When I started investing, I read a lot about ETFs, stocks, and the stock market. I started with a time deposit as I felt super insecure. Once I understood ETFs and the stock market better, I continued with that. Now that I own a house, I’m thinking about investing in it. Not for living comfort — at least not in the context of this article — but as an actual investment. Something where I hope I get more money out of it.
In this article, you will learn how to evaluate investments in your appliances from purely economical points of view. I’ll guide you through light bulbs, dishwashers, and photovoltaic systems as examples. Let’s start!
The Key Metrics of appliances
- Purchase price: You need to buy the stuff which means it costs you something upfront. Take the amount you actually have to put on the table. That means most of the time including taxes.
- Lifetime: Appliances have a lifetime. While it might vary a lot in practice, we assume a reasonable lifetime — it might be more, it might be less.
- Savings: In order for it to be an investment, it has to bring in money. That can also be money you don’t have to pay, e.g. if the new device is more energy efficient. I assume a price of 0.30 €/kWh (a typical price in Germany) and 0.18 \$/kWh (hopefully something typical in the US).
How do you rate investment opportunities?
- Volatility: Volatility refers to the degree of fluctuation or variability in the price or value of an investment over time. It is a measure of the uncertainty or risk associated with an investment. Higher volatility indicates larger price swings, both upward and downward, while lower volatility suggests more stability in the investment’s value. An example of an asset with low volatility is McDonald’s shares. An example of an investment with high volatility is Bitcoin. It is measured for a fixed amount of days, e.g. the past 30 days. Bitcoin currently has a 30-day volatility of 44.5 (source), whereas Google has 24.4, Shell has 24.1, SAP has 13.3, Procter & Gamble has 13.0, and McDonald’s has 10.0.
- Liquidity: Liquidity refers to the ease with which an investment can be bought or sold without causing significant price changes. It represents the ability to convert an investment into cash quickly and at a fair price. Investments with high liquidity can be readily traded in the market, whereas investments with low liquidity may have fewer buyers or sellers, making it more challenging to buy or sell them without affecting their prices. An example of an investment with high liquidity is Apple stocks. No matter when you want to sell them, you will likely find somebody who is willing to buy them at the current market rate. Assets with low liquidity are houses in rural areas. It might be that at this point in time, just nobody wants to move there.
- Total Return: Total return takes into account both capital appreciation (changes in share price) and any income generated by the shares, such as dividends or distributions. It provides a comprehensive measure of the overall return an investor has received from holding the shares. It is measured over a given time in a currency, e.g. USD or EUR. And it can be negative if you lost money. A better way to look at it is in average yearly (compounding) interest.
Given the total returns over the lifetime and the lifetime in years, you can calculate the average yearly returns. At the end, you have your purchase price back plus the total returns:
purchase price ⋅ (1 + average yearly returns)^lifetime = purchase price + total returns ⇔ lifetime ⋅ log(1+average yearly returns) = log((purchase + total returns) / purchase) ⇔ log(1 + average yearly returns) = log((purchase + total returns)/purchase)/lifetime ⇔ 1+ average yearly returns = exp(log((purchase + total returns)/purchase)/lifetime) ⇔ average yearly returns = exp(log((purchase + total returns)/purchase)/lifetime) — 1
Benchmarks — What is a baseline?
In order to judge if something is a good investment, you have to compare it to alternatives. Simply speaking, higher returns should mean higher risk. Not the other way around, but that is a different story.
Here are a few common types of investment:
- Bank account: +2% per year. No risk, and very high liquidity.
- German Federal bond (7 years): +2.4% per year. No risk, low liquidity.
- German Federal bond (20 years): +2.5% per year. No risk, low liquidity.
- US treasury Bonds (20 years): +3.875% per year (source). No risk, low liquidity.
- ETF based on S&P 500: +10.15% per year (source), just like anything on the stock market you might have bad timing when you want to sell. If you don’t consider that, the liquidity is high: You can sell when stock markets are open almost instantly. But the risk then is rather high that you don’t get those 10.15% average yearly returns.
- Penny stocks: Extremely high volatility, very high risk, very low liquidity. It’s just very likely you will hold them until the company goes bankrupt.
That means:
- Every investment must have a reasonable chance to go over 2%, otherwise, it’s for sure not worth it. I would say at the very least over 3% per year, otherwise, you could just buy the very secure German Federal bonds.
- If it goes over 5 years and has a low to medium risk, it should be above +10% per year.
- Anything that goes over +12% and has little risk is pretty much a no-brainer. It also means you can double your money after only 6.5 years.
Example №1: Light Bulbs 💡
- Purchase price: About 2€ per light bulb
- Lifetime: About 10 years. It’s given in hours it can burn + how often you can switch it on/off. It’s a lot higher, but I have doubts the numbers are true. Hence I don’t take the 17 years the 50,000 hours should give me but rather just 10 years.
- Savings: Assume we let it burn every day for 8 hours over 10 years. Assume we replaced an old 40W light bulb with a 4W LED.
Those assumptions are realistic, see:
Is it worth changing the Lightbulb? Switching for a more efficient lightbulb for economic reasons
That means after 10 years we have
total returns = money saved by reduced energy bill — purchase price = (40W — 4W) ⋅ 10 years ⋅ 365 days / year⋅ 8 hours / day ⋅ 0.30 € / kWh — 2€ = 36W ⋅ 29,200 hours ⋅ (0.30/ 1000 € / Wh ) — 2€ = 313.36€
That is 156× the original investment after 10 years.
