How TCO can help -- and hurt -- your finances

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How TCO can help -- and hurt -- your finances

Postby KlfJoat » Thu Apr 19, 2007 2:36 pm

Re: JD's post today on CFL bulbs

There is a concept in business that I think is relevant to that post. It's known as TCO - Total Cost of Ownership. TCO is the concept that your cost for an item is not limited to what you paid for it.

CFL bulbs have a lower TCO than cheaper incandescent bulbs due to their longer lifespan and reduced energy usage. An incandescent bulb may cost pennies, but it wears out quicker and burns more electricity for the same lumens (light) than the equivalent CFL bulb. So TCO(incan) = (purchase + tax + electricity)/years in service. TCO(cfl) = (purchase + tax + electricity)/years in service. It's the number of years in service and electricity costs that make a CFL bulb cheaper.

I have two light fixtures in my apartment which routinely blow out incandescent bulbs before they've reached their rated MTBF. I'm not quite sure, but I think it's a current issue. Anyway, once I replaced them with CFL's, I haven't had to change a single one yet. It's an extreme example of how the TCO of a CFL saves money, but a real-life one.

Incidentally, LED bulbs have an even lower TCO than CFL bulbs, for a higher purchase cost.

This can also go the other direction. For example, a car doesn't just cost $20,000. It costs $20,000, plus tax, plus title and license, plus loan origination fees, plus interest on the loan, plus oil changes, plus car washes, plus insurance premiums, plus yearly maintenance, plus scheduled maintenance, plus consumables like tires and wiper blades, plus major repairs, plus deductables for accidents, and then possibly minus its sale as a used car. A $20,000 car can cost $50,000 over 5 to 10 years. If you fail to budget for the "extras" that go along with the car, the TCO will bite you long after the initial purchase rush is done.

Retail stores count on people not realizing that the purchase price is only a part of the total purchase cost of an item. Sure you may save up to buy that big screen TV, but to get a good signal, you need the more expensive cables (you really do, just not the Monster brand). You may save to buy the computer and printer, but to make it work you'll need to $25 USB cable (which only costs them $1). When I worked retail, we would round up 30% on top of the big ticket item when checking the customer's credit, to make sure there was enough "room" to sell accessories. In certain cases, like car audio, you NEED to buy some accessories to make it work at all (cable harnesses).

So when you make a purchase, make sure to think about what else you might need to buy.

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