Solar Update – April 2017

solar-panels

My favorite time of year has come! The days are longer, the snow seems to be gone for good, and birds are chirping on my way to work. Spring is upon us. I’ve always loved spring and summer, but now I have even more reasons to embrace the seasons. No, not just because the kids are out of school and there will be less traffic. Because it’s sun season! As you know, we got some solar panels last summer and we enjoyed many months of free electricity. It was truly a sad day when I had to pay for my first electric bill in months after the start of a frigid winter. These things will spoil you…

But the sun always shine eventually and, boy is it shining! My March 2017 electric bill was $38. We are retiring the heating for the season and thus expecting a much lower utility usage, until late June when we have to kick on the AC. Even then, I’m thinking that the 12-13 hours of sunlight that summers in New England graces us with should be sufficient to offset the worse of the damage. I might have reached the electric bill break even point. If so, I am looking forward to negative balances (I don’t say that very often) for many months to come so I can run my heat for free in November.

Let’s raise our glasses to sunny days, tax credits, and free electricity.

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Question Everything

I don’t mean to speak for anyone but I’d like to think that we work hard for our money and we would like to keep it. That’s why I discussed fraudulent investments earlier and some of their tell-tale signs to help you recognize and avoid them. But people can be really crafty when it’s time to con you out of some cash.

If the proposed investment initially passes the smell test, here are three questions you can ask to further pull back some layers and determine the merits of the deal:

Does the dealer have a license? Even with the best of intention, the market has shown that it cannot be trusted to regulate itself. The best way of ensuring that people and organizations are doing the right thing is to have the threat of severe penalties (usually financial) hanging over their head. Unlicensed advisers are illegal and accountable to no one. Furthermore, we do not know what their qualifications are.

Does the risk/reward structure make sense? “High risk, high reward” is a common cliche, but it is true. If someone is offering a low risk guaranteed investment, the returns will likely be very low. The opposite applies if the rewards are significant. The risk is likely to be high and the returns will not be guaranteed. Anything different is likely a scam, or at best it is misrepresented.

Is the investment registered? It is similar to an unlicensed dealer. Who is tracking and regulating the security if it is unregistered? Personally, I do not like to rely on a company that is financially invested in me being uninformed for the truth. Registering a security ensures that the SEC, an independent government organization will ensure transparency by providing you with the necessary information to make good choices.

No Rest for Dead Presidents: My Dollars aren’t Lazy Bastards

What an awful headline. But I’m not feeling particularly creative today so it will have to do.

money

In an introductory investment post, I liken dollars to employees who must work to make my life better. Money has a significant advantage over us when it comes to working and earning potential. We get tired, we need sleep, our loved ones want our attention. Money has none of those conflicts so what reason is there for it to not be working tirelessly to free you from the rat race? In my case, my little dead presidents’ only duty is to slave away to improve my quality of life. Here are some of the ways I make sure they aren’t being lazy little bastards.

I structure my bank accounts deliberately: Some days I can’t even keep track of how many accounts I have. But the complexities of both life and banking regulations do not allow me to simply have a checking and a savings. While I have a checking account for my every day use, that is the lowest yielding account there is. I can’t keep all my money in a checking account. However, the highest yielding bank account is a CD (learn more about CD’s here and here) and there are penalties for early withdrawals. Since emergencies do not wait for CDs to mature, I also have a money market account which provides me with quick access to cash at a much higher rate than a checking but without the potential for a penalty.

I only use cash back credit cards: Your bank is making money off your use of the card, shouldn’t you do the same? My credit card gives me 1.5% cash back on everything I buy and on a monthly basis, the bank runs some specials at various merchants where I get an additional 5-15% cash back. For example, my tail lights went out a few weeks ago. We have both an Auto Zone and an Advanced Auto Parts in our area. However, our credit card company was running a 10% cash back special at Advanced Auto Parts. When it was time for my husband to replace the tail lights, I told him to make sure he went there. He spent $40 and we ended up getting $4.60 back (10% special + the 1.5% we would normally get). Of course, since there is no annual fee and we pay the balance in full every month to avoid interest, we are being paid to use our card.

I get educated: It’s hard to make or save money when you don’t know what benefits or features are available to you. I’ve discussed my solar adventures in the past. We got thousands of dollars in rebates courtesy of the U.S. Government for our investment in solar panels (if you pay taxes, thank you!). Although we would have eventually taken the plunge, we might have missed the opportunity for our big tax credit if we waited too long. There is no guarantee that the program will be available indefinitely or even beyond 2020. We also learned about the energy credits which we are on track to receive quarterly for 10 years. While they are small amounts, they will be offsetting nearly half of the cost of the system. So not only did we get a 30% subsidy, we are also selling some of the credits we produce over a period of time to offset the remaining 70% of the cost. That does not include our actual energy savings which have been pretty substantial (my March 2017 electric bill was $38. I live in a 3,100 square foot house in New England).

