Who do you work for? This question is not meant in its literal sense. I am not asking who your employer is. I ask myself why I am still working and my thoughts invariably run to this question.
Let me give you some examples of the people I work for:
My wife – so she can have the health care and other things she needs and deserves.
Our dentist (and the staff) – the fillings and other items installed when I was young have been wearing out and are being replaced.
Our primary care physician
Specialist physicians – varies by year but seems to include something every year.
Our veterinarian – health care for animals is not cheap
Our eye doctors
Our pharmicist – Rx costs for me are trivial, but for my wife they are significant.
Our auto mechanic – we tend to keep our cars a long time. Apart from installing new batteries, I prefer to let the professionals do the work.
Coming over the next year or three – all the contractors who will be helping us with various home improvement projects. There is a lot to do around here but frankly, our minds have not been in that game – but I can see it coming.
Verizon – we get internet and entertainment from this bill – it is one of our 4 largest monthly bills – the one area we have not optimized.
Insurance – probably some savings to be had here as well. We are helping to support an insurance agent who for whatever reason, has not been up to par recently. Action required.
My county – property tax is one of my 4 largest bills – reduced this year due to our solar panel installation credit.
What I have not mentioned is debt – we use our credit cards to order online and to get rewards, but not more than we can pay off immediately. I supposed Amazon could go on the list. That said, we are debt free.
I also did not mention our utilities. As we return our water to the ground, our water bill is about 1/2 fees (to the county) and 1/2 for water coming in. It is a low quarterly bill. As we have no electric bill now (apart from the meter rental), we only pay for natural gas to heat our water year round and our house in the winter – so a few months of high bills and the rest is noise.
Reviewing the full list, I can put real names on a number of the people I
am working for. While I am just one small slice of their income, it
makes me feel good to know that most of these folks deserve the money we
provide. For the ones who do not deserve it, we should probably make
some changes.
Finally, and most importantly, I am working for our future. Our savings rate is high. Trying to calculate the exact rate hurts my head (and I am a numbers guy). Suffice it to say that less than 20% of my gross pay ends up in our checking account. The remaining 80+% goes to tax withholding, 401K, medical, etc. premiums, ESPP* (proceeds all end up in savings), HSA, and after tax savings. Looked at another way, slightly over 1/3 of my net pay ends up in our checking account. It is fair to say that working for our future is our number one expense.
Some reasons the savings rate calculations are difficult:
My wife’s pay, which is modest but helpful is not included in the above – she uses this money to cover specific household expenses and for some personal needs.
Rental, interest, dividend, and royalty income are not counted – they are not even mentioned in the articles I have read on calculating savings rate. I do save the royalty income for other investments.
I typically save/invest my annual bonus – I never know how much it will be.
One simple method of calculating savings rate is a matter of determining a numerator (amount saved) and a denominator (amount earned less taxes). If one only earns income from a paycheck, this is simpler to do. For our situation, I am just happy to say that it is high.
Therefore, it is fair to say that for the most part, I am working for us.
My question to our readers is this: who are you working for? Please respond with some answers.
*ESPP – Employee Stock Purchase Plan – employee benefit only available to those working for US stock-owned corporations. Rules vary – for my company the rules are great and come close to guaranteeing a 60+% return – let me know if you want more information on how this works.
If you work in the IT or Engineering fields you are probably well aware of the expression RTFM – Read the Fine Manual (google it for the more vernacular translation).
I am coining a similar term: RTFP – Read the Fine Print. No vernacular needed.
Truth is, I got this expression from my wife – the next three paragraphs are a (meant-to-be) humorous explanation of how this occurred.
In the Jewish tradition, a marriage has a legal document called the Ketubah, which is the document given by the groom to the bride that lists his obligations. It is written in Aramaic, my understanding of which is a bit rusty.
The Ketubah often comes up in those memorable discussions a married couple have whereby my wife explains to me that I will end up doing something she wants because, you guessed it, I didn’t read the fine print.
As in ‘Why am I the one who always has to take out the garbage?’ “It’s in the Ketubah,” she tells me. Apparently I didn’t RTFP.
