Saving Money With a Tankless Water Heater

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tankless water heater

We moved into our home back in June. The house is on a nice sized chunk of land for our area and we are very happy there. The one issue we are dealing with is our water. Not the pressure, but how much it costs us to heat. After some digging we discovered that our water heater is really old and undersized, which is a terrible combination at best. Our electricity bill has been much higher than at our old home, but with less space.

Since I hate having to pay more for electricity, I decided to figure out what was causing our problems. After testing and researching, I narrowed it down to the water heater. As I said, it is undersized for our home. It is also quite old. The temperature has to be set to 140 degrees in order to pull out 115 at the tap.

This means the thing is running constantly to keep the water warm and has to double up when we run the tank out of hot water. This happens quickly when we give my son a bath. So, in true personal finance fashion, I have decided to look at the costs and benefits of changing out my tank heater for a tankless water heater to determine the payback period.

The Benefits of a Tankless Water Heater


You may have heard things about tankless water heaters or you might not even know they exist. Tankless water heaters tend to be much more efficient than traditional water heaters. Water doesn’t have to sit in a tank and be heated. You heat water on the fly with a tankless water heater. You can get hot water on demand and receive a constant flow of it. Theoretically, you should never run out of hot water with a tankless heater.

After looking around, I found that people save on average 20% of their water heating bill by switching to a tankless water heater. It can be hard to trace back all that savings, but if you use all electric like I do, then it can be easier. On top of saving money you are dealing with a smaller footprint and less environmental impact. I am cool with that.

The main drawbacks of a tankless water heater are the upfront cost and an inability to get hot water when your power or gas goes out. You have to settle for cold water at that point. With a traditional heater, you can still use the hot water in the tank until it runs out. I have had to do that once so far, so that was a nice thing.

The Costs of a Tankless Water Heater


Tankless water heaters cost much more than traditional ones. I can get an 80-gallon traditional heater for around $400. This does not include installation. If I wanted a tankless water heater, it’s going to cost me $750 for the size of my house.

Since the initial installation of a tankless heater is costly, you could end up paying well over $1,000. Luckily for me, I have electric power and an unused circuit, which the new tankless heater can be installed on. I got a few quotes and I would be paying a little over $1,000 for the install and product. I would be paying $650 for a new traditional water heater. The difference is $350.

What About the Payback Period?


I am currently leaning toward purchasing a tankless water heater. The benefits for us outweigh the costs. Since we are about to embark on a basement renovation, this could be a great addition. Our tank heater sits right on the floor in the basement. It is about two feet from a wall. Very convenient, I know!

If I went with a tankless heater, I could move it beneath my stairs and have functional space where the old heater is now. The big problem for me is the payback period. This is how long it would take to repay the initial investment just with the monthly savings. Here is how I am going to calculate this.

I am going to assume my old/crappy takes about 30% of my electric bill. Seriously, that thing is freaking terrible. I’m also going to say a new traditional heater will save me 10% each month. A tankless water heater will save me nearly 25% based on how we are running now.

My overall electric bill averages $100 a month. That makes it very easy. If I bought a traditional water heater, I could save $10 per month. With an overall cost of $650, it would take me 5.41 years to recover the costs. Not bad…just kidding! 😉

With a tankless water heater, I could save $25 per month. At close to $1,000 for the heater and install, it would take me 3.33 years to recover the costs. Well, isn’t that a little better.

Let’s assume the water heater needs to be replaced, which it really does. Instead of doing a payback analysis on the overall cost, why not do it on the difference. If your water heater breaks, then you have to get another one. This would be money I would have to spend. If I decided on going tankless now, then I would have to pay $350 more to get it. If it was going to save me $25 per month, then it would only take me 1.16 years to recover the costs of the upgrade.

The moral of this story is to make sure and weigh all the costs and benefits of any upgrade. With this information, I will be going with a tankless water heater and plan on getting it installed soon.


What do you think about tankless heaters? Have you calculated the payback period yet? What are other ways you can save money around the house? Do you analyze your utility bills for cost saving opportunities?


