September 30, 2008

What do pets cost?

The cost of owning a pet can be quite a bit. There are a lot of people out there who don't realize exactly how much a pet can cost. Vet bills can run several thousand dollars if theres a serious injury or ailment. This is a topic that Free Money Finance has covered numerous times with several discussions on the potential high costs of pets. FMF has numerous examples of high bills from pets. The main thing about the costs of pets is that people should be aware of the costs before getting a pet. Its more than a bag of dog or cat food every month or two.

But what does it really cost to own a pet? I think the answer really depends a lot on how much you want to spend.
Its like answering how much does a car cost? Well it depends on if you buy a used economy car or a brand new luxury car. You could buy your cat a 16 bag of Friskies for $12 to cover 2 months food at about $6 a month, or you could buy individual 3 oz. cans of Newmans own organic cat food at $1.49 a pop for almost $45 a month. So your food costs for a cat could range from $72 to $540 annually.

While there may be no single answer about how much a pet costs, you should be aware of the potential expenses and account for it in your budget.

There are some sites that estimate expenses that can be used as a reference:

The Raising Spot website estimates that the annual cost of raising a dog is :
"For the first year of ownership, dogs cost anywhere from $660 to $5,270 or more." and then later years "The yearly cost can start at $360 and rise to $2,520 or more." That is a fairly broad range of costs. Some people spend little over food while others spend thousands a year on various things.

SPCA has a page with estimates of annual costs for various pets. They say the annual cost for a dog is $1071 per year. That falls into the middle of the figures that the Raising Spot site gave. (note that the SPCA site is in Canada and those might be Canadian dollars)

According to the American Veterinary Medical Association, in 2007 the mean annual expenditure on vet bills per cat was $81 and for dogs $200.

So that can give you an idea of what costs might be. What you should do is identify the expenses associated with a pet and then make sure they are accounted for in your budget. Make sure to consider the possibility of a large veterinary bill if your pet falls ill or is injured so that way you won't run into a big surprise.

Photo by emdot

September 26, 2008

Best of Blog posts for the week of September 26th

fivecentnickel discusses What Happens to Your Mortgage if Your Bank Fails? which is a question I'm sure a lot of people are asking lately. The very short version answer is that your mortgage would just get sold to another bank with the same terms.

GetRichSlowly points out that tomorrow you can get into participating museums free: Museum Day 2008: Free Museum Admission This Saturday

Another from fivecentnickel is the article Current Online Savings Account Interest Rates which points out that WaMu has a 4% rate now for its online checking.

September 25, 2008

Making (pretend) money on troubled banks on UpDown

Disclaimer: Short term trading of stocks is very risky and you could lose all your money. Short term trading of banks and financial institutions right now with real money is virtually insane. I would not do this with real money and I'm only doing it on UpDown for entertainment sake. DO NOT TRY THIS AT HOME.

In my last update on my UpDown investing I mentioned that I'd bought some Fannie May (FNM), Washington Mutual (WM) and Lehman Bros (LEH). I put $30k into the 3 stocks. I was basically just gambling with these trades. I figured that the stocks were trading very low and that at least one of them would recover or get bought out and then go up enough to make the purchases pay off.

My original purchase on Sept 9th was:
1000 shares of LEH @ $4 = $4100
20,000 shares of FNM @ $1.03 = $20700
2000 shares of WM @ $3.25 = $6600
Total investment of $31,400

Initially the bet didn't pay off. Lehman went under and the stock dropped down to next to nothing and was delisted by UpDown. Fannie May dropped to less than 50¢ last week. I was down about $14,000 or about 45% loss in about a week. At that point I figured I'd made a very bad bet. I wasn't sure if Fannie May would recover at all and it was possible WaMu could go under as well.

But this week after the government announced the proposed $700B buyout Fannie May has recovered significantly. Last Friday FNM was trading around $0.75 level. But by Tuesday it has passed $1 and Wednesday it hit over $1.9 at one point. Then on Thursday it had hit well over $2.50 I had a limit order in place to sell 10,000 shares of FNM once it hit $1.40 which executed at $1.83. And once I saw that FNM had gone up so much I decided to cash in some more and set a couple more orders and ended up selling it all as it continued to go up.

My sales have been:

LEH 1000 @ 0.13 = $130
9/23 FNM 10,000 @ $1.83 = $18200
9/24 FNM 5000 @ 1.91 = $9450
9/24 FNM 2500 @ $1.89 = $4625
9/24 FNM 1250 @ 1.79 = $2137
9/24 WM 1000 @ 2.54 = $2440
9/25 FNM 1250 @ 2.08 = $2500

Total sales $39,482

Plus I'm also holding :
WM 1000 @ $2.02 = $2020

So right now I'm ahead $8,082 in cash from my initial $31,400 and I've got another $2,020 in Wamu stock. The stock I'm holding may very well lose most or all of its value so I'm not counting on that gain. But from this little experience I've all ready cashed in a +25% gain on my investment in a 2 week period. But remember that at one point I was down about -45%.

While this kind of thing is entertaining to do with play money this is not something you should do as an investment strategy. If you want to put money into the stock market you should only do so if you plan on keeping the money there for the long term. Very short term trading like I've done here is essentially just a form of gambling.

There are some legitimate bargains in the stock markets right now. If you want to invest in a good stock look for something with strong financials that is undervalued or put your money into an index fund.

(images from Yahoo finance)

September 24, 2008

Is Social Security about to collapse? NO.

Many of us are concerned about the future of social security. We have a legitimate reason to be concerned. With the population of the country growing older and the costs increasing every year it is not hard to see that eventually the tax payers may not be able to support the benefits. Plus if you look at the state of the financial market right now with the government proposing a bailout of the banks, mortgage industry people are worrying more about the certainty of financial system in general.

The Trustees of the Social Security administration put out an annual report on the state of social security. In that report they state a prediction for how long the social security funds will be able to cover the payouts to retirees. The annual Trustee Reports are available at the Social Security site. Right now the 2008 Trustee Report states that "Social Security’s combined trust funds are projected to allow full payment of scheduled benefits until they become exhausted in 2041". So if nothing changes at all then social security will be 100% funded for 33 years. Then even if we do get to the point 30 or so years from now, its quite possible or even likely that the government will either increase taxes or decrease benefits. There is no imminent disaster looming.

While the government currently is saying the system is funded through 2041, they have not always had a consistent prediction. If you look back at the previous years Trustee reports you can see a big variation in the predictions.

Year of SS Trustee report = year funds will run out
1997 = 2029 or 32 years in the future
1998 = 2032 or 34 years
1999 = 2034 or 35 years
2000 = 2037 or 37 years
2001 = 2038 or 37 years
2002 = 2041 or 39 years
2003 = 2042 or 39 years
2004 = 2042 or 38 years
2005 = 2041 or 36 years
2006 = 2040 or 34 years
2007 = 2041 or 34 years
2008 = 2041 or 33 years

The predictions of the social security system are not very reliable. As you can see over the years the prediction for the date which SS would run out of money has changed significantly. Between 1997 and 2008 they revised the date by a difference of 12 years. Also notice that every year the prediction is over 30 years in the future. Back in 1997 it was predicted to fail in 32 years and now 11 years later in 2008 it is predicted to fail 33 years in the future. For 2002 to 2008 the prediction has become more consistent, but given the wide swings in previous years whos to say it won't change by several years again in future predictions.

