My friend Kosmo over at The Soap Boxers wrote an article that reminded me to write of something that I’ve been meaning to write about for some time. Many consumers focus too much on the cost of something now, and rarely take the long term financial considerations into account. The Total Cost of Ownership (TCO), is a business term for analyzing all the ramifications of purchase decision. Microsoft has used this for years to keep customers from defecting to Linux, a free operating system.[Note to Regular Readers: I know you may already know this. However there are still millions of consumers who don’t. If you know someone who this could help, please spread the word.]
The Total Cost of Ownership of a LightBulb
Let’s start with Kosmo’s article: Is a $50 Light Bulb Affordable? The article shows the math of why spending $50 for an LED lightbulb will end up saving you around $75 over the life of the bulb. It doesn’t sound like much, but if you are as Lazy as I am, you like not having to buy and store a bunch of incandescent bulbs and changing them, while saving money.
This is a no-brainer to me. The only question is whether you prefer to save even more money by going with Compact Fluorescent Lightbulbs (CFLs), which have mercury and require special handling.
I suppose there’s the small percentage of people out there who can tell the difference between the types of light. I would imagine that most of those people would adapt to it. Chances are if CFLs came first, incandescent bulbs would seem odd.
The Total Cost of Ownership of a Mobile Phone Service
Like the lightbulb, people focus too much on the cost of the phone itself. They ignore the more expensive component, the cost of the service. When the iPhone came out, I thought it was pretty cool, but I already had a smart phone that did email better (physical keyboard) had music, the web, and a bunch of other stuff. It was the Palm Treo 600 (or 650). The data plan cost me $30 a month. The iPhone evolved (even learning how to SMS photos), but the plan jumped up to around $80 for most people. That’s a large chunk of change.
For awhile I jumped on board the expensive cellphone plan with Sprint. For around $70 a month, I could use a Palm Pre. It was good for awhile, but finally, I saw the light and went to Virgin Mobile’s $25 unlimited data plan (it’ll cost you $35 now). I’ve got an Android phone in the Motorola Triumph. While I think it is a large step back from the Palm Pre, the mass market has spoken and they like Android slab phones. So instead of spending $840 a month on service ($70 times 12), I’m spending $300. Each year I save around $540.
The difference in the price of the phone is miniscule compared to the $540 I’ll save every year.
The Total Cost of Ownership of Landline Phone Service
Let’s take the mobile of the above example. I used to pay around $40 a month for plain old telephone service (POTS in industry jargon). When Vonage came out, I switched to their $15 plan saving me $25 a month. It was a simple subscription change, I didn’t have to buy anything upfront.
However, a year ago, I switched to Ooma Telo free home phone service, and it has been awesome. I paid around $150 upfront (I got a deal) and now only pay about $3 in taxes and regulatory fees a month for home service. Since I had to pay those with Vonage, I have saved the full $15 a month that I paid with Vonage. In ten months, I broke even. The last two months have been savings. Each year I stick with Ooma, I’ll save $180.
The Total Cost of Ownership of Fresh Water
Okay ownership of water is a weird one. I know a number of people who don’t own a Brita water pitcher. I see these same people buying bottled water. I don’t understand it at all. A one-time investment for a Brita pitcher is under $20 and the filters last months working to give you many, many gallons of water.
I get that there’s a convenience factor to bottled water. However, with just a little planning ahead, you can save your $1 very easily, and get a better product. What? A better product? Yep. Bottled water isn’t necessarily filtered or as pure as Brita. In fact, it is about the same as tap water. In addition, with the Brita solution you can avoid that whole BPA nastiness.
The Total Cost of Ownership of Website Hosting
I know most of you probably won’t care about this one, but it home for me recently. I had be running this website using Amazon Web Services, a service that is very economical if you happen to have some Linux technical skills. I didn’t choose Amazon Web Services just to save a couple of dollars, I did it because I wanted to brush up on some technical skills that had gotten a little rusty. It all went smoothly until my website was attacked. Then it started to take too much of my time to defend the attackers.