Back to our main topic.
In previous posts I had mentioned that Anne Arundel County offers a $2500 property tax credit for installing solar panels. My salesman did ask me if I am paying that much in property taxes (which I am – but here comes RTFP).
I received the following letter from the county:
RTFP: taxes levied on the building, not the land,,,
In case you have not seen an AA County tax bill, it looks something like this:
Homestead Credit and Land value reduced the solar tax credit.
The portion of the bill attributed to my county tax starts at $3859. This first gets reduced by my homestead credit by $1465, leaving $2394. (The homestead credit limits increases in property taxes for primary residents, to avoid forcing owners from having to sell due to higher taxes – very beneficial to retirees on a fixed income.)
As the letter states, the tax is only on the building, meaning it is not on the land. Our house holds just over 59% of the value of our property. So the math looks something like this:
Initial Property Tax: $3859 Subtract Homestead Credit $1465 $3859 – 1465 = $2394 — remaining property tax Calculate Building to Total ratio: 243,600/412,800 = 0.59 rounded. $2394 * 0.59 = $1412 — the value of our solar credit
As the letter states, this is a one-time credit – no carry over into next year. So that is it. Because of the fine print, our county property tax solar credit is $1412, instead of $2500.
In other words, the price we will end up paying after incentives will be about $1088 higher than the roughly $15,400 we projected, or closer to $16,500.
Note that we did not lose anything here – this was always how the tax credit was going to work. The only change is in my less-than-perfect break even calculations. That number is a best guess anyway, and will only be revealed as we take this journey. The information on how this tax credit works was probably available from the county. My calculations are only off because I did not RTFP.
Two updates regarding previous posts:
The web site where you can track SREC values is here. The price has varied a bit in the last few months, rising as high as $67.50 for a couple of days, but settling in around $50 as I write this. It will be a few months before we receive our first check.
The July bill came in. We almost broke even this month, consuming 11 KWh more than we produced. This was subtracted from our roughly 1/2 MWh surplus to date:
AC is expensive: first month we used more than we produced – but barely
Googling ‘social benefits of solar power’ or something similar retrieves a large number of solar company articles talking about things like local jobs, less pollution, less fossil fuel generation, blah, blah, blah.
While there may be some truth to this, mostly it is an appeal to the tree-hugger in you to entice you to sign a contract.
To be clear, as outlined in previous posts, we installed our panels to help ourselves. We are lowering future budgeted costs to reduce the amount spent from drawing down retirement savings on these costs, perhaps if we so choose, to spend them on something else. When was the last time you heard someone express joy upon paying their electric bill?
This is nothing more than the invisible hand at work. However, as with most tax policy, the government has deemed it socially desirable to reward higher earning taxpayers for doing something they feel benfits society, in exchange for reducing their taxes. In effect, the government has added a few fingers to the invisible hand.
The combined Federal, State, and County purchase incentives account for over 42% of the purchase price for the system we bought. The combination of electric bill reduction to near zero (about $100 a year for the meter) plus the potential for $600 – $800 per year in income for the next 25 years, justifies the purchase in and of itself.
About that $600-800 number. This comes from estimating our production overage at 2 MWh per year (worth about $176 at today’s rates) plus the current SREC rate of about $50 per MWh * 12 MWh output estimated per year generates this yet to be proven number. Note that all items here are variables subject to change, so the cash flow is also likely to be volatile.
When I first started journaling this effort, SRECs were only worth about $15 each after brokerage fees. The Maryland legislature has since mandated an increase in renewable energy incrementally over the next decade or so, including an increasing amount from solar. The day the legislation passed, the SREC market in Maryland jumped to $55 ($50 net to owners after the brokerage fee). We will probably generate about 12 MWh per year.
SRECs trade in a marketplace subject to supply and demand. The utility companies buy SRECs in lieu of producing their own solar power – this is the demand. The supply of course are the rooftops (and any solar farms communities might deploy). If this legislation results in a large increase in deployed solar panels in Maryland the market price of SRECs will drop accordingly.
