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Cost or Cost Per Year?

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Cost or Cost Per Year?

Big purchases usually mean big costs.  Being budget conscious doesn’t mean that we are cheap.  When it makes sense to do so we are willing to part with hard earned savings.  When I look at a big purchase, I typically will look at how much it is going to cost us right now.  Another way to look at it would be to identify how much use you will get for something and then figure out the cost per year.  This can be a measure of quality of goods, or an investment in eliminating future regret.

The House

Several years ago, Sarah and I bought our current home.  There were certain features that came standard, but quite a few things we wanted were considered upgrades from the builder.  While the house was being built we had our décor appointment set with the developer.  We were told to come with a list of anything we might want, they would provide us a quote for each item and then we would decide what we wanted.

The price of the upgrades was considerably more than fair market value. This is typically when buying a newly built home.  One of our “asks” was for flat ceilings on our 2nd floor.  The standard was popcorn/stucco ceilings because it saved them money on having to properly mud/tape the drywall.  The price tag on this “upgrade” was $3,000.  For perspective that is just over $4.00/square foot of ceiling space.  We could not bring ourselves to justify spending that much money on something that was for aesthetics only.

We have now been in the house for five and a half years, and are hoping to stay for quite a few more.  Even at this point the price tag on that upgrade looked at as a price per year is down to $545 per year.  This has caused some regret on Sarah’s end for not giving the thumbs up to this upgrade.  I still feel it is too much money for what it would have brought to our life.  It certainly is more palatable breaking it down to the cost per year.

Some builders encourage you to add the cost of the upgrades to your mortgage.  You are amortizing them over the same time as your house as a whole.  This means you are paying interest on the costs.  Running the bill up higher over a number of years but it also provides an avenue for people who can’t afford the upgrades to get them away which isn’t a good thing.

The Baby

Babies cost money.  A lot of money.  Spending on the baby is really more about upfront costs than cost per year since most baby items are outgrown inside of a year.  That means that the cost per year is actually higher than the upfront cost.  As I’m writing this article Sarah is going through baby’s old clothes and organizing them for storage since she has outgrown them all.  Although many of the items were given as gifts or purchased by her grandparents, the cost of this box of clothes is more than $500.00.  Realistically the clothes she wore for less than a couple of months had a higher cost per year than the flat ceilings on the 2nd floor we didn’t spend on.

Shopping for second-hand goods is an obvious solution to this problem.  All parents have the same issue of their children outgrowing clothing so as there is a fairly stable avenue for getting clothes you need now from those who no longer need them. We hope to reuse them in the future to reduce the total cost.

The Car

This one is fresh.  Last year we purchased a used car for Sarah.  We typically buy used cars and run them into the ground while saving up for a replacement over leasing/financing a new car.  Recently we began looking for a replacement car for the one I’m currently driving.  It is a 14-year old vehicle with a body that is starting to fall apart.  The first car we went to see was within budget.  It is only 4 years old currently with relatively low mileage.

This car would likely last a solid ten years, assuming it is mechanically sound.  What makes it difficult to pull the trigger on is the luxury features that drive up the cost of the car (pun intended).  This model has a nice panoramic sunroof which adds between $1,000 and $1,500 to the price tag of the car.  Breaking it down over ten years makes that pill easier to swallow at only $100 to $150/year.  The way I look at it is that the car without the luxury sunroof would last just as long (if not longer).  If the extra cost was for a feature that would extend the life it would be a different scenario.  So at this point we are taking a pass on that car – we’ll see where the hunt takes us to see if we want to go back.

When shopping for a car the quality of the car should hold more weight than the luxury features like leather seats or fancy sunroofs.  Putting your money into a model one year newer, or with 15,000 less kilometers on it will provide better value in the long term.

When you have to spend big money, do you consider the cost over time or just the initial costs?

Scott

 

2 comments

  1. Penny says:

    Initial cost is where the pain point is (or where we feel it, I guess). I try to think about cost per use. Even if kiddos outgrow things rapidly, if I only own a dozen items, I don’t feel so bad about the expense. That’s really helped me in terms of what I let into our house AND how much I spend. So glad you wrote this! Important perspective.

    • Couple of Sense says:

      Yes! The initial price tag is where we feel the pain. The tricky part is when looking at the cost per use is you have to determine if your thoughts are based on logical thinking, or if you have trying to find justification to purchase something that isn’t essential. It is tricky, because logical thinking isn’t only about the balance sheet. I do agree that keeping control over what you let into your house. If you buy something and it breaks (or is grown out of) the automatic impulse is to replace it. Even if you didn’t really need it in the first place.

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