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September 27, 2013

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Executioner

Nice work on the solar panels. And well done on paying off the mortgage. That guarantee on the return is far to often overlooked.

deegee

Paying off the mortgage in 1998 was a big step toward becoming financially independent. I had a 1-year ARM whose interest rate had been climbing throughout the mid-1990s, up to about 8%. Becoming debt-free greatly lowered my monthly expenses and enbled me to start working part-time a few years later, my next big step to FI.

Retired Syd

deegee: Well it certainly is an easy call at 8%! You guaranteed a huge return.

Retired Syd

Just a point of clarification since I was asked off-line. That return on solar panels is 15% AFTER I recoup my investment. In other words, over 20 years I'll earn back the entire cost of the panels PLUS another 15%/year.

dgpcolorado

Solar panels don't always pay their way. Small systems like mine tend to be less cost-effective. My original panels, installed five years ago, have a nominal payback period of about 33 years. I recently added to the system, to fuel my Nissan LEAF electric car, and the new panels have a payback period of more than fifteen years. And that's not accounting for the time value of money or anything like that. My view is that "people buy less useful toys, do they not?"

Over the past year my tiny 2170 watt array produced 105% of the electricity I used to fuel my EV and to run my household. And that has value to me over and above the ROI. So, forget the green eyeshade stuff, it is fun driving on sunpower and skipping the gas stations!

So far as paying off a low interest mortgage goes, the problem is that the money tied up in the house is very illiquid: you can't easily get to it if you need it (you can forget about a home equity loan if your financial situation gets difficult). Better to have a $100k mortgage and $100k invested in a conservative portfolio than no mortgage and no money. That said, if you have plenty of other resources to draw on, having no mortgage sure makes life simple.

I built my current house after I retired using the proceeds of selling my previous house. I then tried to get a mortgage on it but was denied because my income was too miniscule. Never mind that I would have had enough savings to pay it off several times over.

So, like many other retirees, early and otherwise, I enjoy the simplicity of no mortgage to pay and my housing expenses are quite low. But having that money tied up in my house where I can't get at it in an emergency — save for selling the house — isn't good financial planning IMHO.

Retired Syd

dgp: Well nowadays, you can get solar panels without putting anything down. Everything is gravy. But in the long run you don't save as much on your electricity bills. Still, that's a great option for folks that don't know how long they will be in their current homes. A return on zero down--very good indeed!

I agree on the mortgage thing. There was a lot of comfort in having that money in the bank when I first retired (well that and the fact that it was in a CD that made more than my mortgage rate). When the market tumbled, I felt better having that money tied up in a CD rather than in my house.

But don't forget, in a pinch, you could get a reverse mortgage. Just be sure to read the fine print.

Jacq

My sister lives in semi-desert country with a lot of sun. They installed solar panels and between the panels fueling their floor heating and wood burning stoves, she hardly has to run the furnace in the winter. Win!

linda vaughn

Syd,
This is a terrific post! A penny saved really is two pennies earned, Good for you for reminding readers of this. I'm so glad my husband and I learned this early in our work lives. You've given me some good ideas to apply to my own situation, particularly as it relates to air travel. Thanks again.

Tom Sightings

Thanks for the great advice. My mortgage is at 3.75% -- a much higher rate than I can get on my savings, but still much lower than any other loan I can get . . . except maybe on a car, but I already have a car that gets 30 mpg. Now the home exchange ... that's something I've got to look into.

steel

I am not so sure that replacing a current vehicle by buying a fuel efficient vehicle is often a cost savings. If you "run the numbers", buying a new vehicle is usually considerably more expensive than repairing and keeping the older vehicle. For example:

You mentioned that the new vehicle gets twice the mileage of the old vehicle (40 mpg vs. 20 mpg). If one drives 1000 miles per month (pretty close to average), at 40 mpg the new vehicle would use 25 gallons of gas per month, and the old vehicle (at 20 mpg) would use 50 gallons of gas per month.

Assuming a gas price of $4.00 per gallon (which is higher than it is where I live...about $3.20 around here), that equates to a fuel cost of $200 per month for the old car, and $100 per month for the new car.

But, even a more "common" new car likely costs around $22,000 to purchase (obviously, many new cars cost much more). If one figures the cost of a 48 month loan at a 6% interest rate, the “car payment” is $540 per month. Sure, one could buy the car outright, but that negates any investment earnings that the $22,000 could generate.

It was mentioned that the old car needed "a few thousand bucks" in repairs. For the sake of discussion, let's say the old car needs $2,000 of repairs every year. Then, the repair bill to keep driving the old car comes to $167 per month ($2,000 divided by 12).

Therefore, in "total", the cost of driving the new car (gas plus car payment) comes to $640 per month ($100 plus $540).

The cost of driving the old car comes to $367 per month ($200 plus $167).

Over four years, the new car costs $13,104 more to drive than the old car. Not to mention the expense of increased insurance premiums to cover a newer, more expensive car. And not to mention the depreciation involved with a new car. With 200,000 miles on it, the old car is pretty much fully depreciated now.

Obviously, my figures could be flawed, and there are other considerations. A new car might have better safety features. It is no fun having to take a car to a repair shop. The new car has that "new car smell"...and there are other intangible benefits to driving a new car.

But, as a friend of mine who is pretty financially adept recently said: "I am going to drive my older car until the wheels fall off, then I am going have the wheels put back on and drive it some more".

But I would like a new car...


Retired Syd

Steel: We pretty much drove the car until the wheels fell off (in the case of one repair, almost literally). The last 6 years ownership it was like roulette--sometimes one repair a year sometimes two. Each time we said "it's cheaper than getting a new car." To the tune of $14k in its last 6 years, and escalating each visit. That's pretty close to the cost of a new car, and in only 6 years. Probably we should have pulled the trigger earlier, but it's hard to know until hindsight.

The problem is you don't know how quickly the next repair is going to come down the pike. You think, oh this will last for a few more years now, only to find out you need to sink another couple of grand in 6 months later!

You have to take into consideration the cost of repairs on a particular model--our old one was a fortune to repair. I'm hoping the Toyota will be cheaper to keep alive in it's older years. I that case it would make sense to keep it going even longer.

retireby40

Wow, great job! We're trying to be more efficient too. Our utility bill is only about $50/month so it's not worth it at this point to try too hard. Our car gets mid 20s mpg so that could improve a lot. Once we drove this one to the ground, we'll get a more efficient vehicle.
We need to work on the travel rewards too. Once we start traveling again, I'll get more points.

Fred Doe

Well syd, sorry I've not replied lately. New computer and all that.(talk about cars wearing out)Solar panels sound nice but after I crunched the numbers it wouldn't pay for us. We use natural gas for a lot of things. Cars? I have one in my near future. Some kind of Subaru station wagon. The Toyota truck is getting old and worn out like myself. Gas mileage was a concern five years ago when I retired but a funny thing happen in those five years I realized I cut my mileage by 60% a year. Because I save "cash" I'll be able to write a check for that new Subaru. We haven't had a mortgage in ten years. To sum up my life style "I live as a poor man with lots of money"

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