The paragraphs above explain how the government is incentivizing high earning taxpayers to install solar. That does not really answer the original question, what is the social utility of going solar – it just describes the economic price the various government units are willing to pay.
To understand the benefit to society in real terms, understand this very important fact about electricity – it is used immediately upon generation.
You may read about some battery storage systems in Australia or some water pumping schemes to move water uphill when demand and rates are low and flow it through generators when rates are high.
These storage or time of day arbitrage efforts are real but to date represent a small percentage of electricity generation. For the most part, as of today, electricity is generated and used. Or not. If the electricity is generated and not used it is for the most part wasted.
To complete the thought we will use a traffic analogy. Picture any of the various loops (beltways) that surround many of our cities. They may be 6 lane in some places, 8 lanes in others, maybe even more in some larger cities. No matter how wide they are, there is still a time of day when traffic is very dense and moves very slowly.
There is typically other times of the day (or weekends and holidays) when these roads are under used. An accident can realy mess things up, especially at rush hour. (Why do they call it rush hour anyway? – no one is moving very quickly – an oxymoron if there ever was one!)
It is impossible to build these roads to perfectly accomodate demand. Some highways are adding time of use tolls, HOV lanes and reversible lanes to accomodate and/or shape demand. These can help, but there are limits to what they can accomplish.
Electric utilities have their own time of day usage patterns. Demand rises as people rise in the morning, levels off as they go to work, increases again when they get home, and lowers greatly when everyone goes to bed.
Just as it would be economically and practically foolish/difficult to build enough highway capacity for the worst rush hour traffic, it is similarly economically and practically foolish/difficult for the electric company to build enough capacity to satisfy the highest demand.
Electricity plants (whatever their source) are expensive. So is electricity storage – maybe that will change but it is true today. So building enough to supply at the highest demand results in either:
generation of electricity that is wasted when no one wants it, or
building plants that sit idle much of the time.
Neither option is smart.
Instead, utilities generate enough of their own power to satisfy some reasonable amount of demand and then buy the rest of the electricity from external suppliers as needed. This is known as the spot market.
Spot prices can vary – as mentioned above, unused electricity is wasted. So when the larger market (beyond the local utility) is not demanding much electricity from external suppliers, the spot market is inexpensive.
Given all of this information, here are some ways that rooftop solar systems help utilities and their neighbors:
to the extent we are using our own electricity at times of high demand, the utility has that much less it needs to supply and therefore that much less it needs to buy on the spot market at high prices.
if we are generating more electricity than we need at times of high demand we are effectively supplying our neighbors with our surplus, as it goes back through the net-meter, reducing the amount utilties may have to buy fromthe spot market.
to some extent, these first two factors must be reducing the load on the wires from the nearest substation to our neighborhood, hopefully reducing the likliehood of transformers or other components failing.
to some extent, these first two factors are also reducing the likelihood of brownouts and blackouts, assuming they reduce the peak demand on transmission components.
in some markets the utilities can sell excess capacity to the spot market and will do so when the spot market is buying for a price higher than what they sell it their customers. So the electricity generated by rooftop solar frees up additional capacity for them to sell. This helps the utility make more money, which benefits its shareholders, but should have some impact on keeping rate hikes for customers down, either by amount or by frequency.
This line of reasoning supports something we did not do, but something utilities should encourage: installing panels on the west side of a house. One counter-argument to my reasoning above is that solar panels produce less as the sun is setting, when demand is rising. This is of course specific to certain times of the year.
If the sun is not setting until 8:30 or later, this is past the surge point, although to be fair, solar power is dropping off for me at 5 PM, though it continues at a lower rate until close to sunset.
There are two factors at play in our situation:
no west facing panels
generation 1 solar system – we have a large tree on the west side of our house that is close enough and large enough to provide the original solar power – shade, and lots of it. So as we pass 5 PM the ever lengthening shadows cover not only the west side of my house, but the southern roof where my panels are.