The estimates from the Social Security Trustees are based on a number of different factors including: birth rates, immigration rates, income growth, employment rates, mortality rates and average retirement ages. All of these figures are variable and could change in coming years. Its hard to predict the future. Its even harder to predict the future 20 or 40 years from now. If anyone one of the variables they are looking at changes significantly then it could throw their 30 year projections off considerably. The Trustee report itself states "Significant uncertainty surrounds the intermediate assumptions".

Different assumptions on the future will give you different results. The SSA report runs the numbers for a 'low cost' alternative and a 'high cost' alternative which are like taking a optimistic view and a pessimistic view. With the low cost alternative they assume good population growth, low inflation and strong economic growth. For the 'low cost' more optimistic figures the social security system is projected to never run out of money based on current tax rates.

Increasing the tax rate would resolve the problem. They've raised the tax rate over the decades so theres no reason to think it won't increase again in the future. The history of the tax rates show a gradual increases over the decades. If they increased payroll tax rate 1.7% between employee and employer or 0.85% increase each then that would ensure funding of social security for the 75 year horizon. Considering that over 60 years ago the tax rate went from 1% in 1948 to 5.05% in 1978 to 6.20% now, it really wouldn't be surprising to see it go up to 7% or so by 2038.

In summary: The social security system is not facing imminent collapse and is fully funded till 2041 under current projections. The projections on the future of social security seem to be a moving target and are continuously revised to push the date out further. An increase in the tax rate for social security similar to increases we've seen in the past would resolve any future funding problems.

So, personally I'm not worried. The system is working fine and should be solid for decades to come. Social Security will need a change at some point in the future but that is not much different than the changes we've had over previous decades.

Additional information:

(image from

September 23, 2008

Notable government bailouts in history

With the news of the government working on a bailout of the financial industry to the tune of potentially $700 billion total, its interesting to look back at some of the other bailouts the government has done in the past..

1933 a $3 billion fund created the Home Owners Loan Corp. to buy bad mortgages from banks. The government made a profit on that deal.

1979 the government bailed out Chrysler corp. with $1.2 billion in loans. At the time Chrysler had 100,000 so this saved 100,000 jobs. Plus again, the government ended up making money on the deal in the end.

1989 we had the S&L crisis when the savings and loans were bailed out. The Resolution Trust Corp. was created to take over assets. This one cost taxpayers $125 billion.

2001 The government put $5 billion in cash and $10 billion in loans into the airline industry to help them out after the Sept. 11 attacks.


September 22, 2008

What is a college degree worth?

People with college degrees have higher incomes than people without college. The Census bureau lists median and mean incomes based on education levels.

Earnings based on education
high school diploma = median income $28,290, mean income $33,609
associates degree = median income $36,362, mean income $41,447
bachelors degree = median income $47,240, mean income $59,365

So the average college graduate makes $59k and the average high school graduate makes $33k. The college graduate makes 76.6% more on average. Looking at the median income levels its $28k for high school and $47k for college which is 67.8% higher. So by this measure college graduates make 2/3 more than those with just a high school diploma.

Lifetime earnings for either can be compared roughly by simply multiplying median income level by the total years someone is likely to work until retirement. To make it simple I'll ignore the impact of inflation.

High school diploma: If someone who is 18 years old right now works 47 years and retires at age 65 then with the median income of $28,290 from a high school diploma they will make $1.3M for their lifetime.

College Degree: With a college degree they will first have to spend 4 years in school and then probably have to repay a college debt. If you figure a rough $15k a year in college costs for 4 years then thats $60k cost for college. Financed over 7% and repaying over 10 years that would work out to $84k total payments including interest. So if someone goes to college, then repays college debt and then works from age 22 to retirement they will net $2.0M, less the $84k for college and you're at about $1.9M lifetime earnings.

A college degree nets the average worker over $600k or 46% more in lifetime earnings above what someone with a high school diploma earns.

These are just average figures and everyone isn't average. Each person should choose the education and career path that works best for them. But the point here is to point out the significant impact that a college degree can have on your earning potential and finances.

September 21, 2008

My Current Asset Allocation

Looking at all of our assets this is how much percent we have in each category:

Real Estate 60%
Cash 16%
Pension plan 14%
Equities 5%
Bonds 3%
Employer stock 2%

Graphically our current asset allocation looks like this:Looking at the different categories:

Real Estate - We have about $145k equity in our home. In addition we also have about $236k equity in 4 separate rental properties. We hold 2 mortgages on the rentals for about $254k so we're only about 50% leveraged. The rental investments also give us an annual cash flow from rents as well as significant depreciation deductions for our taxes.

Cash - This is money held in savings accounts. Most of it is in high yield accounts giving 3-4% return. We like to have a large emergency fund. The money is between 3 banks primarily and is all FDIC insured.

Pension plan - I have an employer provided pension plan. That money is managed by my employer so I have no say in its allocation. I'm 100% vested in the pension.

Equities - These are mutual fund and stock holdings in our 401k and IRA retirement plans. These investments are relatively high risk.

Bonds - A portion of our retirement funds are invested in stable income assets.

Employer Stock - I have a few hundred shares of stock in my employer. I've been divesting my holdings for the past few months because I feel its not a good idea to have stock in your own employer. Plus I also have stock options so if the value of the stock goes up in the future then I can cash in that way. Right now I've got my investment down to a relatively small amount and I'm going to hold on to it for a while until the stock rebounds.

Overall I feel our assets are quite safe. Its possible that our real estate investments may go down some in the next few years but those are long term investments that I expect will appreciate again in coming years. We have very little of our investments in high risk assets.

September 20, 2008

Do not purposefully go without health insurance

In 2007 there were 45.7 million people in the USA without health insurance. Many of those people are simply unable to afford insurance. But a significant portion of people choose not to pay for insurance to save money even though they are able to afford it. If you are one of those people going without health insurance intentionally to save the money then I'd strongly recommend you go get health insurance right now.

Don't think that just because you are young and healthy that you don't have to worry about health care costs. You could break a bone, have your back go out, have your appendix burst, contract a disease, get pregnant, develop kidney stones, etc. Having a major accident or contracting a disease is never something we want to think about happening to ourselves but its something that we should prepare for financially.

Looking at statistics on hospital stays from the Agency for Health Research and quality, they say that about 10 million people aged 18-44 were hospitalized in 2006 with a mean bill of $17,352. Comparing that to the age distribution of our population it looks like Men age 18-44 have around an 8% rate of hospitalization and for women the rate is much higher at 24% due to pregnancies. So there is a fairly good possibility that you could be hospitalized and face a large bill.

