Money, Explained From the Inside

Tools / Plan ahead / Chapter 4 · Every Choice Has a Price

True cost of owning

The price tag is only part of what a purchase costs. Running costs recur, resale value returns some money, and the money tied up could have been working elsewhere: that is the opportunity cost.

1 · The idea

Cash cost and opportunity cost

First add up the cash that actually leaves you. Then ask what the same money (the price now, and the running costs as they are spent) would have become if invested, compared with what you get back.

The formula

Cash cost = price − resale + running costs Opportunity cost = what that money would have grown to − resale − cash cost

resale
what you can sell it for at the end
running costs
fuel, insurance, servicing, subscriptions, per month
opportunity return
return you assume on the alternative use of money

2 · A worked example

A $20,000 car kept 5 years, worth 40% at the end, costing $300.00 a month to run: cash cost $30,000 ($6,000 a year). Adding the growth the money could have earned at 5% brings the true cost to about $7,574 a year.

3 · Now use your own numbers

Change anything. The result updates instantly.

Cash cost over the period
$30,000$6,000 a year
Including opportunity cost
$7,574a year
Value recovered at the end
$8,000
Opportunity cost alone
$7,870Growth forgone on the money tied up

What this means

Think of the yearly figure as the rent you pay to own the thing. Compare it with alternatives: a cheaper model, an older one, or not owning at all.

Running costs usually decide the total more than the price does.

Illustrative, not personal advice. Inspired by Chapter 4 · Every Choice Has a Price of Money, Explained From the Inside. Your figures stay in this browser. Real products add terms, taxes and conditions that this simple model leaves out.

4 · Take care

What this tool can’t see

  • The opportunity return is a judgement. Use a cautious figure, or what you would really do with the money, such as repaying a loan at its interest rate.
  • Some purchases are worth their cost; the point is to see the whole price before deciding.

5 · Go further

Where this fits

See it in a life:

DavidIncome without wealth

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