We are coming up on two years of living through the complete renovation of our fixer upper. Though this is about two years longer than we thought it’d take (amateurs), we’re getting closer to the finish line. During this time our backyard has been a pile of rocks and weeds, all because we were struggling to make one decision…. Should we build a pool? It wasn’t we walked through the process outlined below, that we were able to effectively analyze the options and make a decision. While this specific example may not be relevant to you, this process can help anyone analyze expensive purchases.
Why a pool was in the renovation budget
We included the cost of a pool in our renovation budget after purchasing the home. We fully expected to add a pool, and everyone around us expected that we would. Why? Because this is Scottsdale! It’s crazy hot and full fancy homes and cars. We do not, by the way, have a fancy home. Nor do we have fancy cars. But I guess that’s one of the reasons we are where we are on our financial journey.
While the idea of having a resort-like pool in a resort-like backyard is certainly appealing, I think we struggled with this decision, because (a) it’s very expensive, and (b) we weren’t really that excited about having one. We thought that we needed a pool for future buyers and to have a normal AZ home. If I’ve learned anything on our journey so far, it’s that you can’t be afraid to buck the norm and focus on what you really want.
I think that deep down, we both knew that having a pool wouldn’t be worth the cost to our family. Otherwise, it would have been a simple decision and we could have moved forward with soliciting bids. When you find yourself hesitating…it’s usually your subconscious trying to tell you something.
Second thoughts – Does everyone really have a pool?!
Initially, I was afraid that we’d be hurting ourselves when it came time to sell by not having a pool. It took a while to step back and look at things objectively so that we could properly evaluate the choices and make a decision.
In most parts of the country, homeowners can expect to receive little to no return on investment for putting in a pool. However, Scottsdale is probably one of the few places in the country where most homebuyers want and expect a pool. Even so, most realtors in the area indicated that we still won’t see a significant return on investment, with ranges from 15% to 50%. When you consider that a moderate pool costs $40k – $60k in our area, those aren’t great returns.
And while the majority of people moving to the area have a pool on their wish list, there will be a buyer who loves our house and is totally fine without a pool (or has a preference to add one tailored to their own taste).
How to analyze the true cost of your expensive purchases
This is the process we ultimately used to come to the decision to forgo building a pool. You can use this same process to evaluate the true cost of any expensive purchase you are considering.
1. Estimate the true cost of the purchase
Note that I intentionally used the term “estimate,” instead of “calculate” here. Why? Because the true cost is more than just the amount of money spent at the time of purchase. Your true cost will include the upfront price you pay, and two other costs which can only be estimated and are often overlooked – maintenance and opportunity costs.
(a) Maintenance and other operating costs
These are the routine or occasional costs needed to maintain your purchase for extended use over its expected useful life.
Though there are maintenance costs associated with almost every non-consumable item we buy, these costs are often minimal. However, when you are considering a more expensive purchase, like a home, pool or car, these costs can vary based on the selection you make and can add up. For expensive purchases, remember to factor these costs into your decision making process. It’s easy to forget.
When shopping for a new car, we are often so focused on sticker price that we forget to compare the maintenance costs amongst our options. For example, the operating costs of a BMW or other luxury import brand in the United States will be much higher than that of an American brand. Luxury brands will often have higher maintenance and insurance costs, as well as require premium gasoline. You can get an estimate of the 5-year ownership costs for different car models on Edmunds’ website.
With regards to the pool, we would expect to have ongoing costs for weekly cleaning and chemical treatment, higher insurance premiums, higher electricity bills to run the pump, and the occasional repairs. After speaking with other pool owners in the area, we estimated that these costs would be $1,500 – $2,000 per year. That’s actually a lot of money on a budget that we’re trying to get below $50,000 (see our monthly expenses here).
(b) Opportunity cost
This is the value of the next best alternative – what you’ve given up in making your decision. When it comes to financial decisions, the opportunity cost represents what else your money could have bought or how it could grow under alternative scenarios.
I’m just going to be blunt here. Most people fail to include the opportunity cost in their decisions. I’ve been an accountant for over 15 years and even I don’t forget to factor this in most of the time. But it’s an important cost to consider, especially when deciding what to do with significant amounts of your money or your time.
Our pool decision, was a WANT, not a NEED. As such, we concluded that the next best use of that money would be to invest it.
Because I enjoy nerdy things, I created a spreadsheet with multiple assumptions and scenarios to review to analyze expensive purchases. However, for the purposes of this demonstration, let’s consider the following assumptions: an initial cost of $50k, annual maintenance fees of $1,600, and the annual rate of return of 5%. If we invested this money instead of purchasing the pool, we’d have an additional $19,700 after 7 years.
Compiling the total cost
The one thing still missing from this equation is the residual value or the ROI of the renovation. This represents the remaining value at the end of use or money we’ll get back at resale. Since this is such a crapshoot and we’re working with estimates, I’ll just use a 50% ROI. Though I imagine the return could be anywhere from 15% to 100%.
Once you have a value or estimate for each component of the total cost, it’s time to add it together. Here’s what our estimated total cost looks like for the pool over the 7-year period:
| Cost Type | Amount |
| Initial Build Cost | $50,000 |
| Maintenance | $11,200 |
| Opportunity Cost | $19,740 |
| Less: Renovation ROI | $(25,000) |
| Total Cost | $55,940 |
2. Determine the cost per use (or per period of time)
Once you’ve determined the total cost, you’ll want to divide the that cost by the number of expected uses or period of time to get your cost per use. This number is the real eye-opener that should give you the gut-feeling needed to decide.
For our decision, we used an average time period of seven years for our period of use, after which we expect to sell the house and move on. If we divide the total cost of $55,940 by seven years, the annual cost of adding a pool is $7,991!
As soon as we saw that cost, the decision became clear. Would we enjoy a new pool and the convenience of having one in our own backyard? Absolutely! Is it worth $7,991 per year for that privilege? Hell, no! Even if we could get a 100% ROI when we sell the house, the annual cost would be $4,420. Still more than we’d be willing to pay.
If you wanted to take this further, you could keep digging to get closer to the cost per use. Even though it is crazy hot in Arizona, we would only be able to use the pool for 6 months of the year. Dividing the annual rate by 6 moneys results in a cost of $1,332 per month. More than that our other housing costs!
3. Evaluate the results (make a pros & cons list, if needed)
Consider the cost per use above and how that compares to the value you place on the item in question. Is it more or less? Just because something is expensive or has a high cost per use, doesn’t mean that you shouldn’t buy it. As long as you understand and consider the true cost of your expensive purchases, you’ll rarely experience buyers’ remorse.
A $300 pair of shoes that are high quality and worn every day are going to be a better economic value to you than a $50 pair you only wear occasionally. This is a great tool for evaluating other splurges like a designer bag or a boat (don’t do it).
If the cost per use didn’t smack you in the face with the answer to your “buy or don’t buy” question, consider writing down a pros and cons list. You could also do this as the first step in the process, if you prefer.
We never wrote out a pros and cons list. However, we did talk through all the positive and negative things about adding and having a pool. The problem is that we talked about these and debated them for almost two years until we had the above numbers in front of us. Only then did the conversation and decision became an easy one.
Make a decision you won’t regret
After going through this process, we have not only made a decision, but we feel 100% confident that we made the right decision for our family. This process can help you analyze your expensive purchases, too.
As an added benefit, this decision allows us to move a portion of our renovation funds into our financial independence portfolio which pushed us above the 50% threshold on our journey to FI!
What expensive purchases are you currently debating?
Want to learn more about our journey to financial independence? Start here with our first post.