You should definitely do your best to at least get some form of basic health insurance coverage.

If you are low income then look to see if your state offers any health insurance programs you might qualify for. You might qualify for Medicaid and if you have children then they are also likely to qualify for aid. The non profit group Foundation For Health Coverage Eduction has information and resources on finding programs you might qualify for.

If you don't qualify for a state program or your state doesn't offer one then you can shop around on your own for individual plans. You can get a quote from a company like eHealthInsurance online. They give quick quotes for insurance and carry a variety of policies from different insurance companies. An insurance plan with a Health Savings Account (HSA) might be a good way to cover health insurance, since it gives you the option to save money towards health expenses pre-tax. If you are currently unemployed then its a good idea to look into a short term health insurance policy. A short term policy covering a few months can run half the cost of a regular monthly insurance policy.

When comparing health insurance here are some things to look for:
1. The annual deductible. The higher the deductible, the lower the premiums. But if you have a high deductible policy then you many never get coverage.
2. Co insurance rate. Policies with co insurance will require you to pay a portion of the bills after your deductible. So lets say your deductible is $2000 and your total bills are $5000 and your coinsurance is 20%. That means you'd have to pay 20% of the amount above the deductible or 20% of $5000-$2000 = 3000 * .2 = $600.
3. Total out of pocket maximums. Policies will have a cap on the amount you have to pay out of pocket. Note if it does or doesn't include the deductible.
4. Look at what kind of coverage the plan offers. Does it cover all the basic procedures? Does it require you to go to specific 'in network' doctors? Can you pick your primary physician or do they force you to go to someone they choose?
5. The Co-pay. Programs with a copay will require you to pay a fee for each and every doctor visit. Generally the co-pay is around $20-25.

Deciding what plan you want is a balance act between what your budget will allow and getting the best coverage you can find.

At minimum, it makes good sense to spend $20-$50 a month on a high deductible plan to protect against the possibility of a very large hospital bill.

I did a sample quote for a 24 year old male who doesn't smoke. eHealthInsurance had a plan for $108 a month with a $2500 deductible, 20% copay and $5000 max out of pocket. Or you could go with a higher deductible and pay $65 a month for a $5000 deductible, 25% copay and $14000 maximum out of pocket. For just $21 a month you could go up to a $10,000 deductible, 50% coinsurance and $15000 maximum out of pocket. You could go with an H.S.A plan for $60 with a $2800 deductible, 50% coinsurance and $5000 total out of pocket limit.

If your budget won't allow much then go for a very low price plan with a high deductible. Even if the deductible is $10,000 this will protect you from a very expensive hospital bill that could wipe you out financially. I found a plan like this for $21 a month for a 24 year old.

If you can afford a bit more then consider an H.S.A. plan. The one plan I found was $60 a month with a $2800 deductible. The additional benefit of putting money into your HSA tax protected helps make the HSA more appealing.

So again, if you are going without health insurance right now and have any option to get it then you really should do so.

Additional related articles:

September 19, 2008

Best of Blog posts for the week of September 19th

JD at Get Rich Slowly points to a great idea to Simplify Your Life with a Stuff Replacement Fund
from the book Your Money or Your Life.

Barganieering has a fun take on
Six Money Lessons from Entourage. Entourage is a fun show but the characters in it aren't good financial role models.

Cash Incentives for transfering a prescription - $30 from RiteAid

I heard someone I know had gotten a gift card by transferring their prescriptions to another drug store. Apparently the trick was to call the pharmacies and ask them what kind of offers they had since they didn't necessarily publish their offers.

I did a little hunting on Google and found some references to this. Theres an article Transfer Prescriptions for Fun and Profit from MoneyBlog on MSN. They got a $25 incentive from Safeway to switch. I also found several references to such offers from various pharmacies in previous years.

Right now RiteAid has an offer to give you $30 to transfer a prescription to them. There might be other pharmacies with current offers also. If you call around other pharmacies then they might be willing to match the RiteAid offer, it wouldn't hurt to ask.

If you have an ongoing prescription and are open to switching pharmacy then this might be an easy way to make a few dollars.

September 18, 2008

Install a water heater timer to save on energy bills

If you have a standard tank hot water heater then your hot water is being kept hot by the water heater around the clock. It doesn't matter if you're on vacation, at work or asleep the water heater is still going to keep the water hot. So it would make sense to tell the water heater to not heat the water when you are away and are not going to be using hot water.

According to the Dept. of Energy you can save 5-12% on your costs by installing a timer on your hot water heater that will turn it off when you're asleep or to avoid high cost peak energy times. However they do point out that timers are not as effective on gas water heaters.

At Home Depot you can buy an Intermatic brand 40amp water heater timer for $40 (pictured).

With a typical hot water heater costing about $400 to run per year a 5-12% reduction would cut your costs $20 to $48 per year. So it will take 1-2 years to pay back the cost of the hot water timer.

Buying and installing a water heater timer is a good buy.

September 17, 2008

Current UpDown performance = -1.16% and falling

My UpDown account is not doing all that well lately. I'm at -1.16% right now since starting in March. Thats an annualized return of -2.3%. But on the bright side the S&P500 is down -8.7% in that same period so I'm doing 9.8% better than the S&P 500 thus far. In the same period the Dow is down 10.5% and the NASDAQ down 2.2%.

While I'm pleased that I'm doing better than the indexes, losing money is not a good thing.

I've made some very risky (possibly stupid) moves lately looking for bargains among the financial stocks that have been in jeopardy of failing.

I put about $30,000 into 3 stocks:

  • Lehman (LEH) at $4 and then it went bankrupt and dived to 13¢.
  • Fannie May (FNM) at $1 after the government took them over.
  • Washington Mutual (WM) at $3.25
Now you might look at those buys and conclude I'm crazy to buy stocks that are are dying or dead like these. The idea is that there should be some sort of rebound in one of them. Bear Stearns hit a low of $2 before it rebounded to $10. I'm hoping that something similar will happen to one of these stocks. Lehman has since gone bankrupt after I bought it so I don't think I'll come ahead there. Wamu may yet pull out of the whole thing, but we'll have to see. Personally I think Wamu is financially sound enough to live through it all or at least merge with someone else. I bought Fannie May after the government took them over on the hunch that the shares may fare well in the long term. These were all very risky plays and I may lose all the money I put into them. So far the bet is not panning out and I've lost about $16,000 of the $30,000 I put into them. In hindsight I think it wasn't a good bet to put money into these, but I'm doing this in UpDown as a learning experience so we'll see what happens.

As another test I bought a short UltraShort S&P500 ProShares (SDS). This is an ETF setup specifically to short the S&P 500. I bet on this one because the overall market is down so the short should be going up. Since January SDS is up 25% and the S&P 500 is down about 12%. It seems like a good decision to short the S&P right now. This is another test that I'm trying out in UpDown.

Is a charity credit card a good idea? Nope.

Charity credit cards or 'Affinity' cards are credit cards that have benefits for a charity or organization. Are they a good deal for you and the charity?

