the operating costs of up to eight different makes and models based on how much they drive.

According to the American Automobile Association, the average new car costs $10,728 to own and operate. That includes loan finance charges, gasoline, maintenance, insurance, license and registration fees, and depreciation.

The Bottom Line

Lifetime cost is a useful way to estimate how much a particular item will cost to own and can be especially important in high-ticket purchasing decisions.