What do you think of those CD rates? On a five year maybe you can get 1.75%. You won’t be living high on that fixed income. Here’s how you can do way better.
Buy an electric car or a plug-in hybrid.
You’ll save about $2000 a year on gasoline if your habits are typical, that is if your routine driving is 12,000 miles. Of course if you drive less or your trips are longer than the car’s battery range you won’t get quite the benefit. And if you’re rolling on battery power you will have to pay for a little more electricity. Count $500 a year for that, so your net could be $1500, every year.
There is an upfront premium for the electric drive. $12,000 might be a reasonable assumption. The Government is encouraging you to do this, and it will kick in $7,500. So you’ll be out just $5,500 additional to get a really state of the art car that will save you a net of $1,500 a year. That’s about 27% return by my calculation. Let’s see, $96 a year on your CD or $1500 savings on your bill at the pump. Might be worth a look.
Install PV solar to produce some of your own electricity.
For about $50,000 you can get 10 kW of capacity, enough to provide a major part of your total needs. With electricity prices at current levels, you’ll make $2000 a year worth of power.
Uncle will like it if you do this too. He’ll let you take a 30% credit on you federal taxes, so your out of pocket expense would be just $35000. Your $2000 worth of electricity returns over 5.5% on your investment. Of course you could get something on your 35 thousand if you kept it in CD’s….$612.
Here’s a little more to consider. Taxes. You pay taxes on interest you receive, so if you like CD’s, fork over a forth of what you earn (more or less depending on your tax bracket). On the other hand, Uncle Sam doesn’t get any of what you save on gasoline or electricity. Put that money in your pocket.
Suppose though you don’t have $70,000 sitting in CDs or a savings account. Seventy is about what you’ll need if you put in the PV and buy a Chevy Volt. (You were going to buy a new car anyway, right?) Refinance your home. 15 year mortgages now have interest rates around 3.5%. 5/1 ARMs are available for 3%. Use some home equity to secure some of this cheap money.
You’ll have to pay interest on the extra 70 grand. Remember though, mortgage interest is tax deductible. Your net interest expense, after the tax deduction, will be something like 2.5%. The borrowed money will cost you about $1750 a year.
So hows this all work out? You save $1500 a year on gasoline and $2000 on electricity. You do have $1750 in interest expense. So your net also happens to be $1750 tax-free
income. And you drive a really great, brand new car.
In addition to having this really cool stuff on your house and in your driveway, it’s also pretty satisfying to think that this little annuity will continue to pay for many years. PV panels last a long time. Warranties on performance are typically 25 years, and there are systems in the field that are still going strong after more than 30 years of service. Of course no one can be certain how long a car will last, but there’s pretty good reason for optimism here too. Modern cars last. At 150,000 miles there’s lots of life left, maybe half or more. For a typical driver, that may be an additional 10 years. The Volt comes with an 8 year/100,000 mile guarantee on the big battery. Obviously the engineers have confidence in the package.
A final personal observation on hybrids. My 2004 Prius runs perfectly, just as it did when I found it on Craigs List and bought it a couple years ago. It still averages 48 mpg and is a pleasure to drive. My son too has a 2004 that’s served well for the last six years, in summer and through the very cold winters of Boston.
Necessary disclaimer: This blog isn’t the last word in financial advice. In fact don’t take it as financial advice at all. Just consider these ideas as something to investigate if you’re not satisfied with those puny returns you earn now on your hard earned savings. As always, there are assumptions, such as how much your electric company will credit you for the power you generate. You should probably gather the numbers yourself. Get a quote for having solar power equipment installed. Price the electric car or hybrid that fits your taste. Check out bank rates. Take all the raw data to your accountant and see if the numbers above are correct. If so, what are you waiting for?