I think giving to charity is great and I would definitely encourage people to do so. But before you sign up for a charity / affinity credit card you should figure out how much exactly the charity is getting and determine if there's other better alternatives.

I recently ran across a reference to the Working Assets credit card. They give 10¢ to charity for every transaction you make. Plus they have rewards option for the card user. On first glance this looks like a good deal for both the charities and the card holder. But if I look a little deeper it isn't that good. The 10¢ per transaction seems nice, but the average credit card transaction is over $100 so that's 0.1% for the charity on average. The rewards program is defined in the fine print and it isn't that great either, they offer $100 gift card for 12,000 points or an airline ticket for 25,000 points. The $100 gift card is only 0.8% return and the airline ticket deal is no better than any typical airmiles card. Overall the working assets card is netting less than 1% rewards between the charity and user rewards points. They also advertise a free companion airline ticket when you sign up for the working assets card. But in the fine print they say its only offered via a specific travel organization and I couldn't find any information on the cost of the tickets. I'm doubtful that companion ticket is a good deal considering.

Looking at a few other cards that give to charity:

Target RedCard gives up to 1% of purchases to local schools. Note the 'up to' bit there. They pay 1% of purchases made at Target but only 1/2% of purchases made elsewhere. Target also gives you a 10% off if you accumulate 1000 points there. This alone might be a decent deal if you shop at Target a fair amount but it really depends on your shopping habits. Looking at my spending habits I don't see a single store that would benefit me with this kind of reward.

Ducks Unlimited WorldPoints Visa
card uses the same Worldpoints rewards of the Working Assets card and they say they contribute a 'portion' of the purchases to Ducks Unlimited. I can't find any reference in the small print saying how much of a portion it is. The Consumer Reports article on the topic said its 0.25%.

Make-A-Wish Platinum card from Bank of America gives 0.65% from every purchase to the Make-A-Wish foundation.

World Wildlife Fund card gives 1% of your purchases to the WWF.

The charity cards out there don't seem to give more than 1% maximum to the charity. On the other hand its pretty easy to find cash rewards cards that will net you over 1% cash back. The American Express TrueEarnings card I have now gives 3% back on restaurants and gas, 2% on travel and 1% on other purchases. My Citibank dividend card gives 2% on gas, groceries, drugstores, utility bills and 1% on all other purchases. So overall these cards will net you 1-3% range easily with a minimum of 1%.

You're basically guaranteed to get more in cash back rewards with a good rewards card than you would be able to give to charity via a charity card.

So why not get a cash back reward, use it to accumulate cash rewards from your purchases and then donate that reward to charity? You'll : 1) net the charity more, 2) you'll have the freedom to chose the credit card you want, and 3) you'll be able to deduct the charity contribution from your taxes. Both you and your favorite charity will come out ahead if you use a good cash rewards card to get money for your charity instead of a dedicated charity credit card.

Also see the Consumer Reports article : Give While You Spend

September 16, 2008

Life Insurance is NOT necessary for children.

You may have seen TV ads for life insurance for babies. The one I've seen is the 'Gerber Grow-Up' plan.

I got a quick quote on their site and the rates are $36 a year for $5,000 of coverage to $360 a year for $50,000 of coverage. It is a whole life policy. Whole life policies in general are not a good buy.

But the bottom line is that you do not NEED life insurance for an infant or child. If a child passes away then you do not have to replace their income and you have no financial debts to worry about.

The only reason to even think of life insurance for a child is to take care of funeral expenses. But even then buying life insurance is not a good financial bet. Average funeral costs are $6500 in the USA and can be had for as little as $800. According to CDC mortality rates, the risk of dying before age 18 is about 1%. Given the low risk and potential costs, a premature death of a child is something that you should self insure for.

$25 gift certificates for $4 until Sept 21

Another deal on gift certificates:

Starting 9/16 take 60% off $25 Gift Certificates. Pay $4 when you use the code FESTIVE. Valid through 9/21/08.

Thats a $21 savings per meal.

I use these at my steak house and they work great. But if you're interested in getting them then first: Check the site and see what restaurants in your area take the certificates. Second check out the rules and limitations for the gift certificates. For example my steak house requires a minimum purchase of $50 to use the $25 certificate and they require a mandatory 18% gratuity.

For more on saving money at restaurants see my older posts:

September 15, 2008

Free weatherization improvement for low income individuals

The US government has a Weatherization Assistance Program. The program provides weatherization improvements free of charge for people of low income.

The average improvement is $2800 and they say: "On average, weatherization reduces heating bills by 32% and overall energy bills by $358 per year at current prices"

So this could be a lot of savings for a low income family and its free to those who qualify.

The system is funded by the federal government but handled locally at each state level.

They discuss application at this page. If you are on Supplemental Security Income or Aid to Families with Dependent Children then you're automatically eligible. Otherwise states give precedent to people who are over 60 years of age, families with one or more members with a disability and families with children (in most states). Low income is a main factor in application. Depending on what state you are in you can be eligible if your income is below 125% or 150% of the poverty level or 60% of median income.

If you or someone you know would qualify for this plan then it can't hurt to apply and it might result in saving hundreds of dollars a year in energy costs.

September 14, 2008

Consider a heat-pump water heater if you need to replace yours.

Before I wrote suggesting that you Consider a tankless water heater when replacing your water heater. Well recently thanks to a reference in a Free Money Finance article that pointed to a Consumer Reports article about saving on energy costs I found out about heat pump water heaters.

The Dept. of Energy has a page discussing heat pump water heaters. Heat pump water heaters are similar to heat pumps that heat your home. They use energy to move heat from inside to outside rather than creating heat. Heat pumps save energy because its easier to move heat than create it.

This report on heat pump water heaters examines their cost efficiency. It says:
"Assuming an electricity cost of $0.10/kWh, savings in annual hot water heating would be $262. Assuming an installed cost for an exhaust air heat pump water heater to be $1,500, the simple payback would be $1500/$262 or 5.7 years. If you are replacing a failed water heater, assuming a cost premium of $1,200 for installing an exhaust air HPWH rather than a conventional electric water heater, the simple payback would be 4.6 years."

But on the downside the heat pump water heaters are not very common and may be hard to find. According to the ACEEE they say "Several manufacturers have discontinued their lines of heat pump water heaters due to lack of consumer and contractor awareness". They give a short list of manufacturers none of which are familiar names.

One interesting product is an add on heat pump for a normal hot water tank. The
Airtap product (pictured at right) from AirGenerate is $500 and adds on to a standard hot water heater. They claim that it takes 2.5 times less energy than a normal hot water tank alone. Compared to a standard hot water heater that uses $400 electricity a year the Airtap should use about $160 in energy costs. That equates to a $240 annual savings from a $500 investment for a payback period of about 2 years. The Airtap plugs into normal 110V AC line and their installation demo video claims it can be installed in 1 hour.

