I have recently had a number of discussions with some friends and co-workers about return on investment. (ROI) A number of these friends and co-workers have jumped into some recent purchase in an attempt to try to save some money long-term. I, however, have not taken part in any of these purchases but did offer my humble opinion on theirs. It really interesting to have conversations and share opinions about finances with others that may not be totally on board with budgeting plans or spending less than you make philosophy. What I found interesting was their justification for making these purchases. Here’s a summary of the topics discussed, let’s see if you agree that these investment strategies.
Credit Card Rewards
I’m sure you are familiar with reward credit cards. The more you use your credit card the more cash back, travel points, or gift cards you can earn. There are many reward credit cards available, some charge an annual fee, others don’t, some give you bonuses on certain purchase categories. I’m sure you can find one that right for you or fits your purchase habits to maximize your rewards.
A co-worker and I were ordering lunch a few weeks ago and asked how much do I own. He told me not to worry about it I’m putting it on my card. I insisted that I give him the cash, but he said just pick up the cost of his lunch later this week and I agreed. I asked why he was charging the lunch, he replied for the rewards. He uses his rewards credit card for all purchases and pays the bill off at the end of each month. He does this for two reasons to be able to track his spending via the credit card statement and use the rewards at the end of the year to supplement his Christmas shopping for his family.
Fast forward to this week and I was saying goodnight to this co-work and he was freaking out. He suspected someone had gotten a hold of his credit card and racked some unauthorized charges. It turned out it was just a delay in payment posting, all was okay. He had a big increase in spending the previous month as he paid for a fantasy baseball league for a number of people, and they gave him the cash and he forgot to note that.
As we approach being debt free later this year we are considering adding a rewards credit card as a tool to help maximize saving or rewards when we are already planning to spend money. I’m just not sure if the example of my coworker is the best example of using a reward credit card. Charging purchases for others and then taking their cash seems like it could lead to overspending. When I asked what kinds of end of year rewards he was collecting for his family, he replied that he collected two 16gbs iPods touch, roughly a $430 value.
Some friends were recently complaining about the cost of their electric bills. The group having the discussion had monthly bills ranging from $175 to $450. The idea of supplementing energy cost with solar panels came up. In general solar panel, install requires a cost. Some homes may require upgrades to your roof, the solar panel themselves, and maintenance. Solar panels also offer potential rebates and tax breaks after install so that is something to keep in mind when you efile your return. One of the friends in the discussion provided some real numbers of another friend who had recently upgraded. The total cost of the upgrade was $6500 after all rebates. The home electric bill dropped from $200 a month to $10. That’s a $190 saving per month or $2280 per year. At that rate it would take just under 3 years to pay off the investment and start saving money on the solar panel install, assuming no maintenance cost during that time. What followed was the funniest part of how to fund the initial cost of the install. I suggested cash, other suggested loans, or equity line of credit. I’m not sure if financing is the best way to make a purchase for an item indented to save you money.
The total cost of the upgrade was $6500 after all rebates. The home electric bill dropped from $200 a month to $10. That’s a $190 saving per month or $2280 per year. At that rate it would take just under 3 years to pay off the investment and start saving money on the solar panel install, assuming no maintenance cost during that time. What followed was the funniest part on how to fund the initial cost of the install. I suggested cash, other suggested loans, or equity line of credit. I’m not sure if financing is the best way to make a purchase for an item indented to save you money.
Another one of my co-workers recently purchased a new hybrid car. The cost was $29k and a $30 increase in his monthly insurance payment. The justification for doing so was to save money on gas cost. He has a 70-mile round trip commute per day and the hybrid offers better fuel economy over his current car. So on average, he travels 350 miles a week to and from work. His old car was a Honda civic, fully paid, and in good shape.
Let’s take a conservative estimate of 30 MPG for the civic and an average price of $3.75 per gallon for gas. 350 miles divided by 30 MPG equals 11.6 gallons needed, multiplied by $3.75 equals $43.75 per week or $175 per month for a cost of gas for his commute to work base on his old car. The new hybrid car cost $29k, minus the $4k for trade in, for a total finance amount of $25k. At current average rates of 4%, a 60-month loan would have a $460 a month payment, plus the $30 increase in insurance equal $490. Now factor the gas mileage, the hybrid does get better MPG and we’ll say he will only need to fill up once a month for 15 gallons at the same $3.75 equals and $56.
The total cost of the new hybrid per month $546. Ouch. That’s a $371 increase over current gas payments. Now, this doesn’t factor the old car may require maintenance more often, hybrid cars offer HOV lane benefits while commuting. So there are other factors to consider. After the hybrid is paid off you begin to see a saving of $119 per month on fuel cost. To reap the benefit of that and pay back the initial $25K investment you would need to keep the hybrid for an addition 210 months or 17 years. I’ve been over this calculation a few times and I hope I’m wrong, but I just don’t see how this make any sense.
I by no means intend to judge anyone in any of the examples I provided. I simply mean to provide the examples to give you an understanding of how some people are thinking about money. It’s a personal choice, and I may choose to do something differently. It’s always good to have these discussions to understand other points of view.
Have you ever made a bad investment? Have you ever been involved in any of these three examples in order to try to save money?