Total cost thinking

The sticker price is a lie. Consider the hidden costs of everything.

written by oz chen

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Let’s say you’re the lucky winner of a game show.

You can either take a mansion worth $5 million, or you can take that in cash.

What would you pick?

Even if you make the mansion worth more (let’s say $7 million), I’d still probably take the cash.

There’s the obvious reason that cash is more liquid and easier to use.

But my reason is based on what I call total cost thinking : when you go beyond the initial cost or price to holistically consider the long term financial, mental and emotional impacts of a purchase.

There are 5 hidden components of total cost I’ll cover today. You can jump the section by clicking on it:

  1. Taxes and transaction costs
  2. Interest
  3. Maintenance and ongoing costs
  4. Mental cost
  5. Opportunity cost

Mastering this mental model can help you avoid debt, make smarter money decisions, and ultimately live a freer, rich life.

The sticker price is a lie

I live in LA. Now if I won this New York mansion, my net worth would be up $7 million. But I don’t make money until I sell it. If I continue to hold the property, then I’d need at least $200K/year to keep this mansion:

  • Property tax in NYC averages 1.4%, meaning an annual expense of ~$100K/year
  • Maintenance, utilities and staff needed to run a property this large could easily cost another 6 figures
  • The worry of robberies, squatters and upkeep could easily outweigh the flex of owning a mansion.

Now you might suggest: “Why not just AirBnB it or rent it out?”

That would be great if I wanted to run an out-of-state real estate business. But I don’t. Hypothetical me would be kicking myself, stressed from being granted such an amazing gift: Why didn’t I consider the total cost…I should have just taken the $5 million in cash.

I use this strange example to illustrate the idea of total cost.

But we don’t have to get to the level of game show mansions to derive benefits from this idea.

The components of total cost

Did you know that transportation is most American’s highest cost after housing? On average Americans spend about 15% of their household budget on transportation, mainly attributed to the price of the car.

Let’s look at components of total cost through the lens of the car.

Total cost component #1: Taxes, transaction fees, and total over time

In the States, you’re rarely paying just the sticker price.

Because taxes are a fixed price (9.5% sales tax in California), the higher the price, the higher the taxes.

A $35,000 car is more like $38,325. That’s $3325 more than the sticker price.

But wait—you also have to consider other transaction fees like vehicle registration and maybe even documentation fees.

Outside of buying products, another common transaction fee is the tip for services.

Tip: try this before you dine out next time. Look at the menu and think of your most likely order. Let’s say it’ll come out to be about $50. Multiply that by 1.3, which covers ~10% taxes and 20% tip. Your outing is likely going to be $65, not $50. This is why cooking is a financial skill.

Then we should cap off this section with the most basic form: actual total cost over time.

A $9.99/month subscription is not just $10 bucks—it’s $120 per year, or $600 over 5 years. This seems innocent enough, but then subscriptions add up…and then increase in price…all of a sudden people are looking at extra hundreds per month in subscriptions alone. That’s why I wrote on guide on figuring out monthly expenses and the mindful money map.

This is the most obvious of the total cost components. But what if you have to borrow money to buy something?

Total cost component #2: INTEREST

Here’s a way to think about interest:

  1. You only pay interest when you borrow money
  2. You only borrow money whenever your short term wants/needs exceed your available money.

Someone who wants a new car every few years has a more immediate want, and they’ll pay for that in interest to satisfy that immediate need.

Let’s take the scenario of a $35,000 car. You can buy it in cash, lease or finance it.

ScenarioTotal CostInterest PaidOwnershipProsCons
Lease (3 years)$16,200$16,200 (Full lease cost is interest)NoneLow monthly payment, No down payment requiredHigher overall cost, Mileage limitations, No ownership
Loan (3 years, 4% interest)$19,800$9,800Full ownership after payoffSpread out cost, Build equityInterest charges, Loan approval required
Cash Purchase (Considering Resale)$10,902$0Full ownershipNo interest charges, Potential resale valueRequires upfront capital, Opportunity cost of cash

After 3 years, the lease or loan holder pays the most total cost—mostly from interest.
Buying a car with cash is generally the most cost-effective option in terms of avoiding interest charges.
Note: Total cost of cash purchase = $35,000 – $24,098 resale value after 3 years.