I found a Review of the Airtap from Environmental Building News which was positive overall.
There is one important 'gotcha' about the Airtap though which is mentioned in the comments of that review. Using an Airtap for a hot water heater that is in a room heated by electric heat is not recommended. The reason being that the Airtap sucks heat out of the surrounding air and if you're heating that air with your furnace then you're paying to create that heat to begin with. The Airtap would cool your interior space and then your furnace would have to kick in to reheat it.

If you are due to replace your hot water heater then investigating heat pump water heaters is a good idea. They don't quite seem common place however so you may need to hunt a little to find one. The Airtap upgrade unit does look like it would be very practical solution at least if your water heater is not in a primary heated area.

September 13, 2008

Using a 529 plan to save for college

The other day I talked about Our plan for paying for college costs. Who pays? How much? and I briefly mentioned that I plan to use a 529 plan to save for our children's college.

529 plans are tax sheltered savings plans specifically for saving for college expenses. The earnings in your 529 plan are exempt from federal tax and usually free from state taxes. The main reason to go with a 529 plan is the tax benefits.

529's aren't the only vehicle that could be used for saving for college.

What are the college savings options?

529 plans - They give tax sheltered benefits, they place the funds under the name of the plan owner for purposes of financial aid calculation allows, you to change beneficiary, intended to be used for college only, controlled by contributor, possible state tax deduction, federal tax and 10% penalty for early withdrawal.

Education Savings Accounts (ESA) - Up to $2000 a year, use for K-12 as well as college, puts funds in contributors name for financial aid, controlled by contributor, no state tax deduction, income limits, federal tax and 10% penalty for early withdrawal.

UGMA/UTMA accounts - Considered asset of child, used for any expense to benefit child, no penalties for withdrawals.

Standard savings vehicles - You could alternatively simply invest your money in savings accounts or mutual funds. This option has no tax benefits but you have full freedom on how you use the funds.

The 529 appears better than the ESA to me. The 529 has all the same benefits but the ESA has some other limitations. The UGMA/UTMA accounts are considered as assets of the child which has a greater impact on financial aid qualification, plus theres no special state tax benefits for those. Among these choices a 529 account is my pick.

Vanguard has an evaluator to help you pick what kind of college savings vehicle is best for your circumstances. For me the 529 plan was what Vanguard recommended.

If you figure that a 529 account is your choice then you can next investigate the available 529 options. Generally it will be best to go with the 529 plan offered by your own state so you can take advantage of state tax benefits.

You can go to the CollegeSavings website and find information on 529 plans. From the main page if you select 'My States 529 plan' and then select your state it will take you to the specifics on your states 529 plan(s). My state has a few choices. One is two of the plans are 'advisor sold' and the third option is 'direct sold'.

Make sure to compare the maintenance fees, expense ratios and investment options when you are looking at 529 plan choices. If one 529 plan has a $50 annual fee and 1.5% expense ratio and 11 investment choices and another plan has no annual fee, 0.8% expenses and 25 investment choices then the later choice would be the obvious one.

Some states will have 'prepaid tuition plans'. With these plans you can pay a specified amount today and have a year or unit of tuition prepaid in advance. The prepaid plans guarantee you a locked in price but they are meant for use with colleges in the state of residence only so they may lack some flexibility if you're locked into the schools in your state.

You don't have to go with your own states plan. If your state plan has poor choices, high fees or other negatives then you could enroll in another plan. For example, the is a prepaid tuition plan for 270 specific colleges.

Additional resources:

September 12, 2008

Best of Blog posts for the week of September 12th

A few notable posts I ran across this past week:

Jim at Blueprint for Financial Prosperity pointed out that WaMu CD Rate Update: 5.00% APY, 12-Month CD Thats a great rate for a CD but be aware that WaMu might be on shaky financial ground lately.

A few folks picked up on a Parade article with 10 tips to get rich from Warrent Buffet. All Financial Matters : Warren Buffett’s 10 Ways to Get Rich, GetRichSlowly : Warren Buffett’s Ten Secrets to Wealth and Life and FiveCentNickel : How to Become a Millionaire - Advice on Getting Rich from the World’s Richest Man

MyMoneyBlog points to a class action lawsuit settlement with the credit reporting bureau Transunion that can get us access to free credit reporting: Reminder: 9 Months of Free Credit Scores + Monitoring

OK, this one is actually from Sept. 4th but I didn't catch it last week... MyMoneyBlog examines the biweekly loan payment options in Biweekly Mortgage Payment Plan: BiSaver vs. Do It Yourself

Special offers from Columbia House DVD

Previously I compared Buying DVDs on ColumbiaHouse vs Amazon and later I asked Is joining the Columbia House DVD club a good deal? Today I'm going to talk more about the sales and special offers you get once you're a Columbia House DVD club member.

If you are a member of Columbia House DVD club you will start to see fairly regular offers with special sales.

In the past couple months here are some of the sales offers I've gotten from Columbia House in my email inbox:

Monday September 8th : 99 DVDs for $9 Each - No Other Purchase Necessary!
August 27th: 1 day only sale Free Shipping plus a Free DVD for Every One You Buy!
August 1st :
Massive Clearance - $5 DVDs (over 300 titles on discount)
July 3rd: Get a FREE DVD For Every 1 You Buy - All July 4th Weekend Long!

So they have a mix of $5-10 sales offers on DVDs and Buy 1 Get 1 free deals.
If you wait for the Buy 1 Get 1 free deals you can essentially get DVDs for 50% off.

The Buy 1 Get 1 free deals are pretty compelling. But how does this compare to just buying DVD's off of Amazon??

Rambo : Columbia House $23, Amazon $18

Juno : Columbia House $23, Amazon $16
Sex and the City : Columbia House preorder $20, Amazon $17 preorder

So the Columbia House movies average $22 and the Amazon movies average $17. Shipping is an extra $2-3 for Columbia House and you can get free saver shipping from Amazon. So total costs on Columbia is about $24.5 per DVD and Amazon is $17. But with a Buy 1 Get 1 Free sale you'd be paying $23 for a DVD and then $5-6 for shipping for a total of $28-29 for 2 DVDs or an average cost of less than $15 per DVD via the sale price.

September 11, 2008

Our plan for paying for college costs. Who pays? How much?

How much parents contribute for college expenses is a personal choice. Many parents will try to pay 100% of college expenses for any college their children want to attend. Other parents feel that their children should contribute to the cost. Some parents don't feel any obligation at all to pay for college expenses. Whatever your choice is, it should be decided far in advance so you have time to save the amount you as parents will need.

My wife and I have discussed paying for college for our children. We both agree that it is best if the students and parents both contribute to college costs. Our feeling is that it is important for a child in college to have a stake in their own investment in college so they value the cost of the education. The concern is that if they are spending "other peoples money" (Mom and Dads) that they will not value the education they are receiving as much as if they had a personal investment in it.

We also both feel that public colleges are a good value and provide a quality education. If our children want to attend a pricey private school then it will be their responsibility to cover the added expenses.