During times other than the peak summer days, when leaves are not on this tree and the sun sets more to the southwest, we are still providing power when people come home from work and at a minimum, we are not contributing much, if anything to the increase in demand.
In summary, install solar if you benefit economically from it. If enough people make this selfish decision, the community as a whole will benefit. All the other arguments about fossil fuel reduction, cleaner air, etc. are nice, but are not germane to helping you achieve your financial goals.
In Part 4 I explained why we selected Solar Energy World as our vendor. This post is about the fantastic job they did end to end to get this system installed and operational. I tried to document each step and I am including the dates (where I can document them) to give you some perspective on how long a project like this can take.
Solar Energy World handled all steps of the process (except where a government person, e.g. an inspector or a utility person are required as noted below). This is not true of all solar power companies. Some of them consist of mostly a sales team with all other services, including installation, are contracted out.
The major steps occurred as follows:
WeSigned the Contract – 02/08/2019
agreed on a system and a price (with understanding that it might be modified when reviewed by the experts). In our case that was 34 300 watt panels.
payed the deposit (I used a credit card for the points)
Solar Expert comes to house, measures dimensions, takes photos, prepares report -02/19/2019
In any solar installation project the salesperson does the upfront work to qualify the customer, answer questions, create a preliminary proposal which is encapsulated into the sales contract and close the deal. From that point on a team takes over to shepherd the process to completion. It is possible for example that the specific installation details may need to change based on a number of factors and the contract indicates that a review will take place, a report will be prepared and a final sign-off will be requested from us.
The first person on the scene is someone who begins the process of validating that the number of panels agreed to in the preliminary design is valid and realistic. For this to occur, this person has to take some measurements. A sample from the report that was prepared based on these measurements is shown a few paragraphs below.
In our case, the guy who came had a great sense of humor. He measured the obvious south-facing roof section over our bedrooms and used a special camera that gets a roof based perspective of the sun – it is used to identify possible shade issues and to project how much sun falls on the roof at different times each year. He climbed onto the roof and took the pictures from several places at several angles.
When he was done, I asked if he was going to measure an additional section over my garage. He said that would be $100 extra. He waited a second, then grinned big. Almost had me.
The data collected by the guy on the roof is fed into a software program that prepares a report which is used to validate or modify the proposal mentioned in the contract.
The report that came back for us suggest that 34 panels was just about the right amount to cover our electric bill. My salesman reminded me that the software they used could not tell dark shade from light shade, so the results were probably a bit pessimistic. (A few more paragraphs below you will see one of the photos from this report.)
Dark shade? Light shade? To help explain this, let me propose this thought experiment: suppose I drape a towel over a solar panel – how much electricity can it generate? If you said zero, you are still with me. That would be dark shade. No light gets through.
Now if I take that towel and move it 100 feet up and towards the sun from my house, how much electricity will the panel generate? I don’t know, and neither does the software. Clearly the sun will move through the sky and light will filter around the towel, such that some light is always hitting the panel. That is what I am calling light shade.
While it may not produce the most it could if the towel were not there, it will always produce something. So the installed system is likely to outproduce the amount predicted by the report.
There are trees at the edge of my yard (about 50-100 feet and further from the house) that are perhaps as much as 80 feet or more tall. Some are thin scraggly pines and some have seasonal leaves. So depending on how high the sun is in the sky and whether it is summer or winter, there will be some filtering of the light, but most of the light should still get through. (I am finding this to be true by the way).
The contract estimated the proposed system would produce 9.7 MWh per year but after review, the estimate was upped to 10.649 MWh. I think they are still under but time will tell. As I showed in Part 2, we used about 10.56 MWh the twelve months prior to installation, so the proposed installation appears to cover us right at 100%.
Following is one example of the perspective from one part of my roof, showing how much sun should fall throughout the year and the effect of the distant trees – the yellow area is the sunshine, the green area the shade:
View of the sky from my roof and estimated solar amount throughout the year, as affected by shading. 100% would indicate no shade.
Contract is finalized, approved – 02/23/2109
I reviewed the report and approved the final design .
