Total cost of ownership

Before you rely on it

What to check

Include resale value.

The common error

Where people go wrong with total cost of ownership

Omitting depreciation from the comparison. Two assets that hold value very differently can look similar on running costs while differing by thousands over the same period.

Worked through

Total cost of ownership in plain numbers

Compare two cars over five years. Car A costs $28,000, uses $1,800 a year in fuel, $1,500 in insurance and $700 in maintenance, and resells for $14,000. Its total cost is $28,000 + 5 × $4,000 − $14,000, which is $34,000, or $6,800 a year. Car B costs $24,000 but runs $2,400 in fuel, $1,400 in insurance and $1,100 in maintenance, and resells for $10,000. Its total is $24,000 + 5 × $4,900 − $10,000, or $38,500, and the cheaper sticker price costs $4,500 more over the period. Ownership costs include purchase, running costs, financing, taxes, repairs and what you get back at the end.

Easily confused

Total cost of ownership and its neighbours

Total cost of ownership is not the purchase price, the monthly payment or the depreciation alone; the price is only the starting point. Payments include financing, which can be a big part. Depreciation is one component of ownership cost, often the largest for cars. TCO is broader than life-cycle cost in some fields, or equal to it, depending on whether disposal and environmental costs are counted. In business, TCO includes support, training and downtime for software and equipment.

In real decisions

Where total cost of ownership turns up

Buyers use it to compare cars, appliances, homes, software and equipment; businesses use it in procurement, since maintenance and support can exceed the price. Homebuyers compare owning and renting with it, including taxes, insurance and upkeep. A calculator organizes the costs by year and totals them, and helps show which option costs less over the time you expect to keep it. Extending the horizon can change the ranking.

Know the edges

Where total cost of ownership stops being reliable

Estimates of fuel, repairs and resale value are uncertain. Time value of money is often ignored in a simple total. Non-financial factors such as comfort, safety and reliability matter. Different holding periods change the result. Use realistic figures, test a range and consider what you value beyond cost.

Quick answers

What people ask about total cost of ownership

What should I include for a car? Purchase price, taxes, financing, insurance, fuel, maintenance, repairs, registration and the resale value at the end. Depreciation is the difference between price and resale.

How long should the period be? Use how long you expect to keep the item. A longer horizon usually favors more durable, efficient options.

Do I include the time value of money? For a more accurate comparison, discount future costs to today. A simple total is fine for quick estimates.