So our general plan is to pay a portion of our children's college education and there will be a cap on what we contribute. The exact amount we contribute or how we determine it isn't written in stone yet. We've discussed paying only for tuition up to the cost of an in state public school and we've also considered paying 50% of the college costs up to a defined maximum. Given the cost of public schools we're looking at approximately $7000 annual contribution. That should cover either the tuition or 50% of the total costs, whichever way you want to look at it.

However that $7000 per year is in todays dollars. In 18 years the amount will be considerably more. Tuition inflation is more than general inflation. FinAid site has an article on tuition inflation and they have annual inflation rates from 1958 to 2007. From 1958 to 2007 annual increases in college tuition have averaged 6.9%. More recently in the last 20 years from 1988 to 2007 increases have averaged 6.06%. So its reasonable to expect college tuition and fee costs to increase 6-7% annually.

Room and board shouldn't go up quite as fast. Rent and food for college students isn't any different in essence than rent and food for the general population so its inflation rate shouldn't be much different than general inflation rates. Housing and food will probably go up closer to 4-5% annually.

Looking back at what I paid for college and comparing what it costs today I see similar increase rates. I paid around $2400 a year for tuition 17 years ago and the same school now charges about $6800. Thats about 6.3% annual increase for tuition. My room and board was $3600 a year 17 years ago and it would now run $8600 a year. Thats a 5.2% annual increase for room & board.

From the previous article on college costs the rate for public in state tuition is $6,185 annually and the total cost is $13,589. We can use the formula to adjust for inflation to figure the costs in the future. At an annual increase of 6-7% the tuition will be $17,654 to $20,904 annually in 18 years. Over 18 years of 4-5% increases the other expenses will end up $14,999 to $17,818. That would put the total cost for a 4 year public school in 18 years at $32,653 to $38,722.

If we plan on paying for about half of the total costs OR paying for the tuition then we'd be on the hook to cover $16k to $20k in 18 years. Multiplied by 4 that gives us a total of $64k to $80k.

So to sum up, if taking inflation into account, we have to save $64k to 80k per child to partially fund their college.

I plan on using a tax sheltered 529 college savings account to save for college. This will allow our savings to increase without having to pay taxes on the gains. I'm going to use relatively stable and save investment choices to ensure that we get consistent gains. So I'm going to estimate a conservative 6% annual return.

Given our savings goal, how much will we need to put away each year? MSN has a savings calculator. I can use that to estimate my annual savings requirement to hit our goal. Walking through the calculator options: 1) choose the option "How much must I contribute to my savings?" 2) specify :initial balance $0, savings goal $64k or $80k, term 18 years, 3) pick a rate of return of 6% and 4) pick 'no' to indicate the savings aren't taxed. The calculator says that I would need to save $2038 to $2548 a year at 6% return to accumulate $64,000 to $80,000 in 18 years.

That is using a fixed investment figure. However I expect that my ability to save will increase in the future as my pay increases. So it would make sense to gradually increase my savings contributions annually with inflation adjustments. I can better estimate this by using a spreadsheet. I figure that if I start with an annual contribution of $2000 and my contribution increases 3% annually with inflation and I make 6% return then I would be able to accumulate about $80,000 in 18 years.

The bottom line is:
We plan to pay for half of our childrens college at a public 4 year school. To meet this goal we will need to save $2000 a year starting at birth and increase the savings with inflation.

Photo by D'Arcy Norman

September 10, 2008

Will my kids be eligible for financial aid for college?

The other day Free Money Finance posted to say We're Getting Zero Financial Aid for Our Kids

When a child goes to college they figure out how much the student and parents ought to be able to afford to spend towards the students college expenses based on their income and assets. Financial aid eligibility is a basic formula of the Cost - Expected Family Contribution (EFC) So if the college costs are $20k and your EFC is $5k then you're eligible for up to $15k of aid. Now this doesn't necessarily mean you'll get that much aid but that you might need it.

I found an EFC calculator on the College board site. I found a second calculator for EFC at the site. You can use these calculators to determine how much your family is expected to contribute to college.

The calculators ask for your annual income, cash on hand and other assets. They count the value of real estate investments. With my current income level and my investments the two calculators estimate that my families expected contribution would be $32k to $35k just for the parents contribution.

I have a good income and assets so I can afford quite a bit to pay for college $30k a year is a lot to spend though. But still the formula is to figure financial need and I can't say I need aid. If you have a high income and assets then you're unlikely to qualify for any financial aid.

From this Financial Aid 101 guide at the Journal of Accountancy it says:
"Families with high income and assets often are ineligible for financial aid. If parents’ income is in excess of $100,000 and assessable assets are higher than $100,000 (referred to as the 100-100 rule of thumb), their EFC (of $30,139) significantly reduces their eligibility for financial aid."

So will my kids be eligible for financial aid? No, probably not.

Photo credit by Nav A.

September 9, 2008

The cost of college

How much does college cost nowadays? Well the exact figure will depend on the college in question. There's a huge variation in tuition and room and board rates between schools. But we can easily get the average figures as a reference point.

According to the College Board, the average figures are below (see full report)

Tuition rates
2 year public school tuition: $2361
4 year public in state tuition : $6185
4 year public out of state tuition: $16640
4 year private tuition: $23712

Room and board:
4 year public: $7404
4 year private: $8595

Total costs
4 year public in state: $13589
4 year public out of state: $24044
4 year private: $32307

September 8, 2008

Net worth update: August 2008 +$10,783

I updated my networth account at NetworthIQ:

From July to August 2008 updates I saw an increase of $10,783. Most of that was sales of stock and increases in cash from income. I saw a bit of a drop in my retirement account due to market losses. Our total net worth is now at $593,636

Good Book : The Millionaire Next Door

This is a review of The Millionaire Next Door. Its by Thomas J Stanley and William D Danko and was published 1996.

If you're interested, you can read the first chapter here.

The Millionaire Next Door is a landmark book in personal finance. It gives us insight into who millionaires are and how they got there. The book discusses the traits and habits of millionaires in America. The big revelation is that most millionaires are living middle class lives, driving older American made cars and have never bought a Rolex watch. Millionaires made their wealth by living frugally. The book is a good read and has a nice mixture of stories of example millionaires and statistics on millionaires that the authors have researched.

From the book here are some basic facts about millionaires:
1. They live well below their means
2. They allocate their time, energy and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self sufficient
6. They are proficient in targeting market opportunities
7. They chose the right occupation.

The book discusses two groups which they call Under Accumulators of Wealth (UAW) and Prodigious Accumulators of Wealth (PAW). The UAW has less net worth then average and the PAW has much higher net worth than average. The PAWs are better at saving and accumulating wealth and thus they turn out to be millionaires more often than their peers. The Millionaire Next Door gives a simple formula for your expected net work:

Expected Net worth = Your age * Your income / 10

If your net worth is half the expected net worth amount then you're a UAW and if your net worth is twice expected then you're a PAW.