Permits, other paperwork filled out
There is a lot of paperwork that must be done prior to and even after installation and the folks at Solar Energy World did a great job. I don’t show dates for these items as they occurred through the life of the project, but the first two below were needed for installation work to begin. Some Items of note:
Construction Permit
Interconnection Agreement – for our utility company
Tax paperwork (for both state payment and county tax property tax credit)
Final inspection
SREC agreement – for payment of Solar Renewable Energy Credits post installation
Installation 03/08/2019 – they tell me it was record time. A slot opened up, they had all the equipment ready, they called me Thursday March 7, and the installers were on my premises on Friday, March 8th. Normally it is a month or more from final approval before installation begins.
The installation team consisted of 4 people. Two were up on the roof installing the panels and two worked on the inverter and all the electrical connections.
The guys on the roof were tied into harnesses and ropes they had secured to the roof at the outset. Everything about this installation was done with safety in mind. Nothing was left on the ground. This was an end-to-end professional job.
Note the safety harness – no one is falling off this roof!Hooking up the electronicsThe inverter, shutoff, and connection to our meter.
Testing, validation 03/11/2019 The installation is supposed to take one day but it snowed a small amount that afternoon so they were not able to test. They returned on the 11th to do their testing, which just took a few hours.
Final Payment – 03/12/2019 – I received a notice that my installation was substantially complete and I needed to make my final payment, which I did. Once that was received, Solar Energy World contacted my county to do the inspection.
Inspection – 03/20/2019
The county inspector confirmed both the outside installation and the hookup inside my power panel in the basement.
For those of you who may be curious about how the inverter is connected to our power panel, the inspector explained to me how the 4 wires that came into this panel were connected (1 ground, 1 neutral, and 1 each to the two 100 amp feeds coming in from the utility company).
More importantly, he passed the inspection!
Utility notification – 03/20/19 Solar Energy World sent the completed paperwork to our utility company.
Meter Installation – 03/25/19 – around 7:30 am we heard a knock on the door. Our utility person was on our porch holding the new meter. Amazingly, he was able to swap out the old meter with the new net-meter without us losing power. He set the new meter at 00000.
I asked him if I could turn the solar panels on when he was done – not yet, he explained – they still had to set up the billing properly at the utility company. They had to close out the old reading for a final bill on the old meter and start us on our new billing cycle with the new net-meter. This would happen after he returned to the office. In the meantime, I am chomping at the bit – we are this close (picture me holding my finger and thumb about a quarter inch apart).
Notification to turn on – 03/26/19
The next day I received an email permitting me to activate the panels. I was busy at work and did not notice it for several hours. When I finally read the email, I rushed home, asked my wife to come with me and together we threw the cutoff switch to the on position. By this time the meter had advanced to 00012, meaning we had used 12 KWh on the new billing cycle.
It was a sunny day and even though it was about 1:45 PM, we still got about 20 KWh that first day. By the next day we had rolled the meter back into the 99999s and have never looked back. We have been producing more power than we have been consuming most days since.
In my next post I will talk about some post-installation operational challenges and will show a picture of the completed system.
understand how it can reduce your electric bill
and possibly provide some income,
have determined that you’re a good fit
(physically and financially) to purchase one,
let’s discuss how to find an installer.
I am going to discuss two methods, the wrong way and the right way.
Wrong Way
My first two attempts to find a solar panel installer were the wrong way. Hopefully you can learn from my mistakes. Basically, for my first two attempts to find an installer, I just Googled “Solar Installers in Your Area.”
I figured (correctly) that giving local installers a fair
shot first was the right way to go, since it’d be easier for me to hold them
accountable for follow-up maintenance.
I have some experience with in-home sales folks and the techniques/tricks they use, so I felt confident I could deal with this.
Attempt 1
I made an appointment with Vendor A. They sent Salesman A, who was reasonably effective at his job. He patiently explained the product, the installation process, the payment process and answered all my questions. He took measurements of my roof and collected a copy of my most recent electric bill.
