Initial Cost Versus Total Life-Cycle Cost

The inspiration for this post was taken from Thomas Stanley’s book, The Millionaire Mind.  You can read my review of The Millionaire Mind here.

One of the primary ways the wealthy are different from ordinary Americans is their focus on value.  It’s amazing how most people will spend far more time researching their brand of laundry detergent and next to none researching investment options or their next automobile.  What’s the advantage of saving $12 per year on your laundry if you overpay by thousands for your next car or get sold on an expensive, loaded mutual fund more likely to fatten your broker’s wallet than your own? 

You Get What You Pay For (Usually)

Everybody has heard the old saying “you get what you pay for.”  Of course, it’s not always true (it certainly isn’t with mutual funds), but more often than not it is.  The wealthy realize this.  Often, the more durable, higher-quality products will cost more upfront (high initial cost) but will save you money over the long run (low total life-cycle cost).  Take antique furniture, for example.  High-quality, solid wood furniture isn’t cheap if it’s new and even less so if it’s older, but what is the alternative?  A $400 couch from Ikea is bound to be much less expensive initially, but it will inevitably wear out and become worthless within a few years.  Since they are so “inexpensive,” it’s generally less costly to simply discard and purchase another than to have them re-upholstered.  A solid-wood piece in a classic design, however, easily has a life-expectancy of well over a century and if re-upholstered (which is relatively inexpensive) once per decade or so, will look like new for generations to come.  Even better, well-constructed antique furniture has a tendency to appreciate in value over the years.  Instead of losing money on your furniture purchase (as with Ikea), you may actually make money over its lifetime. 

This is an extreme example, but I think you get the point.  Higher-priced certainly doesn’t always mean higher-quality, but it’s useful to be mindful of life-cycle costs nonetheless.  An attempt to save a few bucks in the short-term could end up costing you dearly in the long term.  Sometimes, the frugal choice isn’t what it initially appears.  The wealthy always weigh total life-cycle costs against initial costs savings, and you should too.