There are some other specific topics in Millionaire that are interesting. They dedicate an entire chapter to how millionaires buy cars. They discuss how many buy new versus used and how many shop around dealers. They take a chapter to talk about what they call Economic Outpatient Care. This is a term they use for parents giving money to their adult children. In general they say that EOC is detrimental to the financial health of the adult children receiving the money as it removes their incentives to gain wealth on their own.

I liked The Millionaire Next Door overall. It was an enjoyable read with some pretty interesting bits of information in it. If you want to become a millionaire then its a good idea to look to the habits of other millionaires as role models and inspiration.

On the negative side I thought that Millionaire was a bit lacking in concrete usable information. You could sum up large sections of the book with a single sentence and there isn't a lot of take aways for us to use in our own lives.

Overall The Millionaire Next Door is a good book and I'd recommend it. Look for interesting tidbits on millionaires spending habits and general attitudes, but don't expect much useful personal finance information. You can probably find a copy of The Millionaire Next Door at your local library. I'd recommend checking it out.

Best of Blog posts for the week September 5th

Couple interesting posts from last week:

Matt at YFNCG posts in Statistics Shmatistics about the wide variation in statistics cited about failure rates of new small businesses.

Jim at Bargaineering poitns out that Amazon No Longer Offers Price Drop Guarantee!

September 7, 2008

Couple more negative aspects on Rex Agreements

I wrote a while ago how you should avoid Rex agreements in the post : Rex Agreement = Bad idea. I just came across an article from the Seattle Times blog : A reader recounts Rex Agreement experience.

As the title says, the article has one persons experience with a Rex Agreement application. Two main 'gotcha's they found when doing a Rex agreement application:

1. There are penalties for early sale of the home: "Those who are interested need to read the "early out" penalty clause very carefully. If you sell your home within 5 years of entering into the REX agreement, the financial penalties are very substantial. In fairness to REX & Co., they do point this out as not a "short term" solution to financial situations."

2. The appraisal they got on their home value was well below market value. The appraisal from the Rex agreement company was $734k. He had an appraisal from a previous refinance that put the home at $810k. But a local mortgage lender said " that even a quick, cursory look showed at a minimum $765 to $775K" and his Realtor cited " a listing price for my home would be in the $790K to $795K range.". So it seems they under valued his home by $30k or more. This would matter quite a bit for a Rex agreement. If they set your initial home value low then when you go to sell the house later it will show extra appreciation. Since the rex agreement lender shares in the appreciation they'd cash in.

Say for example you own that home the reader has and it has a $500k first mortgage on it and they undervalue your house by $30k. Your house is really worth $765k and they appraise it at $735k. Then 5 years from now you go to sell the house. Lets say it appreciated a bit in those 5 years and is now worth $900k. The real appreciation would be $900k - $765k or $135k. You'd owe half of that to the rex agreement people so their real share ought to be $67.5k. But if they undervalue your home then the appreciation the agreement would show would be the sale price of $900k minus the low appraisal of $73k or $165. Half of that would be $82.5k. Thats a $15k difference you'd be paying out of your own pocket. Its 22% more than you would pay otherwise. If they were intentionally doing low appraisals on homes then that would be a very slimy way to squeeze more money out of people. Now to be clear I don't have any reason to think they're doing it intentionally. Maybe it was just a bad appraisal. But a low appraisal is definitely something to be on the look out for with a Rex agreement.

So there are two more reasons to stay away from a Rex agreement.

September 6, 2008

A couple positive opinions on wood pellet stoves

A while back I wrote the article Are wood pellet stoves financially practical? In that article I concluded that wood pellet stoves might be a good choice to heat a home in the winter at least if the pellets are readily available in your area.

Recently Trent over at The Simple Dollar discussed Twelve Tactics to Prepare For and Minimize Winter Heating Bills (Besides Woodstoves). Trent has a lot of good ideas in his post about saving on your heat bills. But while Trent didn't think wood heat was a good investment a couple commenters in the thread had positive opinions of wood pellet stoves.

"Last winter we installed a pellet stove and it is the best thing we could have done. It nearly paid for itself in one heating season and my home was warmer than it ever was with our forced air gas furnace."
-- Cindy

"Last year we bought a pellet stove that sits in the former fireplace. We used 1.5 tons of pellets at $250/ton delivered and were able to heat the whole house, rarely turning on the baseboards."
-- Mister Worms

Install a water heater insulating blanket to save energy.

Water heaters can use a lot of energy. If you have a typical 50 gallon tank water heater then its may be costing you around $400 a year to operate. One fairly easy and inexpensive way to cut down the cost of heating your water is to install an insulating blanket around the water heater.
Lowe's has an R10 water heater blanket for about $22.

According to the DoE Energy Efficiency guide, insulating your water heater can save 4-9% on your heating costs. If you're using $400 now and save 4-9% then thats an annual savings of $16 to $36. That's a good return on a $22 investment and it should pay for itself in around a year.

Its pretty simple Do It Yourself project too. The DoE has an illustrated guide to installing water heater insulation.

September 5, 2008

How to evaluate the return of energy saving home improvements.

Lately I've talked about some home improvements that can help save energy costs. I installed compact fluorescent lights, I bought a programmable thermostat, I installed a water saving device on my shower, I use an electric mower and I've bought a smart power strip. Each of these purchases help save energy costs and give me an ongoing return through lower electricity bills. But they also cost money to buy in the first place. So how exactly do I tell if the energy savings of an item is worth the cost of purchasing it?

I would evaluate energy saving purchases in two ways. First you can look at the annual return rate and payback period. Second you can calculate an estimated rate of return on the investment.

Figuring a Payback Period

This is the simpler method. Basically all you do is figure out how many years it will take to recoup your initial investment. To do this you divide the initial cost by the annual savings. For example if you could spend $150 today to save $50 a year then you can divide the cost by the annual savings or 150 / 50 = 3 years.

Payback period = initial costs / annual savings.

If your payback period is 1-3 years then thats probably a good buy. Payback period can be pretty useful if you're comparing the purchase of multiple alternatives.

Lets look at some examples:
I discussed previously that buying compact fluorescent lamps for my home is saving me about $61 a year. I paid $50-100 for those initially. If we assume the higher cost of $100 then the payback period is: initial cost / savings = 100 / 61 = 1.6 years payback period.

I also bought a shower attachment for $30 that I figure is saving me $20 a year. For that purchase the payback period is = initial cost / savings = $30 / $20 = 1.5 years payback period.

If I compare these two purchases the shower attachment is marginally better with a payback period of 1.5 versus 1.6 for the CFLs. So if I had just $30 to spend then I'd be a little better off putting it into the shower attachment.

Estimating the Annual Rate of Return

For larger purchases that have a longer payback period it might make more sense to look at the annual return rate over the life of the purchase. Buying a large improvement such as a new efficient furnace or a solar array is essentially an investment so you should figure the rate of return on that investment and compare it to other investments.