I pay debt aggressively: Debt is slavery. It’s crippling because it’s expensive. The best way to handle debt is to get rid of it as quickly as possible. My student loan interest is 5.16%. It makes no sense for me to carry that balance for 10 years (standard repayment) if it’s costing me as much as a moderate investment portfolio would cost. So when I graduated from an MBA program with a balance of $47k and change, I was determine to get rid of it by any means necessary. Two years later, my balance is  $11,600. I have saved myself thousands in interest and the amount that I did have to pay, I have able to deduct it from my taxes. So I have used the money I have in the bank and the money I earned working both my regular job and real estate to cut my balance and reduce my interest.

I keep cash to a minimum: ‘Minimum’ is relative.  It doesn’t mean I only have $1,500 in the bank. I keep a fat emergency fund which correlates with my low risk appetite. The more risk adverse you are, the more money you want available to weather unpleasant unforeseen events. For me that number is a year’s worth of living expenses. Before the recession, the recommended amount was 3 months. After 2008, financial experts were recommending 6 months. I like to be cautious, maybe overly so, thus, I choose 12 months. Anything above that number is invested in various types of projects (or debt payments) that are meant to increase cash flow (or cut my interest expense).

Think of the ways you can make your money work for you. Idle funds are being eaten away by inflation and are not doing anything to improve your bottom line and get you closer to financial freedom. This is the value equivalent of throwing your money away.

Student Loan Update – April 2017

higher-education

When I graduated in May of 2017, I chose not to think about my student loans. It was a hot humid day but people traveled from different states to come see me complete another milestone. I was juggling full time work and a part time MBA program right when my husband was settling into a new job. I had a lot to be thankful for and a number of people were proud of me. The Department of Education was going to grant me 10 years starting in December 2015 to agonize over student loans but I was never going to get another graduation day.

I picked up my diploma after the ceremony and I sat in the front seat of my husband’s car running my fingers on it back and forth as my parents sat in the back. I was pretty impressed with myself. Not in a gloating kind of way but more so in a “I actually did it…” Almost as if I couldn’t believe it.

The next day, things went back to normal and I decided that the honeymoon period with the diploma was over. Real world responsibilities required me to know what my balance was and what my monthly payments were projected to be. It was nothing that I could not afford but it was painful. Over $350 a month a and $40k+ balance. I could get a whole new car with that! I devised an aggressive pay down plan as follows:

  1. Start paying immediately rather than waiting for the grace period
  2. Apply all raises to the monthly payment and all bonuses to the balance
  3. Apply all tax refunds if any to the balance

3 simple steps. The toughest part was the discipline of not eating out as much as we would have liked and not splurging at the mall. However, 23 months later, that plan has worked so well that I am dancing for joy.

Capture

In case you are having trouble reading the small font, this says:

Current balance $11,641.17 & Due date 7/18/2020

While there are no guarantees, these numbers indicate that I am likely on track to finish paying the debt off by the end of the year if all goes as planned. That will be 8 years ahead of schedule. This is more than I could ever hope to achieve. When I said I was determined to pay and save myself an astronomical amount of money in interest, I was not joking.

I am grateful for the discipline I have that allows me to focus on long term independence goals rather than instant gratification. I’m also thankful that I have a supportive husband who understands my goals and can see my vision for our family. Some people would have valued the high life over a debt free life and it could have been a source of friction. Instead, he trusts my judgement and is happy delaying a little bit of gratification in favor of peace of mind.

Dear DOE, thank you but no thank you. I will decline your offer to take a 3-year hiatus from my obligation. You’re going to collect these payments and you’re going to like it. But better yet, you will set me free.

 

Knowing the Investment Products

Investing can be overwhelming. The key is knowing what is available and where to start. There are many investment products. I will list them below and provide a high level overview of some of their features and inherent risks.

INVESTMENT TYPE FEATURES COMPANY BENEFITS BENEFITS RISKS
Stocks Capital appreciation & Dividend payments Capital & Market expansion Growth potential Volatility
Bonds Steady income & Capital preservation Capital investments Predictable returns Interest Rate Risk
Certificates of Deposits Steady income & Insured balances Low cost access to liquidity No risk Low returns
Real Estate Investment Trust Investing in commercial real estate Access to capital Diversification & real estate income Lack of transparency

Most Common Investment Frauds

Fraud

I discussed in a previous post that there are mechanisms in place to protect investors however, we should never under estimate the determination of a scammer. Their most recent successes show that they are innovating just as quickly as the laws are evolving to stay ahead of the regulators. One of the ways that you can protect yourself is by learning to recognize the features of a fraud  before it happens. Here I will discuss some of the most recent and successful schemes that have robbed Americans of billions.

