Understanding Total Cost of Ownership - Ignore and Pay the Price

Understanding Total Cost of Ownership - Ignore and Pay the Price

The other day a light bulb in my office burned out. Even though LEDs bulbs were more expensive up front I analyzed the available options and ended up saving $192.06 over 5 years!

It worked by doing a total cost of ownership calculation right there in the aisle. There are major price and performance differences between LED and incandescent bulbs, both in up front cost, but also operating cost which is a big gotcha on many purchases.

The inefficient 75 watt incandescent light bulbs are still on the shelves for about $1, and the highly efficient 10 watt LED bulbs are $3-10 each.

The incandescents look cheaper because of the low up front cost but the operating cost is totally out of control.

I'm in good position and able to opt for LED bulbs because my wife and I agree that quality household items are a priority on the budget. We also both understand the idea of total cost of ownership and are happy to maximize our utility. This idea is useful not just for light bulbs but applies to most purchases.

 

LED vs Incandescent bulb cost breakdown over 5 years:

For this total cost of ownership example, let’s assume the light is on 12 hours per day, everyday, for the next five years. That is a total of 21,900 hours. We’ll also assume the lifespan of the LED is roughly 18k hours (about fifteen times an incandescent), not enough for 5 years, but I’ll need two at the most. Meanwhile the incandescents burn out every 3-4 months with this plan requiring 19 bulbs. What really matters more though is how the bulb wattage impacts my electric bill going forward.

 

Incandescent

LED

Cost per bulb

$1

$6

Life span

1200 hours

18,000 hours

Watts

75

10

Bulbs for 5 years
12 hrs / day (21,900 hours)

19 = $19

2 = $12

Electricity cost ($0.13/kWh)
[21900 hrs * (watts/1000) * $0.13]

$213.53

$28.47

TOTAL COST OF OWNERSHIP:

$232.53

$40.47


To light up my room for the next 10 years, I can choose between paying $6 now for the LED bulb and $40.47 over 5 years (including one extra LED to buy and install). Or with the incandescent I can pay $1 now and $232.53 over 5 years, plus the time waster of buying and installing 18 extra light bulbs.

LEDs use 13% of the electricity vs the incandescent bulb and their operational cost is a WHOPPING 83% lower! It’s not everyday investments like that come along! Yes I’ll take an LED bulb please!

It is a little sad that not having $5 today can lead to a $192.06 hit over 5 years. I feel sorry for the people who are forced into the cheaper short term option (because of money constraints). They end up paying almost six times more in the long run.
 

The Moral Of The Story - Look at Price but Decide By “Total Cost of Ownership” (TCO):

Always consider what future you has to do or pay as part of the purchase decision.

Here is what future you will end up paying:

  1. Up front cost - what you pay today.
  2. On going maintenance / operating cost. In the case of the light bulb it is the power draw. In the case of a car - gas, tune ups, tires, etc.
  3. The cost of your time perform maintenance (even more if you DIY).
  4. Any residual value. Moot in the case of light bulbs, but very relevant in the case of a car or piece of equipment.
  5. The total cost of ownership, including your time = items 1 + 2 + 3 + 4.

If you have the ability to choose between products it pays to minimize cost and maximize utility.
 

Cheap vs Utilitarians vs Luxury:

 

Cheap

Utilitarian

Luxury

Initial Cost

Low

Moderate

High

Lifespan

Low

High

Moderate - High

Operating Cost

High

Low

? - varies

Frustration Level

High

Moderate

Low

Resale Value

Low

High

? - varies but can depreciate rapidly


The table above is a generalization but works for cars, light bulbs, leather jackets, dishwashers, helicopters, computers, golf clubs, budgeting software, etc…

The key point is you get the best value from utilitarian products.

The post Understanding Total Cost of Ownership - Ignore and Pay the Price is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Financial Literacy, Budgeting
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