Save money with solar panels? Better do the numbers....

I would love to put solar panels on our house. It seems like the right thing to do, especially from an environmental perspective. Click here for a real-life example posted on ThisOldHouse.com.

Summary of money spent and payback is listed at $26,000. They say they now pay $500 per year in electricity a "75 percent" reduction, but at the bottom they save $2,000. It looks like it should actually be an 80 percent reduction (going from $2,500 to $500 vs. $2,000 to $500).

Here's the breakdown (as I see it).

SAVINGS:

Electricity Savings of $2,000 per year ($166.67 per month average). Reported break-even point 13 years ($26k/$2k/yr = 13 yrs)

COSTS:

Cost (paid in cash): $26,000

Cost (8% loan at 13 yrs): $41,901.48 in payments over 13 years ($15,901.48 in interest).

Opportunity Cost (if paid in cash) depends on investment return/debt repayment as follows:

• If carrying a credit card balance with national average of 12 percent rate, your interest savings would be 1 percent per month or $260 per month. Note: you are actually losing $60 per month by putting solar panels on the roof.
• If invested $26,000 with 8 percent return over 13 years, the "Future Value" would be $73,306.20. This is an increase of $47,306.20 or $303.24 per month. Subtract taxes depending on brackets/state rates and you may end up with around $200 per month.
• There are many mix/match combinations of the above. Other scenarios may be contributing to retirement plan with tax savings, changing the terms to more or less than 13 years.

It's okay to decide to put solar panels on your roof (even if you lose cash flow each month). Just acknowledge that as an additional cost for this project when making your final decision.

TAKE HOME POINT

The important thing is to weigh the cost (both direct and opportunity) and savings before taking the plunge.