Monthly Archives: April 2015

Tucson Water – That Grass Cost Me What? (04/29/2015)

This post has little to do with financial planning but I think many of our Tucson readers will find this analysis quite interesting. Summer season is almost upon us and as I was adjusting irrigation schedule for our yard, I got to thinking “How much is this grass going to cost me?” The answer turned out to be much harder to figure out than I thought.

I’m going to use our actual household water bills in the analysis below (we are pretty close to the average residential customer in Tucson). Exhibit 1 shows the details on my most recent bill (April 2015) and Exhibit 2 breaks it down in a different way.

A few observations:

  • Despite being a “Water Bill”, actual Tucson Water charges amount to only 31% of the total
  • Pima County sewer charges are a whopping 48% and Trash/Recycling is another 16%
  • It costs Tucson homeowner $41.50 a month just to have those services available, regardless of usage

Exhibit 1 – April Water Bill Detail


Exhibit 2 – April Water Bill Breakdown


So you have to pay $25 a month for fixed sewer and water charges just to have indoor plumbing. Then there are variable charges based on water meter readings. To make things complicated, water volume is measured in CCFs, which is a hundred cubic feet or 748 U.S. gallons. During the past month, we used 9 CCF or 6,732 gallons of potable water. This translates to household usage of 224 gallons of water per day or 224 / 3 = 75 gallons per person! For reference, average Residential GPCD (Gallons per Capita Daily) is 88 here. Total Potable GPCD in Tucson is about 130 gallons (compared to 220 in Scottsdale and 179 nationwide).

So how do we figure out what it costs to water your lawn, take a shower or flush a toilet? Exhibit 3 derives costs per gallon. There are three tiers of water charges, depending on the monthly CCF usage. So it will cost you anywhere from 0.75 to 1.5 cents for each incremental gallon of water. Our household usage in the past year has averaged 11 CCF per month, but we did hit 15-16 CCF in the summer months (Exhibit 4).

Note: sewer volume has more complicated calculations since they cap the max CCF based on three winter months. But for simplicity’s sake I’m assuming that sewer volume equals to water usage in any given month.

Now that we know the variable charges per gallon, let’s estimate how much it costs to perform some common household activities (Exhibit 5). Note that you need to know how many gallons each activity takes and it’s not that easy to figure out.  Also keep in mind that this is water volume only and doesn’t include costs of electricity to run the appliance OR heat up the water for it.

Exhibit 5 – Estimated Water Costs of Common Household Activities


So the results are not as dramatic as I expected. Finding out the it costs me 1-2 cents each time I flush the toilet is not likely to change my behavior. However, watering the grass does turn out to be quite costly during the height of the summer season. It might be something like $4.50 per cycle x 3 times a week x 4 weeks = $54 to keep the grass green for the month of July or August. Of course, there would be some monsoons to reduce the usage, but still…

If you were inspired to make some changes, Tucson Water has some excellent conservation tips.


Just to give you an idea on where your water goes, here is a breakdown for average U.S. household (Exhibit 6).



Can We Predict Bond Returns? (04/02/2015)

One of my favorite sources of weekly analysis are “The Weekly View” pieces from RiverFront Investment Group. Their team came up with a number of really cool analytical frameworks and one of them is shown in Exhibit 1.  The basic idea is that the starting yield on a 10-Year Treasury bond is a very good predictor of its total return over the subsequent 10 years.  So if the yield today is 1.9% (as of 4/2/15) then we can expect our annualized return to be 1.9%, give or take a few basis points.

Exhibit 1 – RiverFront’s Bond Return Framework


Intrigued by such a simple model, I decided to run my own numbers to see how it works and if I can glean any additional insights. The results of my admittedly more amateurish analysis are shown in Exhibit 2. The 10 Years panel recreates RiverFront’s chart with annual instead of monthly data. It shows strong correlation between starting yield and returns: R-square of 0.9 is quite high and there is a clear linear relationship. The next three panels drop the projection timeframes to 5, 3 and finally 1 year. As you can see in the correlation equations, the accuracy of return predictions declines for shorter periods. Visually, the datapoints exhibit more dispersion with the 1-Year panel spread all over the place.

Exhibit 2 – Forward Annual Returns Based on Starting Yield

Source: FRED, Robert J. Shiller, Aswath Damodaran, PlanByNumbers

So what does it all mean for people buying bonds (or bond funds) today? The equations suggest that bond investors should expect to make roughly 1.6% over the next 10 years (Exhibit 3). Keep in mind that those are nominal returns before inflation, which could easily be higher than that and result in negative real returns. Five year projection is a little higher at 2.3% but comes with lower “accuracy” of 0.8.  I wouldn’t pay much attention to the shorter timeframes, especially the 1-year randomness.

Exhibit 3 – Projected Forward Returns on 10-Year Treasuries


Overall, I would take these return projections with a grain of salt. One general takeaway is that bond investors should temper their expectations, which is not easy to do after a 30-year bull market.