PONZI SCHEME: The fraud is set up in a way that the existing investors’ “returns” are actually payments from the funds collected from new investors. The issue with a Ponzi scheme is that the investment managers do not actually invest the money so there is no return. The dividends being paid out rely on a continuous flow of new investors and eventually, they will run out of new investors, at which point the oldest investors will see their returns decline and the newer ones will never have a chance at getting their money back as the scam collapses.

Some red flags include guaranteed returns (there is no such thing), unlicensed investment managers (no regulatory oversight), inaccurate or inconsistent records (if it’s true the information should be correct and consistent every time).

PYRAMID SCHEMES: We’ve all seen the social media posts of Shakeology/Beach Body, Herbal Life, #shoppingannuity, etc. Before social media, those of us who were kids in the 90s remember our parents discussing Amway. They are old and the concept has not changed. The only thing that changed is the service or product they’re selling. Essentially, the participant offers a service or product, but the key to actually making money heavily relies on recruiting new members. Participation often requires steep membership fees or even low but regular dues that quickly add up in addition to being required to buy the product being offered. The primary emphasis is usually on recruiting as the products being sold tend to be available elsewhere for a more reasonable price, making it difficult to build a consistent client base with it. All pyramid schemes will collapse eventually and most investors except for those at the very top of the pyramid will lose their money.

Pyramid scheme red flags are aggressive recruiting efforts that border desperation (that’s where the real money is), confusing commission structure (why does everyone above you get a cut of what you earn?), no real revenue from product (as stated above).

PUMP AND DUMP SCHEMES: This one is near and dear to my heart. When I first started investing in the stock market at 22, I lost $5,000 in a pump and dump scheme after following the advice of someone I thought was a knowledgeable after he made some good profit on Citi stock. Usually the scammers will tell you they have info (pumping) on this hot new stock, often penny stocks (which is why some brokerage firms won’t let you invest in penny stocks if you don’t mean a minimum account balance). You and hundreds if not thousands of other people invest and the activity drives up the price of the stock. The fraudsters then decide when they get tired of the game or when they have run out of people to contact, they sell their share of the stock (dumping) making big profits right before the price collapses and everyone else who didn’t know better loses big time.

Some red flags you should watch for are stocks that no one else has heard of, stocks that you’ve only ever seen on social media or unsolicited email chains, stocks for companies where little to no financial information is available.

Remember that no one is immune fraud no matter how seasoned or inexperienced the investor is. The key is to stay vigilant and scrutinize every proposal.

Introduction to Investing

Investing

I often talk about the importance of financial independence; at least to me. However you can’t achieve that through working only. Your earning potential is limited as a wage earner and only the most exceptional and/or connected will ever get to a salary level where their earnings alone will make them independently wealthy. So the rest of us turn to investments.

The approach that I take to investment is to look at every dollar I have as an employee. They are supposed to work and be productive. If they aren’t working they are costing me and I need to find an activity for them. But the drawback is finding the right “work site”. I believe that diversification is extremely important. Some of my dollars are doing heavy lifting in the real estate market, some are doing lazy work in CDs and savings and others are doing risky work in the stock market. That is my way of diversifying.

Diversification is an old and basic investment concept. It is a tool used to spread out your risk to ensure that you don’t have all your eggs in one basket. In my case, I use real estate as a mechanism to provide me with guaranteed cash flow since people will always need a place to live. I use my CD and savings accounts to provide me with flexibility and liquidity. Meanwhile, I use my stock market investments as a tax tool since they are work sponsored retirement plans.

My husband finds humor in me saying that investing is fun. But the truth is, the fun doesn’t stem from the process of learning to navigate the market or feeling my stomach drop every time a bad political move causes the DOW to fluctuate or mortgage rates to spike. The fun comes in knowing that even when I sleep, I’m still earning money. When I’m working, I’m earning my wage was well as money from all of my investments. I don’t have to work as hard but I can make more money than the person sitting next to me for the same amount of work.

However, as much fun as it is when you’re performing well, investing can be tricky. A lot of investments, particularly stock market investments are volatile. Not only that, they are also not backed by the full faith of the U.S. government. My CDs are in a banking institution that carries insurance on my deposit up to $250,000. If I put that same amount in the stock market today, I could wake up tomorrow and have it disappear with no recourse. In a best case scenario, I will retire at 62 or 67 with a million dollar portfolio that will give me enough dividends to live on until I die. The goal is to not outlive my investments. But there are no guarantees. And even when I get my way, I’m still going to be subject to both emotional and financial roller coaster rides over the next 30 years.

None of this means that the industry is unregulated. The Securities and Exchange Commission is the agency that oversees investment advisers and enforces securities laws. But they are just there to make sure that the companies don’t get away with committing fraud, not to guarantee your investments. And even with the regulations in place, even the law enforcement safeguards in place do not guarantee safety as you know by Bernie Madoff’s actions. So it is best to know what you are doing and how to protect yourself by being informed. There is a plethora of resources available and I hope to share them with you here.