Total Cost Of Ownership - TCO

Categories: Accounting

The wheel. Fire. The telephone. Plastics.

And now, Uber.

If you don't know what it is, welcome to Earth. We are here in peace (check your Martian ray guns at the door). Uber started in 2011, and gives literally billions of rides at prices usually highly discounted relative to taxi rates. How do they perform this miracle? They have aggregated the driving skills of hundreds of thousands of extra-dough-seekers who download the Uber app, pass a few tests and—voila!—they are your Uber driver. As a user, after loading in your credit card information and usually home address, you click a button to call a driver, track them on your Google map, and 12 minutes and 8 bucks later, you arrive at Grandmama's.

The service has become so popular that many pundits have begun to question the value of owning a car. And if you live in a major city, it's a really good question if you care about the money and enjoy being chauffered around.

Let's make up a year's worth of Uber and do the math:

You go to school or work 200 days a year. It's 8 bucks each way, or $16 a day. Times 200. Or $3,200 for the year to commute to work a la Uber. Then, 100 days a year, you run errands: a weekly grocery store thing, a monthly dentist, doctor or shaman visit. Each of those is $10 each way, for a total of $20...so add $2,000 to your total. There are 50 days a year you just don't drive. That's...$0. And then there are a half dozen days you want to drive far, like...$100 round trip on Uber (that usually gets you like from New York to Paris and back on Uber's super-saver). So we'll call that $600. The grand total from your Uber bill on a pretty heavy usage schedule, then, is $3,200 + $2,000 + $600 = $5,800.

That may seem like a lot of dough, but compared with just the depreciation of owning a car...plus gas, parking, insurance, maintenance, and yeah, the occasional ticket (ahem)...it costs about the same amount as driving yourself around.

Related or Semi-related Video

Finance: What is APR?0 Views

00:00

and finance Allah shmoop What is a P R old

00:07

Even pirates know nothing worth anything in life is free

00:10

But unlike in G olden days of pirate lore where

00:13

you'd have to steal to get more money in the

00:15

bank well you can actually rent money today For instance

00:18

a mortgage a car loan a credit card They're all

00:20

forms of renting money taking on debt in exchange for

00:24

some interest in you know paying for that debt or

00:26

renting it But setting up alone includes other costs Like

00:29

you know when you buy a house you have to

00:31

pay a closing costs You have to pay to be

00:33

sure there's no mold on the wall and you have

00:35

to pay to be sure there's a proper title to

00:37

the house so no one claims ownership to it in

00:39

a whole bunch of other expenses and fees that come

00:41

in there Well somebody's got to pay those inspectors the

00:43

title Dudes you know the home underwriters That's why we

00:46

like a PR I annual percentage rate which takes into

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account the interests you'll be paying until the loan is

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repaid and all those other costs and fees right so

00:55

a PR basically tries to roll in everything so that

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you get the gross cost out of your pocket not

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just one sliver of some of the costs It's going

01:03

to take you to buy whatever it is you want

01:05

to buy Well a PR combines all the cost the

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borrower of alone will be facing An average is them

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over The term of the loan is a percentage right

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so it grosses up the percentage to match reality But

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when you look at buying a new car house or

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a researching credit cards you'll probably notice two rates the

01:20

A p R And the interest rate to different things

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where the interest rate is the interest you'll be paying

01:25

on the loan on Lee will each month You make

01:27

payments to pay the loan back with well in the

01:29

beginning most of it being interest that you're paying And

01:32

gradually you worked down the principal until it you know

01:35

goes away and there's nothing really a PR shown will

01:38

be higher because it wraps the interest rate in with

01:41

all the other fees So you get a better idea

01:43

of exactly how much this is really going to cost

01:46

you Well the A p R is your best friend

01:48

When you want to know Are these guys ripping me

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off For what When your comparison price shopping like between

01:53

two different credit cards or mortgages while a PR will

01:56

tell you which one will actually cost you less Overall

01:59

if one company has lower interest rate about hire a

02:02

PR than a number well it means there's hidden fees

02:04

and charges all the time They're going to hit you

02:06

for that money And yes those charges will hurt If

02:09

a company keeps pointing to its low interest rates asked

02:12

them for the a p r to get the real

02:15

measure of that cost comparison right Well with mortgages in

02:18

particular you have the option of hey those extra costs

02:20

upfront or you can wrap some of them into the

02:23

loan itself which means you'd be paying those fees off

02:26

just like you're paying off the principal balance Well some

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types of loans come with lots of fees like mortgages

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like points up front all kinds of their taxi things

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and some with fewer like credit cards Like more competitive

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They're kind of simpler but whichever type alone you're signing

02:38

up for Remember a PR is usually calculated with simple

02:41

interest rather than compound interest Simple interest grows linearly over

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time little by little Compound interest includes interest on top

02:49

of interest It grows a whole lot faster over time

02:51

Well this is important to think about since some loans

02:53

Yu's compound interest like credit cards and some use simple

02:56

interest like mortgages Let's say you get a credit card

03:01

with an 18% interest rate and you go hog wild

03:04

buying rum and gold and then a tropical island the

03:07

size of your bathroom racking up 500 grand in credit

03:10

card debt Well that debt will grow in a calm

03:12

pounding rate Not only do you owe interest on the

03:15

principal amount the amount borrowed but you'll also end up

03:17

owing Maur the interest on the interest you just haven't

03:20

paid yet Every month your credit card company calculates how

03:23

much you owe them in total not based on that

03:12

500 grand you initially borrowed But on that 500 grand

03:29

principle pull us any unpaid interest to date So let's

03:32

just see how big compound interest is compared to simple

03:35

interest and we're getting to the whole notion of a

03:37

PR here Your 500 grand of credit card debt with

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18% interest It would take you over 15 years to

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pay off if you paid in aisle 7 800 bucks

03:45

and change for months with calm pounding interest you'd end

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up paying a 6,688,000 and change Yeah you borrowed half

03:52

a mil and ended up going over 6.5 mill If

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credit cards were simple interest like mortgages well then in

03:59

the same situation you'd only end up paying 1,000,000 9

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That just under 2,000,000 for borrowing that half of interest

04:05

very expensive There's a reason the bank executives have really

04:07

nice jets So you ended up paying six point $5,000,000

04:10

total in interest and principal with calm pounding interest and

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only one point 9,000,000 with simple interest Well when you're

04:15

using a PR is you got to remember that number

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is using the simple interest calculation If you get a

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credit card and rack up calm pounding debt which you

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will if you don't pay it off in full every

04:25

month well then you're gonna go a whole lot more

04:27

money to your credit card company than the A P

04:30

R would have had you believe when you signed up

04:32

for it And you know about that island there Give

04:35

backs island buying maybe and

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