A decision we all must make. Do I buy a 20-year-old car for $5,000 or a new car for $25,000 with free servicing and a 7-year warranty? Do I go with a cheap do it yourself kitchen or spend the money and choose premium materials, finishes and workmanship?
To help us decide it’s important to calculate the long-term real cost of the purchase.
Implementation and cost
Using the car as an example, $5,000 looks like the better choice upfront. However, looking long term, the old car is likely to cost around $5000 per year in maintenance and servicing and may only last another 5 years. So, if the car needs replacing in every 5 years, your 20-year cost is $5,000 x 4 (replacements) + $100,000 (maintenance + servicing) = $120,000.
The new car is likely to cost around $1,000 per year in maintenance and servicing for the first 7 years and then around $3,000 per year after that. The new car should last for at least 20 years. The real cost of the new car is ($1,000 x 7) + ($3,000 x 13) = $46,000.
Clearly, the new car is the right choice when we consider the real long-term cost. Over 20 years, the new car will save you $74,000.
Similarly, you are less likely to want to replace a premium kitchen 5 years from now and in addition, the property resale value will be higher than a cheap do it yourself kitchen. Spending a few extra thousand dollars on a kitchen may seem excessive now but buying quality vs cheap is often the right choice for wealth generation.