calculating savings; "rule of 72"

[stevehull]

I have had a blast looking at hundreds (thousands?) of threads on this site in the last few weeks, but have not seen anyone that has quantified the concepts of returns on investment.

At the danger of doing this again, I thought I would point out a fantastic financial tool that gives you an approximate equivalent percent return on your savings as a result of you saving some money.

For example, suppose an improvement (reduction in morgage rate, new furnace tune up, installation of a heat pump, whatever) saves you $100 a year. The cost of that improvement was $500. Simply stated, you "pay" for your "investment" in 5 years.

But it is better than that as your $500 investment is now saving you more cash in the future. To get an idea of this use the "rule of 72".

Take the investment return time and divide it into 72. In the case above this is 72 divided by 12 resulting in five. This result is the equivalent interest rate that you would have to get if you had put that initial $500 in some account - 5%.

So if the above savings were $100 per year and the improvement cost were $1,000 then the return time would be ten years and the % return on investment would be 7.2%.

Let's now suppose you do something really silly and save $100 per year, but it costs $7,200 to get the improvement. The return time is 72 years and the effective return is 1%. Terrible "investment".

I will do almost anything as a DIYer to get a return of my investment in 1-2 years. This calculates out to an equivalent return of 36-72%. Where in the stock market can you get that!

My cut off is around 7-8% equivalent return - depending on how much work and/or enjoyment I get.

For example, I will cut down dead trees, split wood, pile/stack it up, burn it in my wood stove and feel GREAT about it. I do hours of work for a very lousy return as my home is heated by a GT heatpump! But the radient heat from a woodstove on a cold blustery night is pure enjoyment that cannot be quantified.

But heating with wood like I used to (7-8 federal cords of wood per winter) REALLY gets to be work! Wood heats you three ways; cutting it, hauling it and burning it.

The equation (rule of 72) also works in reverse. If you know an interest rate you want, then you can calculate a savings and then decide how much to invest in the improvement.

Some things are obvious and have HUGE returns, but they appear mundane and are not "sexy". In this catregory are sealing cracks, closing up air leaks, insulating the attic, repairing the rotted sill plate, etc. Far more sexy are wind turbines, PV panels and such.

As an approximation, I feel that conservation is a lever with a "leverage" of at least twenty. This is a return on investment (ROI) of 14% at a minimum.

On the other hand, the resourceful DIYer can pick up a defunct heat pump, get it working for a few $ and REALLY score a huge ROI! In some cases the time to recover the initial investment is only weeks or just a few months.

Lastly, I have often found myself looking at a project and saying, "yeah, I can bang that out in a day". A week later, I am still struggling at it. But if I enjoy it, then the ROI still is large. I just have to put up with the spouse's stares and sighs as I am not getting the "other stuff" done.

Ahh, such is life!