Ross and Heather discussed asset replacement cost in the previous post in answer to a participant’s question. This is the continuation of the conversation.
And I think, you know you’re talking about the 6% increase that somebody suggested. And I think you could choose what interest rate you think seems to be the most appropriate…
But if you’re good at that, change your job and work in Wall Street because I mean nobody is getting that right at the moment. So…
Yeah. I was going to say the same thing like you know just putting in the concept that you don’t think $10,000 is going to be the exact cost 10 years from now. And if you want to be a little, maybe on the safe side, put a higher interest rate. If you want to be a little less conservative, you can put in a lower interest rate.
But you’re trying to get the bulk of the money set aside, so really that’s kind of I think your goal. Just get the bulk of the money that you would need. Set aside, and you know you’re approximate, what was it, $80 a month or something.
With approximate getting the bulk of the money, you need a bit of extra. And if that’s going to be a problem to get ten years down the road, well then pull a bit more money aside so that you kind of give yourself a cushion.
If you don’t think it’ll be a problem to get another say a $1000 bucks at the time of purchase, then just putting aside the purchase price would probably work. So it’s kind of up to you what interest rate. I don’t think there’s any magic to say it should be 2% or 5% or 8%…
Well, 6% will be quite high at the moment.
Yeah, 6% could be a little high I think.
It depends on how you’re funding. I mean, if you’re bond funding, you can just go and look at the muni-bond average and use that set of numbers or if you’re funding by land taxes or direct charges, you could look at something similar.
In New Zealand, each authority or each water authority has to have a basically a treasury policy, that says how/what they’re doing. So it’s easy for the engineers because they just look at the treasury policy and say, oh we’re using a rate of XYZ and that’s what it is.
But for us even, like you go back a decade ago, it was 8% was the figure. It’s not that anymore, it’s below that, and I think we might be using 4 or 5% now.
And if you don’t have a reserve account. I would highly recommend that you get one. A repair and replacement reserve that you can put your money aside that’s typically where we would say like your short term.
You can have a short term and a long term if you want. Or they can all be the same, it doesn’t really matter how you want to structure that at some place where you can set that money aside.
And that you have a plan that the money in there is to go for this pump or this tank and this well or this pipe or whatever this set of stuff is, that you have the plan, that somebody doesn’t just see this money and think – oh we can spend this on something else.
You want to lock it away. Yeah, you want to lock it away so that it is not sitting in the budget that looks like oh wow, we’ve got this extra $10,000 we can spend on who knows what. Let’s go to a conference or something.
You want to make sure that you lock it away in some kind of reserve account. So if you haven’t done that, I would highly recommend that type of situation so you can have it put aside for a specific purpose.
PHOTO CREDIT: Andrés Nieto Porras via Flickr Creative Commons License.