When you’re willing to wait so that you don’t have to borrow money to acquire a good, you’ll typically pay less in total cost.

This behavior also translates to investing. Those who are impatient to make money will typically time the market and try stock picking. (This approach has been proven to lose money.)

As such, the saying goes: “The market is a mechanism for transferring money from the impatient to the patient.”

Total cost component #3: MAINTENANCE & ONGOING COSTS

When you buy something, you also buy the responsibility of keeping it in your possession.
Typically the more expensive the car, the higher the maintenance cost:

  • Higher insurance costs on luxury cars
  • More frequent and expensive repairs + maintenance for luxury cars.
  • Everything time you go to the pump, you’ll pay $0.20 more per gallon to run your car

There’s a story on Quora of someone who bought a $16,000 used BMW and spent $13,000 on repair costs.

Of course this doesn’t mean just buying the cheapest car possible. At the end of a 12 year run with my last vehicle, any major repairs it’d need would cost more than the value of that car. I had to consider total cost of keeping that car (not to mention the danger of it falling apart), so I ended up buying a used hybrid. This is also why I decided to buy more expensive clothes that last longer.

Remember, it’s not just the sticker price. It’s the ongoing cost of the thing. And that includes the mental cost of keeping up with something.

Total cost component #4: Mental cost

I considered buying a (used) luxury car a few years ago. Now, the neighborhood I live in is the type where sometimes people fish around the recycling bins in the middle of the night (iykyk).

Living here, I’m more comfortable with my Kia parked in the driveway than a luxury car. I don’t have to worry much about it. If I had a shiny BMW sitting in my driveway, I’d be more worried about people breaking into my car or home, thinking that the BMW means I’m loaded. (I got a bit more comfortable when my neighbor got a Tesla).

If you’re the smartest one in the room, you’re in the wrong room.
If you’ve got the nicest car in the ‘hood, you’re in the wrong hood.

This is perhaps the biggest hidden cost that most people miss: a purchase taking up too much real estate in your mind. If you’re constantly worrying about a purchase, then it’s taking part of your mental freedom.

Other examples include headaches from home ownership, remodeling or repairs, when you could just rent. Or buying certain luxury goods that makes you afraid of damaging it.

Here’s another take—the expectation of maintaining a certain lifestyle is a type of “mental tax” we create for ourselves.

Any boost of happiness from a new purchase is often short lived, because our brains are so good at normalizing to a baseline. But the culture of consumerism incentivizes us to get that next dopamine hit via retail therapy. This is how lifestyle inflation happens, which is a type of mental tax we create for ourselves.

Total cost component #5: Opportunity cost

Whatever money you spend on one thing is a tradeoff for not spending it on something else.

That’s why it pays to be rate conscious.

Let’s say you have 2 options to use up $10,000:

  1. Lease a car for 5-8% interest rate.
  2. Put it into a high yield savings and earn 5%

By going with the car lease, you are giving up the opportunity of making more money.

The bigger the purchase, the bigger the opportunity cost.

I once did a calculation that buying a $1 million house would mean I’d have to staying working for at least 10 more years, whereas I could stop working now.

Opportunity cost compounds the other costs we talked about, like mental and maintenance cost. If you’re expending extra energy maintaining a new purchase, then you are also giving up your time (and thus freedom).

Would I rather be spending extra time keeping my new whip clean, or could I allocate more of those resources towards my investments, health, or my writing?

The goal is not to not buy stuff

It’s your money. No one can tell you what to do—unless you have creditors you’ve borrowed money from.

Most Americans are trapped in a debt cycle, and I believe part of this can be attributed to a lack of financial literacy. Understanding the idea of total cost can help you get real with your finances.

I hope these components of total cost help you as a filter for making the big financial decisions in your life, whether it’s buying a new home, car, or throwing a big wedding.

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