Speaking of average yearly accumulating returns, you would need to get exp(log((313.36€ + 2€)/2€)/10) − 1 = +65.9% every year for 10 years. That already accounts for the fact that the bulb is broken after 10 years and the initially invested 2€ are gone. That is a crazy good investment! It’s that good because you save so much in electricity cost — at least if electricity is similarly expensive.
It’s actually a little bit better as the old light bulb likely would not have lasted that long. So you would have the need to buy a new one within those 10 years anyway. But that doesn’t change the overall picture.
In the US, you pay about 0.18 USD/kWh and the bulb would cost about 2.50 USD. That means:
−2.50 \$ + (40W-4W) ⋅ 10 years ⋅ 365 days / year ⋅ 8hours/day ⋅ 0.18 \$/kWh = -2.50\$ + 36W ⋅ 29,200 hours ⋅ 0.18/ 1000 \$/Wh = 186.71 \$
In average yearly returns it’s exp(log((186.71\$ + 2.50\$)/2.50\$)/10) — 1 = 0.541. That means +54.1% every year. Still extremely good.
Dishwasher
My old dishwasher consumes about 2 kWh of electricity per cleaning cycle, whereas a modern one consumes roughly 0.746 kWh per cycle. The new one I have in mind costs 550€. I assume it lasts 15 years.
total return = total energy savings — upfront cost = (2.006 kWh/cycle — 0.746 kWh/cycle) ⋅ 1 cycle/day ⋅ 365 days/year ⋅15 years⋅ 0.30€/kWh — 550€ =1.26 kWh/cycle ⋅ 5475 cycles ⋅ 0.30€/kWh — 550€ = 1520€
average annual interest = exp(log((investment + total return)/investment) / lifetime) — 1 = exp(log(2070€/550€)/15) — 1 = +9.2%
+9% per year almost guaranteed is not bad. Yes, it could break sooner. But my current dishwasher is probably 30 years old.
The old one is broken: Basic vs Advanced Dishwasher comparison
If we have to buy a new one soon anyway, the comparison changes. A basic dishwasher costs about 440€ and needs about 0.95 kWh/cycle.
total return = (0.95 kWh/cycle — 0.746 kWh/cycle) ⋅ 5475 cycles ⋅ 0.30€/kWh — (550€ — 440€) = 1116 kWh ⋅ 0.30€/kWh — 110€ = 224.80 €
average annual interest = exp(log((224.80 + 110) / 110)/15) -1 = +7.7%
The extra 110€ only return 7.7% per year, less than the 10% we wanted for an investment over more than 5 years. Purely economically speaking, it is wiser to buy the cheaper (new) dishwasher. If you consider extended warranties or a higher lifetime of the more expensive dishwasher, it might be worth buying that one.
What's the annual return for the cheap dishwasher?
Let’s make the first calculation with the cheap dishwasher:
total return = (2.006 kWh/cycle — 0.95 kWh/cycle) ⋅ 5475 cycles ⋅ 0.30€/kWh — 440€ = 1295 €
average annual interest = exp(log(1735€/440€)/15) — 1 = +9.6% per year
Taking different lifetimes into account
To the “buy cheap, buy twice” folks: You will likely buy a new dishwasher in your lifetime anyway. The main question is how often and if it’s really that bad to buy a few years earlier.
But let’s assume the one that is 110€ cheaper would last 2 years less. Hence not 15 years, but 13 years. You can then calculate a yearly cost, e.g.
- 550€ lasting 15 years is a yearly cost of 36.67€/year
- 440€ lasting 13 years is a yearly cost of 33.85€/year
Now you have a yearly cost for the dishwasher itself. You can add the electric bill:
- 550€ machine: 36.67€/year + 0.746 kWh/cycle ⋅ 365 cycles/year ⋅ 0.30€/kWh = 118.36 €/year
- 440€ machine: 33.85€/year + 0.95 kWh/cycle ⋅ 365 cycles/year ⋅ 0.30€/kWh = 137.88 €/year
So the more expensive machine is about 20€/year cheaper if you consider the electric bill. However, you have to pay 110€ more upfront. Assuming you would have put those 110€ in an investment increasing its value by 10% every year, you would gain roughly 11€ each year. So the difference becomes only 9€/year. At that point, I would say that you should decide on other factors as they are financially too close.
Photovoltaics
I’m thinking about buying solar cells for my balcony. They are limited to 600 Wp (Watts peak) in Germany. The big advantage is that I can install them myself which means the cost is comparatively low.
There are a few tools to calculate stuff around those types of solar cells. I use the following:
I assume that I can manage a 50° angle, south-east direction. According to them, a 600W system would cost 650€. After 20 years I would be 1411€ better off, meaning I would have saved 2061€.
average yearly returns = exp(log((purchase + total returns)/purchase)/lifetime) -1 = exp(log(2061€ / 650€)/20) -1 = +5.9%
Summary
In this article, you learned how to calculate the average yearly returns given the total returns (energy savings), the purchase price, and the lifetime. You’ve also seen how to compare a cheap and less efficient device with a more modern and efficient one from purely economical viewpoints.
You have also seen the idea of calculating a device's “lifetime cost” which makes it way easier to compare two choices with different energy efficiencies. The “yearly total cost” including the energy paid makes it possible to ignore potential differences in lifetime in a reasonable way.