The real cost of buying cheap
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.
"You’d be stupid not to try to cut your tax bill and those that don’t are stupid in business"
- Bono: U2