He was not there to pressure me to sign a deal. In fact, he needed to send all the information he gathered to someone at his office. The office would then prepare a report showing Salesman A’s recommended installation plan and what it cost. Salesman A delivered everything he promised, including a detailed proposal.
So why was this the wrong way? In part, because he never
followed through – I challenged him on some points in the proposal and he did
not respond. A few weeks later he apologized (apparently some personal issues
kept him out of touch). But more
importantly, I lacked the context to
be able to understand the proposal – I had nothing to compare it to. (Stay tuned, I’ll help you solve this problem
in just a moment).
Attempt 2
I made an appointment with Vendor B. Vendor B did a lot of
pre-qualification work on the phone, including requiring that Mrs. TDSF be there as well (Vendor A
worked with me only).
ALERT: When an
in-home sales caller requires all decision-making parties to be at their
initial presentation, you are going to get a high pressure presentation. Danger
Will Robinson. Aooga! Aooga!
Mrs. TDSF and I are not rookies at this – this is not our
first rodeo, we did not fall off the turnip truck last night, and we weren’t
born yesterday. We knew what to expect – and we got steam-rolled anyway.
Let’s be clear. No
matter how much experience you have at this game, the sales folks ALWAYS have
more. Sigh.
Salesman B was nice. He was professional. When I say
high-pressure, it was done with the softest touch, with nuance, with finesse. Before
I knew it, I was signing a contract and writing a deposit check. Ugh.
After Salesman B left, something felt ‘off’ in my gut, so I
called a friend of mine who has solar panels. We discussed the contract. Here’s
what Salesman B proposed in his contract:
26 solar panels, at 305 watts per panel.
26 * 305 = 7930 watts or 7.93 KW.
The panels manufacturer is Mission, a reputable company out
of Texas.
The inverter manufacturer is Enphase, also a reputable
company.
Nothing wrong so far…
Except the price: $30,000.
My friend did not want to say it explicitly, but he made it
clear that this price point was too high, and I should investigate.
So I did. And I didn’t get much sleep that night. The next
day I cancelled the contract with Salesman B. Fortunately, if you sign in-home
contracts of this sort you have 3 days to change your mind, at least where we
live.
Here’s why I decided not to go with Salesman B:
It’s all about the math. Solar system prices are generally compared by using this simple equation: Price/Watts. In this case:
$30,000 / 7930 = $3.78 per watt (rounded).
This simplicity allows systems which may use different equipment to be compared based on the results they achieve.
As you’ll see in a moment, this price turns out to be not
just high, but ridiculously high.
For comparison, Vendor A wanted to install 39 solar panels,
at 300 watts per panel, (39*300 = 11,700 watts), also for $30,000.
In that case, the cost was:
$30,000/11,700 = $2.56 per watt (rounded).
That’s a BIG difference in price per watt.
The Goldilocks
Problem
I intuitively felt that the first offer was for more panels
than I needed (and the price was more than I wanted to spend). The second offer
was for less panels than I needed – at the same price as the first offer!
So, how to find the ‘just right’ solution? I needed enough panels to supply my electricity needs, and I needed them at a reasonable price. I wanted to drive our bill to zero, but I also didn’t want to spend more than about $14K (net after incentives). The formula for the purchase price, where I live (due to incentives described in Part 3) is:
Purchase Price * .7 – $3500 where:
.7 accounts for the 2019 30% federal tax credit
$3500 accounts for the state and county
incentives we are eligible for
Right Way
That night that I stayed up, I did a ton of research, and finally found a really great web site, EnergySage.com . This site is a great way to find a solar installer that will meet your needs.
(Please note that the link I am using is an affiliate link.
If you care to support my site, please use this link.)
EnergySage.com provides a lot of educational material to help you understand how solar panels work and how the installation process works. Most importantly, they act as an honest broker. You register on their site and they provide you with bids from affiliated, vetted installers. Then you contact the bidders as you wish, and decide which installer is best for you. They operate much like an Angie’s List or Home Advisor, except specifically for solar panel installation.
