Are You Getting What You Paid For?

In the world of project management, I deal with this all the time, with project budgets that have ranged from $200,000 to upwards of 25 Million dollars. Before making any large investment, companies want to know if this is worth our time, people, and money to invest in this new capability.  This makes sense in the business world, but many people do not even think about that when they are applying it to the personal side of finance.  Many homeowners should think about this for any home improvements, such as this DIY bathroom remodel I did last year.  Let me break this down a bit so you can figure out if you are spending your money in the right way or in the right areas.

What is the return on investment? Simply put, it is how much money are you going to make back and how long before you start to make a profit. Let me give you an example and I'll use one of my favorite topics to debunk...solar panels.

1) How much is this investment going to cost? Let's say $20,000

2) How much income is this going to generate? Or how much are my expenses going to go down as a result of this?  

Let's assume my electric costs for $300 a month.

3) How long is it going to take me to make that $20,000 investment worth my while?  This is where it gets a bit more complicated, but not really.

$300 x 12 = $3,600

Total Investment ($20,000) / $3,600 = 5.5 Years before I break even on the initial cost of the Solar Panels.

Now, I know the math nerds are going to get after me on this because this does not take into account the cost of money, usually a rate around 4-8% depending on many factors, but I wanted to keep it simple. Realistically, many would call this above a break-even analysis. When do I break even on this investment?  

Why is this important?

The goal is to make us think about the long-term effects of where we spend. In the analysis above, if I plan to live in my house forever, this may make sense, as 5.5 years from now I may be saving $300 a month and my investment is technically all paid back. But what if I'm not sure I'm going to stay here that much longer, well, then this changes the thought, because you will be burning that $20,000 up because chances are the next homeowner is not going to pay for what you thought was a good investment. Or, maybe in 5 years, those panels are going to need maintenance and that is going to cost another $10,000, is it not worthwhile? These are the questions you need to ask yourself, especially on large investments.

You also have to think about the total price of the job. Is this the best price with the same value? For instance, what if I could find a highly-rated solar company that could do this job for $15,000? Now is it worth it? That shaves about 1.4 years off the break-even analysis.

Where else can this apply?

This particular calculation is really important as you are thinking about your kid's schooling.  Something you can use to help them narrow down the right school for them. Colleges range greatly in cost from $10,000 a year to upwards of almost $85,000 per year.  In many cases, there is not much of a difference in the educational levels.  Now, don't get me wrong, some of these top universities have great career placement services and will help you get a job quickly.  However, if you are going to rack up $350,000 worth of Student Loan debt, at an interest of 8-10% you are going to be paying a large portion of your salary for many more years after you graduate.  

If you factor that in, with a $50,000 cost for 4 years, with possibly no debt or minimal debt how does that change?  Is your job coming out of college going to be the same level? Will your degree get you there faster? Will you have more limitations because your degree is not from a Brown or a Harvard? Chances are no. Those colleges may help you get into one of these higher-paying areas, but there is no guarantee of how far you will go and nothing that stops you from going far beyond college.

My degree is from Fairmont State. A college most people know nothing about, but they provided me with a solid education for 4 years.  What I did after that was continue to grow myself with further certifications, knowledge, and growth, that went beyond my 4-year degree.  Sure, I did an M.B.A. from Lehigh University, but no one has ever asked me where my degrees were from. 

I'm not trying to bash those who went to high-tuition schools, you go where it makes sense for you and what you want to study.  What I do want to challenge you and your kids is to go to the right school that you can afford for the field of study you are looking to go into.  And if you don't know it is ok to spend a few years in community college figuring that out.