TO figure what an improvement returns as an investment you have to look at what it will net you financially. Basically with an energy saving improvement you have an item you're buying for a certain amount today which will then give a fixed annual return for a number of years. For example I might pay $150 for an improvement which then saves me $50 a year in electricity and lasts 5 years. If I just took that $50 each year and sat on it at 0% interest then I'd accumulate $250 in a 5 year period. So my $150 investment turned into $250 over 5 years. We can use the formula for compound annual growth rate (CAGR) to figure the rate of return. The formula for CAGR is:

% return = ( (FV / PV ) ^ (1 / # years ) ) -1

For the example that works out to ( ( 250/150 ) ^ (1/5) ) -1 = (1.66)^.2 -1 = 1.107 - 1 = 10.7%

You then have to compare that to what else you could have done with the money. If I had $150 in the bank right now I could easily throw it into my high yield savings account and make 3.5% interest.

For this example paying that $150 will end up netting me a 10% return over 5 years. Thats a good return rate compared to 3.5%.

As a general process for figuring the rate of return on an energy saving investment:

First of all I determine the annual energy savings of the item. This depends on the item you are buying. Hopefully there is enough information on the type of improvement that you can figure the savings. If you are buying an appliance you can compare the energy guide documentation which will tell you the annual energy usage of the item.

Second I determine a lifetime for the item. The lifetime of the item will depend on the nature of the item. I basically take an educated guess to estimate the lifetime roughly based on how long I would expect the item to last. A small item I might figure a life of 5 years. For a large appliance I'd pick a 10 year lifetime. If the item is a major improvement such as a new furnace or something like a solar panel then I might go with 20 years.

Then you simply run the CAGR calculation using a future value of the annual savings * lifetime of the item.

That gives us an equation of:

expected % return = (( annual savings * lifetime in years / cost ) ^ ( 1/lifetime in years) ) -1

If you are not certain on the values then you should run the equations for the minimum and maximum estimates so that you can get a range. For example if you think the item might last 10-20 years then run the equation for 10 years and again for 20 years.

Note that I'm making a couple assumptions in order to simplify the calculation. I'm assuming that the item I buy is not going to retain any costs. In other words I assume it depreciates completely. Basically I figure if I buy a new fridge then over a number of years that fridge will wear out and basically be worthless at the end of its life. The other assumption I'm making is that there is no difference in tax impact from the item. This isn't true exactly but it makes the calculation and comparison simpler.

Lets look at a couple examples:

Example #1 buying a heat pump:

I'm considering buying a new heat pump furnace. For example purposes let say the heat pump costs $5000 to buy and have installed and that I will save around $300 to $500 a year in energy costs. I also figure the heat pump should last me about 10 years minimum.

Given the formula:
expected % return = (( annual savings * lifetime in years / cost ) ^ ( 1/lifetime in years) ) -1
We plug in the numbers for the minimum case to get:
return = (( $300 * 10 / $5000) ^ ( 1/10) ) -1
= .6 ^ .1 -1 = .95 - 1 = - 5%
And the maximum case is :
return = (( $500 * 10 / $5000) ^ ( 1/10 ) ) -1
= 1 ^ .1 - 1 = 0%

So for this example I'd be facing a -5% to 0% return on my money.

The choice of a 10 year lifetime was pretty conservative and its possible the heat pump might last 20 years.

If I figured a $300 annual savings for 20 years then it would be :
(( $300 * 20 / $5000) ^ ( 1/20) -1 = 1.2 ^ .05 - 1 = 0.91%
or at the $500 annual savings over 20 years is :
(( $500 * 20 / $5000) ^ ( 1/20 ) -1 = 2^.05 -1 = 3.5%

Therefore overall if we buy a furnace for $5000 and expect it to give an annual energy savings of $300 to $500 and the furnace will last 10 to 20 years then our expected rate of return on the investment is -5% to 3.5%. I can get 3.75% right now in a CD so this isn't a good investment.

September 4, 2008

Evaluating energy saving dishwashers

The other day I talked about buying a newer fridge to save on energy costs. For fridges I concluded that if your fridge is 20 year old or so then it makes good sense to upgrade to a new model due to the energy savings. Today I'll look at purchasing energy saving dishwashers.

It appears that almost all Dishwashers meet the Energy Star criteria. So simply picking Energy Star models isn't enough detail to sort the best from the rest. To find the really energy efficient models you have to dig further. The Energy Star website for dishwashers has an Excel sheet that compares models and lists their energy usage.

Shopping around a little and comparing models, I found the cheapest dishwasher at Home Depot is an Americana model for $199 and costs $36 a year to operate. The Americana model is Energy Star compliant. I looked through several of the Maytag, Amana, Jenn-air, GE and LG dishwashers on HomeDepot's website and I didn't find any that used less than $33 a year in energy.

I found that the Asko brand of dishwasher seems to be very efficient. They have a model that consumes 194 kWh annually or about $19 in electricity. I found reference on via web search to these dishwashers costing over $1000. The additional $800 cost is certainly not worth the $17 difference in energy.

Then I found a Bosch model that goes for about $800 at Sears and uses about $25 a year of energy. But again $600 more in cost isn't worth an $11 annual savings.

If you compare the cheap $199 Americana model to the most energy efficient dishwasher out there the best you'll do is saving $17 a year. I wouldn't pay over $150-200 premium for such a savings. But the most energy efficient models seem to run in the $800-1000 range.

My conclusion is that energy savings alone are not worth justifying the purchase of an expensive dishwasher.

But I would not ignore the energy usage of the appliance when making a purchase.

Here is what I'd do if shopping for a new dishwasher:

1. Decide what features you want in the dishwasher first
2. Shop for and identify the models that meet your needs.
3. Compare energy savings among those models.
4. Pick a model that meets all of your needs with energy efficiency as one of your selection criteria.

Should you update an old dishwasher?

I found this page from the Office of Energy Efficiency at Canada which cites the energy efficiency of older dishwashers:

1984 1990 1997 1999 2004
Standard 1213 1026 649 640 457
ENERGY STAR qualified 422

If you compare that to today's models which use around 200 to 500 kWh a year a dishwasher from 10 or 20 years ago is significantly less efficient. A 10 year old dishwasher uses roughly double the energy of today's models and a 20 year old dishwasher uses almost 4 times as much.

If you have a 10 year old dishwasher today it is using around 640 kWh of power a year which equates to about $64 (at 10¢ per kWh). If you replaced that model with a new model like the basic Americana dishwasher then it would drop to $36 a year in energy costs. Thats a $28 annual savings. Based on a purchase cost of $199 thats a 14% annual return or a 7 year payback period.

For a 20 year old dishwasher on the other hand you are currently using around 1000 to 1200 kWh a year. So thats $100 to $120 in energy costs. Updating to a new basic model today would save you $64 to $84 a year. Thats a 32% to 42% annual return for a 2-3 year payback period.

Replacing a 10 year dishwasher isn't likely to save you enough money to justify the cost. However, replacing a 15-20 year old dishwasher is likely to be well worth the investment in a new and inexpensive dishwasher model at least.

If you're going to evaluate replacing your own dishwasher then you should check the energy guide information for your current model if you can find it.

*Photo from ewen and donabel

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