Total cost of ownership is a way to calculate how much something will really cost over time (purchase price plus ongoing costs).
Car Before The Horse?
Say you just graduated college and need a vehicle to get to your new job as a management consultant. The drive’s not far, so you don’t need a vehicle that can go long distances.
After talking your friends and family, you narrow it down to three options, and try to figure out their total cost of ownership (TCO).
Option #1: The Horse
It sounds crazy, but horses are actually legal in your town and your uncle can sell you one cheap and board it at his stables. You could get back and forth to your job on the horse, and it might even be kind of fun.
Purchase price: $2,500
Annual costs: $2,500 (includes feed, vet care and vaccinations, and boarding)
Option #2: The Used Electric Car
A friend offers to sell you his used Nissan Leaf, which is in good shape but only goes about sixty miles on a charge (it’s an early electric car battery, now obsolete). You like the idea of carbon-free driving, and also that it won’t require much maintenance.
Purchase price: $7,500
Annual costs: $500 ($400 for electricity and $100 for maintenance like replacing windshield wiper blades)
Option #3: The Used Gas Car
You can buy a used Honda Civic on Craigslist for cheap. It’ll do the trick, but since it already has 200,000 miles on it, it will probably need some repairs.
Purchase price: $6,500
Annual costs: $2,000 ($1,000 in gas and $1,000 in maintenance)
Which vehicle should you buy? The one with the lowest total cost of ownership, of course!
To figure this out, add the purchase price to the annual cost times the number of years you expect to use it.
This comes out to $10,000 for the horse, $9,000 for the used electric car, and $12,500 for the used gas car.
So… congratulations on your new (used) electric car!