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Financial Planning Tip March 2023

Would you be interested in an investment that pays a guaranteed 33% return for a minimum term of 20 years? Then we have a pitch for you: light bulbs. No, we don't suggest buying light bulb stocks or speculating on light bulb prices. Changing from CFL bulbs that were common in the 2010s to more modern LED bulbs can yield a 33% return on your investment even considering higher up-front costs.

Most people don’t think of light bulbs as an alternative to stocks. (We're investors at Midway, and when you have a hammer, everything looks like a nail.) That's helpful in this case, though. Replacing every light bulb in your home may cost a few hundred dollars, and it will pay you back at a rate of 33% per year. Sadly, you can't invest many thousands of dollars at this 33% return on investment, but it's certainly a better choice than a savings account or the stock market.

You can calculate the simple return on other energy efficiency upgrades like a new furnace or water heater, windows or solar panels. In simple terms, the equation looks like this:

Return = ((total savings - total cost)/initial investment )/years of service

Typically energy efficiency projects offer better returns than other places to stash your cash. This is especially true when you consider tax incentives and recent increases in energy costs.

Many companies offer an analysis like this as part of a sales pitch. They may even offer financing options so your upgrades "pay for themselves." This might be a good deal, but be skeptical. This is a sales pitch after all, and financial regulators like the SEC aren't standing in your corner to ensure disclosures are honest and thorough. Benefits can be oversold, but the project might still make sense after incorporating realistic assumptions. Ask questions, be sure you understand up-front and ongoing costs & benefits, and understand what happens if your assumptions change.

And while you are talking to your tax preparer this time of year, ask if there are credits available for something you want.

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