Photo courtesy of: stevendepolo

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Grayson is the owner of Debt Roundup and Empowered Shopper. He also co-owns Sprout Wealth and Eyes on the Dollar. After going to battle and winning against consumer debt, he decided it was time to learn how to use credit wisely and grow his wealth. He discusses all things personal finance and is not afraid of being controversial. He also is a freelance writer and blog manager.

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  • I didn’t even know there was such a thing – so now i’m going to have to look into it. Shame I wasn’t aware before we signed the contract for our new house 🙁

  • Nick says:

    Not sure I understand your math. Saving $10 a month would result in $650 of savings in 65 MONTHS, not years.

    • Grayson Bell says:

      Of course you don’t get my math! I was writing the amount in months, but then putting years afterwards. Sorry about that. I converted the numbers to years. Completely my mistake.

  • I guess the tankless water heater *might* cost you more in electricity if everyone revels in the unending hot water and starts taking super long showers! But I’m sure that’s not going to be a problem for you guys. 😉

  • I know one person who installed a tankless water heater and loves it. I would consider it if the price weren’t so high- the ROI just isn’t there yet! Maybe when our water heater dies =/

  • My dad installed a tankless water heater in his home a few years ago, and he was surprised at just how fast he recouped his investment. The numbers were really compelling and I would love to do that in our home, but we have to prioritize our home projects and unfortunately the air conditioner is up next.

  • Kim says:

    I would consider a tankless one when ours goes out. I’m not sure we didn’t put one in originally, but I’m sure it was looking at the upfront cost and not down the road.

  • Aaron says:

    Hey Grayson. Have you found the water to be as hot as the previous one? I have just read they don’t heat as well as the others – especially in the colder climates (in the winter).

    • Grayson Bell says:

      I can’t tell you that. I haven’t pulled the trigger yet on the tankless. It is coming soon, but we don’t have really cold winters here in NC, so I am not worried about it. I have heard the same thing, but it also depends on the model you get. There are so many.

  • Miriam says:

    A couple of comments: We had an electric tankless and found it had difficulty raising the water from our well enough degrees and kept shutting off. Check the temperature of your incoming water and the specs for how many degrees it can raise it. If you can get natural gas where you are, they are supposed to work much better. I recently read an article on the web (Fine Homebuilding I think) and they said the savings being quoted were exaggerated and that a natural gas well insulated tank would probably cost about the same. Of course, if you are stuck with only electric that might be different.

  • So, check this out: our furnace guy just told us a week ago that they could put in a tankless water heater for the low, low price of $4,000!!! WTH??? Apparently, I need to do some more checking around.

  • Patrick Lach says:

    As a finance professor, I have a different take on tankless heaters. I have looked at a tankless heater too and one thing you failed to mention (and someone please correct me if I’m wrong) is that a tankless heater will last 20 years while a traditional will last 10 years. If this is the case, it is best to compute an internal rate of return since you are dealing with unequal useful lives. Buying a tankless instead of a traditional heater will save $15/mo for 119 months. At month 120, the tankless will save you $15 + $650 since you won’t need another heater. From months 121 – 239, you will save $15/mo. Your initial investment of $1,000 produces an internal rate of return of 1.62%\mo, or 19.45% per year. My next heater will be a tankless heater!

  • Ah payback period…one of my favorite financial calculations. I honestly had not heard of a tankless water heater, but it seems like it could be a great option for new(er) homes or home renovations. I’m assuming the reason most people have water heaters with tanks is because technology hadn’t progressed far enough yet for tankless water heaters to be affordable (or possible). I’d consider it for my next home.

  • My daughter has a tankless gas and it seems to take forever for the water to run hot out of the kitchen tap.

  • Amy says:

    My parents got a tankless heater for their home, and they really like it. I would definitely consider it, when we need to replace our existing heater. (Our house was built in 2004, so I’m hoping that’s not for at least a few more years!)

  • Kathy says:

    We are building a new house next year and our contractor is suggesting a tankless water heater. He has one in his own house and loves it. I’m still undecided. The conventional kind has worked for decades and the tankless is such a new thing. I’ll have to give it more thought.

  • Gretchen says:

    We had a tankless water heater growing up at my parent’s house, and while it was nice, I always assumed that the cost was too great for us to put one in our own house. However, with a payback period of a little over a year, I am officially on board. Thanks for breaking it down so I didn’t have to!

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