Smart Savings, Dumb Savings

by Mr. Cheap

I’m reading and enjoying a book I got from a good friend for Christmas (“How to manage Residential Property for Maximum Cash Flow and Resale Value” by John T. Reed). Reed has a very pragmatic approach to life and investing, which I appreciate. One of his “rules of thumb” which seems like a good one, is only purchase something to save money if you’ll earn back the purchase price within three years.

He talks about this in the context of electricity metering and whatnot, but I think its probably pretty good universal advice. If you’re running a business and you’re thinking about investing in higher capacity machinery, if you’ll earn back the cost of the machinery in the next 3 years through the increased profit, get it, if you can’t don’t.

We encountered this situation at the building I’m a silent partner at. The active partner wants to install solar paneling. I’ve read about buildings that have installed solar panels and feed energy back into the grid (and get paid for it). It all sounds great, until I got to the part where it takes solar panels 20 years to save/earn enough to cover the costs of the equipment. Factor in the “time value of money” and you’ll never earn back what you put into it. Even though it would save us money every month, we’d never get back what we put into it, so it’s a dumb way to “save” money. I’ve told this to my buddy repeatedly, but he keeps bringing up the idea of installing solar panels every couple of months (I think he likes the idea of having a cutting edge building). We’ll probably eventually put them in (sigh). Down the road, solar panels will get more efficient (cheaper to make and/or more effective) and about the time they’ll pay for themselves in 3 years they’ll be worth installing in most buildings.

On a more personal level, if you’re doing something to save money around the house, make sure you’ll make it back in 3 years through savings. If you’re considering installing insulation, make sure the decrease in electricity spending will save you the cost of materials and installation over the first 3 years. If you’re considering putting a low-flow head on the shower, or installing a low-flow toilet, make sure the savings will be re-couped within 3 years, etc, etc.

What “cost saving” purchases have you made and how long did it take them to pay for themselves?

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{ 18 comments… read them below or add one }

1 Four Pillars

You gotta stand up to him – no solar panels!

Some people just like technology. They would rather buy a Prius car and drive all over the place instead of just cutting back a bit on their driving and speed.

Mike

2 Four Pillars

I forgot to mention my “3 yr example” – I used to rent a PVR (TIVO device) from Rogers which cost $20/month. They cost $400 to buy which means you get the expenditure back in 20 months.

3 WhereDoesAllMyMoneyGo.com

How about the final condition of your agreeing to the solar panels (since it seems you believe you eventually will have to) is that the partner has to sign a paper that says:

“I am in business to:
O Make Money
X Lose Money”

So he has to put a check beside “Lose Money”.

He would also have to agree to put that in his office displayed prominently and if he takes it down, the costs of the paneling will be covered solely by him.

?

Might as well have some fun with it if nothing else. 🙂

If the addition of the solar panels allows you to increase revenue and appeal to a new market – that *might* be a different story. But then you might have extra costs associated with advertising the space as “green”.

Best of luck! 🙂

4 Gates VP

You know Cheap, I’ve been doig lots of reading about solar panels and it seems to me that they’re in a real grey zone.

A big chunk of the cost for solar panels isn’t the panels, you also need all of the associated gear for storing the energy or feeding it back to the grid, etc. Of course, once you have the gear, then you can just add more panels, better panels or whatever will generate electricity (water wheels in the gutters?)

I think that the big problem, is that we’ve never built houses to really be “off grid”. If places just had a giant “battery” in the basement (read fuel cell) and all of the power ran through that, then it would be easy to just “add more panels” and become more independent. Plus you’d have the ability to operate the house if the power went out.

But this is still a long ways away, the infrastructure just isn’t there. And sadly, for now, I will dutifully agree that solar panels are an expensive dream. 🙁

5 Mr. Cheap

Yeah, I’m with you guys that I’m pretty sure the solar panels are a bad idea (which is why it’ll suck if we put them in). WDAMMG, I thought of the same thing, maybe we can advertise the building as “green”, but the tenants we’d attract would probably be insane (they’d expect me to “de-gnome” the garden, and install “anti-magnetism” paneling on the sides of the building). Plus its a small town, so probably there isn’t a huge high-income green contingent.

Gates – That’s exactly my feeling, certain needed parts of the system aren’t there yet, and the parts that are there don’t have the right price/performance yet.