The solution was to move the site to WP Engine, a hosting provider that fights the attackers for you. This site is much faster now than it was before the attack. I pay $100 a month, where Amazon was costing me around $60, but it is worth it, because I don’t have to deal with any attacks. If something goes wrong, they are on it right away. In the past, when something went wrong, I would put on my Linux system administrator and spend time fixing it. Now I can use that time to write articles like this one. Focusing on my business gives me a greater return than the cost of the more expensive hosting.
Unlike the other examples, this web hosting one is more about me spending money to save time and using that time to make more money. Still, I felt compelled to include it as it is just the most recent reminder of spending more to save.
These changes don’t seem like much, but they add up to save you probably a $1000 a year or more. Do you have more tips on how to spend a little money to save more in the future?
“The only question is whether you prefer to save even more money by going with Compact Fluorescent Lightbulbs (CFLs), which have mercury and require special handling. ”
That’s definitely a valid point. I saw people positioning the debate as incandescent vs. LED, which is why I approached it from that perspective.
Currently, TCO of CFL is cheapest, followed by LED, with incandescents a very distant 3rd (they use 4-6 times as much electricity as a lumens-equivalent alternative). Some of the newer LEDs are slightly more efficient than the CFLs, and the LEDs have a life that is roughly 3 times as long, but the up front cost of the LED is greater than these savings.
As you mention, the mercury issue does scare some people away, and I’ve heard of people getting headaches from the CFL. I’ve never had this happen personally, even through I’m somewhat prone to headaches in general.
For the bottled water comparison, you also need to include the startup costs of buying one or more BPA-free water bottles. It still make sense and is one of the many choices you can make that is “green” in multiple senses of the word (good for both the environment and your wallet).
Modest Money says
I think most people are just too lazy to take the time to calculate the lifetime savings of such purchases. Or in the case of the iPhone, people fall for the hype/marketing. Furniture is another example that fits this case. If you buy cheap furniture it is bound to wear out quicker and need replacing, whereas if you invest a bit more it will last much longer and cost less in the long run.
Lazy Man says
Good point about the BPA-free bottle. I see some on Amazon in the 4-6 range. That puts you a little above the $20 mark for the pitcher and bottle. That just gets you closer to the $25 minimum order for free shipping from Amazon ;-).
I would argue that people aren’t lazy enough if they continue to make decisions that lead them to paying more. That means working harder and longer at their job, cutting back in other areas, or getting another job to make up the difference.
I might be with you on furniture… if we didn’t get a puppy a couple of years ago. Cheap furniture, through Craigslist if possible is the way to go for us.
I’d be curious to see from a financial blog a total cost of ownership of life insurance. Suze Orman and Dave Ramsey despise permanent insurance and only promote term. All banks, Donald Trump, Warren Buffett, etc, despise term and buy as much permanent as they can. What is the cost of ownership of each one?
Lazy Man says
Well if Suze Orman and Dave Ramsey are promoting something, you know it’s wrong ;-). Sorry, they are at the bottom of my list of personal finance gurus.
I didn’t realize that banks buy permanent life insurance. Do they get paid when the bank dies? I can’t even begin to imagine how much permanent life insurance Trump and Buffett have with their billions of dollars. I would think some insurance company would be happy to sell them more until they were broke.
I would think the cost of ownership is dependent on rates, life expectancies, probability and other things that actuaries are experts at.
Personally, I think I’d only go with term because my belief is that life insurance’s purpose is take care of those dependent on your life. For most people that’s when they children until that child is age 18-22 (some people believe in supporting through college while others make a case to just get them to being a legal adult). So depending on the number of kids and their ages, it probably makes the most sense to cover that term.
My husband sent me a link to this article, since he is always getting frustrated with me for not figuring out the TCO on the things we buy. It’s just so hard for me to get out of only thinking about the cost in the short term!
My first visit. Nice post. However, should also note Lost Opportunities as a competing & complementing factor. Not so relevant in the examples presented. But there are those who cheap themselves to death. TCO & LOC.
Maybe I’m missing something here but why not just drink tap water?
Seems like buying a filter or buying bottled water is a waste of money.
Lazy Man says
Some people don’t like their local tap water.
SB @ One Cent At A Time says
I admit to be lazy to calculate TCO on almost every items I buy. I am in market for a second car, preferably used. I would consider TCO approach before making final decision, very thought provoking post.