Debt Free

All too often we buy things without really thinking the purchase through. We take it on face value that springing for the upgrade or extra is a good idea if it will save us money in the long term. Unfortunately, in many cases the numbers just don’t pencil out.  Many people just never stop to actually run the numbers and figure out if the savings will ever justify the additional money spent. If you're trying to get debt free, this is calculation you have to make.

A good friend of mine is a sales manager at a VW dealership. As the price of fuel has risen, people flock through the doors of his dealership in search of fuel efficient vehicles. Over the last few years VW’s best vehicle in that regard was the Jetta with the turbo Diesel engine. Currently the 1.9 liter TDI engine is on hiatus, but will return next year. The problem in purchasing this car with an expectation of saving money on fuel is that, although the Jetta with this powerplant returns a very admirable EPA milage rating of 36 mpg city and 41 mpg hiway, it also commanded an approximately $4,000 premium over a Jetta with the standard 2.5L gas engine. At an MSRP (when new) of $26,650, the TDI wasn’t a cheap car. Thankfully it has excellent resale value to help offset the higher cost over the long term.

Even the most math challenged among us can readily see that even with current fuel prices, you’re going to have to save a bit of fuel to get that $4,000 back. In fact Edmunds.com lists the 5 year fuel cost for this vehicle with an automatic transmission at an estimated $6,350. The 5 year fuel cost figures for the standard 2.5L gas powered car with an AT are $8,752. At this savings rate ($480/ year) it will take 8 years and 4 months to see a positive return on the initial cost of the more expensive engine.

In this case, there are actually other costs associated with this engine, that offset some of the fuel savings. Diesel’s traditionally have lower maintenance costs than gasoline engines and can last much longer as well. The ultimate engine life won’t come into play in a 5yr cost calculation, but the maintenance will. At $3,725, the actually TDI costs more to operate than the gas version, at $3,140, fuel costs excepted, so tack on an additional $585.

On the debit side for the Diesel engine is a greater depreciation cost. Even though so many fine consumers profess to be in love with the idea of fuel savings, the 1.9 TDI actually has a higher depreciation cost than the car with the standard engine. 5 year depreciation costs for that car are an estimated $8,147, while for the Diesel powered variant, they’re $9,828. So add another $1,681 to your 5 year cost for the TDI. If you take into account the added costs of maintenance and depreciation, it will actually take you a hair over 148 years to amortize the added costs of the TDI engine. If you keep the car that long, I’m sure it will be worth far more as a monument to technology from years gone by than as a transportation device.

Turning to an example of a different sort, I’m sadly facing a water heater replacement. These babies aren’t cheap. There are a few choices here. One choice would be one of these new tankless units that provides endless hot water and is more efficient to operate because it only heats the water as your use it. Standard water heaters must keep all the water in the tank hot. Keeping 40 – 75 gallons of water hot 24/7 costs you money. By avoiding this expense, the tankless units save money. That may not be the case if you use your newfound, limitless hot water to indulge yourself with 45 minute showers, but all else being equal…

There are a tremendous number of variable here that must be taken into consideration before you can determine weather or not you will actually realize a positive ROI from a tankless water heater, though. First of all, in many cases simply exchanging a traditional water heater for a tankless isn’t. A simple exchange, I mean. There are several things that must be taken into account. If you have a gas unit the gas plumbing must be adequately sized to deliver the required amount of gas to the heater. If it isn’t, the gas line must be re-plumbed, often at considerable expense.

If the unit is electrical, the circuit feeding the heater must have enough capacity to feed the new beast. In a worst case scenario, new wiring and a new breaker would have to be installed to accommodate this. Actually in a real worst case scenario, your electrical panel would already be at capacity and you’d have to add an additional panel to accommodate the added circuit, but that’s pretty unlikely.

Another potential cost to consider is the possibility of substantial re-venting. Tankless water heaters require stainless steel venting to exhaust the considerable heat produced by the burners. In the majority of cases your traditional heater will not have this venting, so the exhaust vent will have to be replaced. Ouch! The cost for the tankless heater itself is only moderately more expensive. A standard water heater runs about $400 - $700, depending on size, manufacturer, etc. A tankless unit is about $600 - $1,000. Tankless units are supposed to last about twice as long as a standard water heater, so if you plan on staying in your house for 20 - 25 years, you could figure this savings into the equation as well. I don’t plan on being there more than 8 – 10 more years, so I didn’t.

Depending on where you have a tankless unit installed, you can gain additional storage space from the decreased size of the new units. Mine would be I a closet that is currently used half for storage and half for the heater. I’d love to have the entire space for storage. If your figure construction costs at about $150 / sq foot, I’d gain another $900 worth of storage space for the 6 square feet I’d gain there too.

Many people could justify this added expense. However, when the added costs of installation are taken into account, the estimated cost for changing to a tankless heater can easily jump to between $3,000 - $3,500. My quote for a Rheem 50gal gas water heater with a 10 year warrantee, installed was $900. The high efficiency unit has a $40 energy savings rebate so the net cost drops to $860. The tankless units will get you a $300 tax credit from Uncle Sam, so you can subtract that from the cost as well.

Do the numbers pencil out in favor of the tankless unit? Hardly. Even if you save at the high side of the 10 – 25% estimated cost savings given by experts, you’ll be heating water for a long time before you see a positive ROI on one of these things. If you’re using gas, and your price per therm is $0.60, you’ll save about $40 a year. At that rate you’ll be 8 years before you see a positive return on a purely monetary basis.

Judging things on a purely monetary basis ignores the other aspects of the decision, such as convenience, comfort and environmental benefits that can be derived from spending money on added features and upgraded products. These benefits are somewhat more difficult to analyze, as they are fairly subjective. Is worth it to you to go 500 miles between fill ups while burning bio Diesel, and emitting less carbon? How about the entire family enjoying a hot shower (Not together, you sick bastard) without fear of running out of hot water? Those are questions only the individual can answer.