I registered on the site, and even posted the contract from Vendor B that I had just cancelled. I also talked to someone from the site, who patiently answered many questions. They were very helpful, and I highly recommend using them.
Note that the bidders cannot see your personal contact information, rather they contact you through the portal, so you have no risk of getting spammed.
I got 3 bids through EnergySage.com immediately, and a few more over time. This screenshot shows examples of the quotes I got (vendors masked):
Real quotes on our Energy Sage page.
These are the summary boxes, with all the details for each
bid just a click away. Note all the great information presented in these boxes:
Number of reviews (and average rating)
Price/watt
% need met (how much of your electric bill their proposed number of solar panels will cover)
Net price after incentives (Net Upfront Price)
Payback estimate
Specific panels and warranty
I initiated discussions with all 3 vendors. Two were based
out of Virginia, and one was local. All were very friendly, professional, and
knowledgeable. The sophisticated high-pressure sales tactics were nowhere to be
seen. I very much enjoyed my discussions with these vendors, and regretted that
I had to tell two of them “no deal.”
Through these conversations I learned something really interesting. The predicted annual production of a solar panel in MegaWatt Hours (MWh) is approximately:
Kilowatts of installed system = number of panels * watts/panel
Predicted annual production = Kilowatts of installed system * 1200
If you know how much electricity you use (10.5 MWh in our
case) you then can figure out how many panels you need to cover your usage:
For our usage, 8.750 Kilowatts * 1200 = 10,500 MWh
In my case, 29-30 solar panels at 300 watt/panel would cover about 100% of my usage (8750/300 is 29.17).
Some Notes about these Numbers:
Different panels are rated at specific watt values. These values are determined through industry standard testing. Basically, under optimal conditions (sun at a certain angle, panel mounted at a certain angle, air temperature at a certain value) an individual panel will produce a specific number of watts at any moment in time.
Note that a panel rated at 300 watts will not produce 300 watts all the time.
This rating number is at or close to the maximum production value possible for that panel, under ideal testing conditions.
It is possible that a 300 watt panel will produce 300 watts (or slightly more) for a limited time during the day (they work better when the outside temperature is colder), but most of the day it will produce less.
Over the course of the year a given panel will be exposed to some number of hours of sunny weather, cloudy weather, and rainy weather. Trees or other objects in the distance can throw shade as well.
The expectation is that the 1200 number used in the equation above will roughly approximate the total production in a year. Of course, some years are rainier than others, so this number is just for planning.
Now that I had this information about how individual panel production relates to annual power production, I was able to think more clearly about our options.
I concluded that the original salesman who wanted to sell me 39 panels was overdoing it, and the high pressure salesman who wanted to sell me 26 panels was a bit under.
Either way, both salesmen were charging $30,000 (or a net of $17,500 after incentives). This was more than I wanted to spend.
Originally, I wanted to spend $25,000 total, for a net cost of $14,000 ($7500 tax credit plus $3500 from the state and county = $11,000 in incentives and $25,000 – $11,000 = $14,000 net cost).
Surprisingly, it turned out that the first bid (shown above) from EnergySage.com was from a local vendor called Solar Energy World – the same vendor who gave me the original 39 panel bid from Attempt 1. So, if Attempt 1 was “the wrong way” why was this bid, from the same vendor, different?
The key difference was the salesman who put in this bid, Daren Weatherby. Because the bid came through EnergySage.com I didn’t have to deal with high-pressure sales tactics.
Instead, Daren came to my house on a number of occasions and really listened when I explained what I needed. He was very responsive, and provided me with enough additional information and a new bid that I felt comfortable accepting.
Daren measured the part of my roof with the best southern exposure, and determined that we could fit 34 panels on the roof. This is more than I apparently need. Daren explained that I have some shade issues, so I will need a few more panels than I initially estimated, in order to get the production I wanted.
The 34 panels fit nicely, and basically take up that whole section of roof. Daren admitted that he was over-provisioning a bit, but he emphasized that he wanted to under-promise and over-deliver.
