Money down the Outlet

The bad news keeps rolling in:  job loss, falling housing prices, falling stock market, growing national debt, etc., etc., etc.  Not only do we have to worry about our wonderful declining economy, but we also get to look forward to rising temperatures and energy prices.   Mapawatt Blog is loving the great news these days!  Why is Mapawatt blog revelling in our frustration?  Because when in the history of the world has there been a better time to be a blog about energy conservation!

If you haven't caught on to the fact that investments in energy conservation are probably better than current investments in the stock market, then you need to put down your Investing for Dummies book and start reading Mapawatt blog or the book The Home Energy Diet.  I actually planned on writing about energy efficient windows today (don't worry, I will do that later this week) but when researching tax incentives I started down this other train of thought.  I decided I needed to write this while looking at the current tax credit from the IRS for energy efficient improvements.

The credit is for improvements installed in 2009 and 2010 and equates to 30% of the purchase of energy-star door/windows/skylights, insulation and sealing, and certain home heating and cooling equipment.  The Alliance to Save Energy has a good summary table on their page.  This credit goes up to $1,500.  So you can spend $5,000 on improvement and assuming you pay taxes, the government will give you back $1,500 dollars next year!  Which got me thinking:  There is so much focus on falling stock prices and home prices, why isn't there more focus on investments that are actually improving?

So I had to do an analysis!

I totaled the cost of the energy I consumed from April 2008 to March of 2009 which included electricity (kWh) and natural gas (therms).  I didn't include any service charges charged by the natural gas marketer because these are flat rate charges and do not vary on the amount you used.  I did include sales tax on the electricity, because this is only charged on what you use.  If you don't use kW, you don't get charged tax on them.  The total amount I spent in 12 months was $1,318.79!  I know Georgia has relatively low energy prices, but I'd be interested to see your comments to see how this compares to other parts of the country!

I then made some assumptions to compare energy efficiency improvement to investments in the stock market.  Let's assume that I had $1,000 dollars to spend at the end of this year and I can use this money to buy more efficient windows/air conditioner/insulation/heat pump/etc. or I can spend this money buying $1,000 worth of stock.  I'm going to use the $1,318.79 for my baseline annual energy cost and make the following assumptions:

• Energy (both electricity and natural gas) prices will rise 5% annually (this is seen by many to be a VERY conservative estimate)
• The $1,000 dollars I spend on energy efficiency improvements will save me 10% on my bill annually. (Probably conservative as well)
• The hypothetical stock will appreciate 5% annually (historically this is low, but it's excellent considering what we've seen the last few years)
• The stock does not pay dividends
• The capital gains tax incurred when the stock is finally sold will be 15%.

Based on these assumptions I calculated out to the year 2020 at which point I added up all the money I saved from my conservation improvements  (10% of my energy bill each year) and added that to the tax credit received in 2010 of $300.  I then compared it to the money I made from selling the stock, minus the capital gains tax.  It is important to note that money saved by efficiency measures IS NOT TAXED.

So the results?  $1,000 invested in efficiency improvements returned a net profit (money earned minus initial expenditure) of $1,267.26; while the $1,000 invested in the stock market returned a net profit of only $603.79!  I must point out that one also has to consider risk when making these decisions.  Not only do the energy efficient improvements seem to make more sense on a straight monetary basis, but they are inherently less risky!  I can almost guarantee you that energy prices will not be lower than what they are today in 10 years, but as we have seen, the same can not be said about the stock market.  Now, with increased risk comes increased reward.  So if you need to make a lot of money, the stock market is your best bet, but I like to  make smart, safe decisions and not leave my fate up to Wall Street.   Looks like efficiency improvements need to start getting some more attention from the investment crowd...

*I'm hiding some cells in an image of my excel analysis below just so it fits on the screen.