Finance Definitions: Carrying Costs

Once again, guest blogger Mitchell Pauly takes us on a financial definitions ride through his fun, funny and informative take on finance definitions! This week’s insight: Carrying Costs.

Recently I have begun the search for a new car because when I look at my current car I feel like the only kid in gym class with short-shorts. It’s served me well, however. While most cars are a financial black hole, absorbing all free cash flow that travels too close, I have actually made money off my car. Through happenstance and circumstance I have been lightly rear-ended, dinged and scratched to the point of profit. It always seems like the insurance money includes a “personal damages” bonus. Subsequently my car now looks like I bought it off the set of “The Dukes of Hazard.”

Carrying Costs: the Last Consideration Should be First

When we go to make a purchase, we are usually thinking about the problem a product will solve or the emotional lift it will give us. Those are the feelings that attract us to a product initially, but to be a true financial competent would take a step back and ask: what are the carrying costs?

In business, carrying costs are the expenses associated with keeping inventory. You don’t have inventory in the business sense; you have possessions. The difference between inventory and possessions is the intent of the item: inventory is purchased to be sold; possessions are purchased to be enjoyed (but technically can be sold). There are carrying costs associated with both, however. A business that sells couches needs keep its inventory sheltered and cool to maintain its value, and your couch needs to be periodically cleaned to maintain its value. Carrying costs are thus things like maintenance for our cars, house or boat; storage costs; cleaning costs; electricity or gas to operate our possessions; insurance; etc. All of this presumes you care about your possessions, of course.

Items that Have the Highest Carrying Cost

The items with the highest values tend to have the highest carrying cost. Think of them as high-maintenance lovers. Some of the items with the highest carrying costs are: boats, cars/motorcycles, houses, hot tubs and swimming pools, and manicured lawns. The carrying costs can be a huge for some of these items. In looking for a new car, I calculated the carrying costs as ranging from $22,000 to $30,000 for a small size car, primarily pending gas efficiency and maintenance. Remember, that is not inclusive of the cost of purchasing the car. So basically I could buy a car for the cost of maintaining a free car. When I think of the carrying costs associated with a boat, it makes me want to become a desert dweller.

While there are certainly flukes out there (my car example and Lehman Brothers being examples), it’s not something to bank on. There are no ways to completely avoid carrying costs, unless you have a sugar mama or daddy. Accept them as part of the price we pay for modern convenience, and then include them in your decision-making process. Another important aspect of carrying costs: they are not just financial. When something breaks or needs maintenance, it requires time and effort. What is your tolerance for irony?

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Bio:
Mitchell Pauly is a Financial Professional with experience working for Fortune 500 companies and small businesses. He enjoys investing and personal finance, comedy and sports. In his spare time he writes for various publications about personal finance, with a mind towards young adults and parents of young adults.

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