Sunk cost

Past spending can make a purchase feel like a commitment to keep spending. Money you cannot recover is the same under every remaining choice, so it does not make one choice cheaper than another. A previous repair bill may tell you something about an appliance's reliability, but its unrecoverable amount is not a reason to approve the next repair.

In a sentence

• "The $1,000 already spent on this washer is a sunk cost, not part of today's repair quote."
• "A refundable deposit is money I can recover, not a sunk cost."
• "I'm treating the old repair bill as a sunk cost and comparing what each option costs from here."

How it works

A sunk-cost comparison starts with the decision you can still make, not the decision you wish you had made earlier.

1. Name the alternatives available today, such as repairing, replacing, or going without an item, and compare them over the same period.
2. Separate costs already incurred that cannot be recovered under any alternative; leave those amounts out of the decision comparison.
3. List the future costs each alternative changes, including new payments, operating expenses, repairs, and any cancellation charges, then subtract refunds or net resale proceeds that option would produce.
4. Compare the resulting costs alongside the benefits, reliability, and inconvenience of each alternative; the cheapest option may not provide the same service.

An upfront payment is not automatically sunk in full. Check what you can still recover before deciding which amounts belong outside the comparison.

An example

Suppose you paid $800 for a washer and $200 for an earlier repair. Neither payment is refundable, and the broken washer has no net resale value as it stands, so the $1,000 is sunk. You now compare another repair with replacement over the next three years.

For this illustration, assume both options provide the same usable service, require no further repairs, and are paid for in cash. The replacement price includes delivery and disposal, and the table includes estimated net resale proceeds at the end of the three years.

On these assumptions, repair costs $340 less from today. The past $1,000 changes neither total; different repair risks or resale estimates could change the choice.

Why it matters

Treating sunk costs as a reason to continue can turn one disappointing purchase into a series of new costs. You may keep paying for an unused service or approve repeated repairs because stopping feels like wasting what you already spent. The decision cannot undo that spending.

Ignoring sunk costs does not mean always quitting or replacing. Continuing can still be the cheaper or more useful option, as the repair example shows; the reason is what you get for the additional cost, not what you paid before.

Sunk cost versus recoverable upfront payment

A sunk cost cannot be recovered, while an upfront payment such as a refundable security deposit may still represent money you can get back. The recoverable amount matters when your choices affect whether you receive it. An item's net resale value matters for the same reason, even when it sells for less than you paid.

Total cost of ownership can include acquisition and past operating costs when measuring the full cost of owning something. A decision about keeping or replacing it instead compares the remaining costs and benefits, including resale. Past spending belongs in the ownership history without becoming a reason to spend more.

Common questions

What is the sunk cost fallacy? The sunk cost fallacy is allowing unrecoverable past spending to justify continuing an activity when its future costs and benefits do not support continuing. Thinking "I have already spent too much to stop" is different from finding that finishing still provides enough value for its remaining cost.

Is an early termination fee a sunk cost? A fee you would incur only by canceling now is a cost the decision can still change, not a sunk cost. Include it when comparing cancellation with continuing the contract, along with the payments each option requires. A termination fee already paid and no longer recoverable is sunk for a later decision.

Does ignoring sunk costs mean ignoring past experience? No. Earlier breakdowns can inform your estimate of future repair risk, and an unused membership can tell you something about likely future use. Use that evidence to estimate what comes next, without treating the money already lost as a benefit of continuing.

Go deeper

• Is it cheaper to repair or replace a broken appliance? compares the future costs of both choices over the same period, including follow-up repairs and uncertainty.
• Is it worth paying an early termination fee to lower my bills? compares switching now with waiting, keeping the exit charge and other costs the decision can still change in the calculation.