6 Mr. Cheap

Mike: Good job on buying the PVR! My parents rented a phone from Bell for 20 years. Finally one day, my mom read an article and looked at what she had been paying for it, basically it was more then buying a new phone every year (and Bell only replaced/fixed it once).

7 Four Pillars

Mike: Good job on buying the PVR!

I learned this lesson from the digital box I rented for three years prior to getting a pvr. I paid $10/month (it would have cost $200) for over three years!

Water heaters are another area where people can save money by buying – particularily if they are paying a normal rent for an older tank.

8 Four Pillars

Another concern of mine with respect to solar panels is that I think they might devalue your house/building. Similar to a pool, I’m not sure how many people are comfortable with some new technology as part of their house (no matter how “green” they say they are).

Mr. Cheap – maybe you can offer free helmets double lined with tin foil? 🙂

Not sure about the exact dynamic between you and your partner – shouldn’t you both have a veto over something like this? Also – why don’t you suggest that he do the panels with one of his other buildings instead of yours??

Mike

9 Mr. Cheap

Mike: That’s exactly what I suggested. It’s tough, because he’s responsible for the day-to-day stuff, so I don’t want to intrude *too* much. The last few times we’ve talked about it, I have vetoed it, but he’s still bringing it up. I guess we’ll see which of us breaks first ;-).

10 Potato

What’s the math behind the 3-year payback rule of thumb? My naive thinking would be 5+-years: the pool of money you start with should double every ~10 years at ~7%, so after 5 years you earn back your original in savings, and another 5 years you earn that again to get your doubling — and if whatever you invest in still has life left in it, you have assets to boot.

Don’t forget to factor in the future potential savings when making decisions like this: will electricity be as cheap in 10 years as it is today? Would that influence things? For this specific example, probably not, since you can always buy solar panels later when they make more immediate financial sense. For other things where you might need to decide sooner (a bulb burned out and you need to decide whether to buy another incandescent or CFL, or your car dies and you’re deciding between a civic or civic hybrid, etc) then guessing what the future holds becomes more important 🙂

11 Mr. Cheap

Potato: I’m not sure if there’s any math to back it up… You could probably fiddle around with the math behind a the time value of money calculation and get something that would justify 3 years (or any other time frame you wanted, just play with your assumptions until you get the answer you want).

I suspect the 3 years is just an arbitrary point that experience has led him to…

12 nancy (aka money coach)

this post brought a wry grin to my face. I don’t know how many times I’ve justified my own literal latte-factor: buying a mug which = 10 off each drink and figuring it would pay for itself. I didn’t factor in how easy it is to lose mugs that travel with me! So I’ve yet to ever come close to “paying off” the mug purchase. Having said that, I’d still rather pay more for a mug (or a couple) that I reuse, and save the paper.

13 Four Pillars

Nancy – you should tie the mug to your wrist! 🙂

Mike

14 Mrs. Micah

Interesting. Obviously one has to draw a line somewhere about when savings need to be in effect. 3 years seems like a decent rule of thumb.

Another question–will the building gain value if it has solar power? If you’re renting space, might it be more valuable? Also, if you’re doing LEEDS green building initiative, that would be a huge step. I don’t know if it gets you tax breaks, but it at least allows you to classify your “greenness.”

15 Mr. Cheap

Mrs. Micah: If it’d been a close case, I might have been willing to go with it for the increased building value and as a neat little talking point about the building, but it was just *SO* expensive for such a little return that it didn’t seem worth trying to justify the purchase…

16 James

Four Pillar, when buying the PVR you have to keep in mind that the price of the PVR will drop over time, so your payback schedule is a little bit understated. Give it a year and they will be dirt cheap because everybody will want a HD PVR.

17 FourPillars

James, you are right but it’s the rental schedule that is relevant since I think the rental amounts have gone down a bit. I think it’s gone from $20 to $15/month which will extend the payback period. Regardless, it’s still worthwhile for me since I won’t be going HD for a while.

Mike

18 Sustain_ability

Had a huge discussion with engineer types about housewives using SUVs daily but never on the highway – in/security factor, why pay two way car insurance, affordable housing for couples having children but hours away from office, etc. The resource wars are upon us, it seems, with violence becoming a permanent “feature” of modernity, but as with pollution, being “exported” to someone else’s backyard. Promoting green lifestyles takes on a much bigger meaning if you consider these things.

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