Personal Finance Topic #203 - There is no free lunch! Look at the whole package before you buy

Don't look just at the price, look at the whole package before signing the contract

How often do we do this? We compare and buy the best price in the market.  But we forget to look at the cost of the entire package and the life cycle operating cost.  Let me cite an example of a hybrid or electric car. 

Example: a hybrid or electric car

There's a gas shortage, so we think I NEED to get a high mpg car TODAY!  So you go out shopping, and all hybrid or electric cars are sold at sticker price or higher.  Plus they are few thousand dollars more expensive than a gasoline powered economy car, similarly equipped.  So you drive around saving maybe $800 to $1,000 a year on gasoline.  Then you find out that you must maintain the car at a higher cost because the labor cost on these cars are not cheap.  Then you find out that every few years, you are told to replace the batteries which is again is at a premium, which just about wipes out the saving of driving this car.  If you have an accident, there is a cost to even touching this car because it's a high voltage machine.  Repair is obviously more expensive, and at the end of the day, you are not saving much, if any, in the total operating cost during a life cycle of this type of car.

So here are some other products/items that you buy, looking for the best price.  But it is very important to add up all of the ancillary costs associated with the purchase, plus the normal operating costs that go with it:

Looking at the whole package:

Cars - Sales tax, depreciation, registration fee, property tax (in some states), gasoline, oil, repairs, maintenance, insurance, deductible amount for accident, resale value, add-ons, etc.  And did I mention depreciation? A typical new $30K car that you finance will end up costing about $90K over a 7 year period.  A used car that you pay cash for can cost about half of that.   Read my posts "Buying a new car is stupid!"  series.

House - Yes, home price generally goes up slowly (but we all know the appreciation is not guaranteed.) Buying/maintaining/selling a house is very expensive.  I can almost guarantee that you WILL lose money in the first three years of purchase after taking into consideration the costs of buying and selling, plus the huge mortgage interest expense which goes down the drain. 

Costs include: purchase closing costs (points, origination fee, realtor fees, professional services, title insurance, etc.), initial move-in costs (furniture, new carpet, window coverings, landscaping, new appliances, connection fees, etc.) property tax, insurance, condo/townhome maintenance fees, alarm system, homeowner association due, regular maintenance expenses (lawncare, utilities, minor repairs, etc.), sale closing costs, realtor's commission, moving expenses, and there are many other expenses.  The biggest expense, of course, is the mortgage interest.  This can increase the cost of original price by 50% or more for a 30 year mortgage loan.  And these days, the tax advantage of owning a house is a myth.  Read my posts "Buying a house is stupid!" series.

Employment - What?  I thought employment is where you EARN money?  Yes, that's mostly correct, but there are many expenses you must consider - and some may not be tangible costs.  Some tangible expenses include: job hunting expenses, moving cost, house sale/buy expenses, additional income tax at a higher rate, Social Security tax, Medicare tax, health insurance, child care expense, additional clothing, dry cleaning, lunches out, and office gifts, a second vehicle (payments, maintenance, and insurance), additional household expenses (ready-made lunch items, take-outs), intangibles (commute time, missing out on kids' activities, starting new network of friends and coworkers, relearn the logistics, maps, streets, better nutrition, etc.).  Read my post "Does it pay for the spouse to work?"  

When Microsoft came out with Internet Explorer, they gave them out free.  But we all know that it wasn't free.  We had to buy things that were necessary to keep using it efficiently.  Microsoft Office Suite costs a lot, and most PC/laptop manufacturers still use Windows based operating system.  These are not free.  As they say, there is no free lunch.  You are paying for things one way or another.