The final contract I signed was for 34 solar panels, each rated for 300 watts. So the size of our system is:
34 panels * 300 watts/panel = 10.2 Kilowatts
Using the 1200 number mentioned above for planning annual output, this system will produce about 12 MWh per year, at least the first year.
10 Kilowatts of panels * 1200 = 12 MWh per year (I am rounding for simplicity as this is for planning only)
Note that panels will produce less output over time. About 25 years from now, this system will produce about 85% of what it’s producing now, or about 10.5 MWh per year (about what we use today). In effect, Daren was future-proofing the system for us.
So, what did it actually cost us?
We paid just over $27,000 for the system (before incentives) or $2.65/watt. This was a little more than I wanted to spend, but less than the other bids. After incentives, the whole system will cost us about $15,400, or about $1.51/watt.
Think about that. We are generating all the electricity we will probably use (and then some) for the next 25 years, for about $616 per year (25 * $616 = $15,400) by paying in advance – this doesn’t even include the additional post-installation incentives I discussed in Part 2 and will elaborate on in a future post.
Compare this to the $1433 we are currently spending per year (at current prices, which will probably go up) and I think we are getting a great deal.
I asked Daren for a referral code to embed here, but he doesn’t have one. He said to ask for him at solarenergyworld.com and mention me (TDSF) as the referrer.
The two take-aways from this post are:
Use EnergySage.com to get bids from approved installers in your area, and to learn more about the process.
If you live in the Maryland area, please consider using Solar Energy World, and specifically ask for Daren Weatherbee. They’re a great organization, and Daren did a great job for us.
In Part 5 of this series I will describe the installation
process and show you what you get (besides the panels) for all this money. Stay
tuned…
In Part 1 we learned how solar panels work. In Part 2 I showed our electric bill and discussed how much money we expect to save each year ($1748). In Part 3 I am going to discuss how to decide if installing solar panels is right for both your wallet and your house.
To be clear, I love my system and it seems to be working great for us. That said, let me state emphatically that solar panels are not for everyone. There are both technical and financial reasons why you may not be a great candidate for solar, at least at this time. Let’s see why…
Some Technical Issues to Consider:
Do you have a south-facing roof with little or no shade?
If the surface area of your roof faces mostly north, east, or west, or if your southern-facing roof is highly shaded, it’s probably not worth getting solar panels (there is an exception I will discuss later).
You can visit: https://www.google.com/get/sunroof to get an idea of how much sun your roof gets. This tool allows you to enter your address and get an overhead view of your home and an estimate of how much solar energy you might generate. (Note the age of the picture if you can, as conditions may have changed since it was taken.)
How old is your roof?
The best time to add solar panels is soon after replacing your roof. If you have to replace your roof after the panels are already installed, you’ll have to pay someone to take the panels down and then put them back up (after your roof is done being replaced). If your roof is 20 years old, it’s probably better to wait 5 years or so, and then add solar panels when you replace the roof.
Financial Considerations
Financial Considerations break down into 3 categories:
What is your final cost after incentives?
How long will it take you to break even (payback period)?
Can you afford it?
Final Cost AfterIncentives
What you end up paying is the difference between the purchase price (what the installer receives) and monies returned to you, based on a number of possible incentives. As these incentives will vary by where you live and when you purchase, you will need to keep on top of what is a changing situation. This information is valid as of May 2019 – please do your own research as I am not qualified to give any tax advice and this information is subject to change.
-26% for systems placed in service after 12/31/2019 and before 01/01/2021
-22% for systems placed in service after 12/31/2020 and before 01/01/2022
-There is no maximum credit for systems placed in service after 2008
-Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2021
-The home served by the system does not have to be the taxpayer’s principal residence
State, Local, and Utility rebates – These vary by location – you will have to look them up. Your sales representative will probably have the latest accurate information (but do your own research as well – mine did a great job but missed a couple of small points which I will discuss as we come to them).
Your final purchase price is adjusted for these incentives. Note that you have to spend the full amount up front and you get the incentives later. (there is an exception to this I will cover, but to be clear, it is not an option I approve of).
My state currently offers a $1,000 payment after the system is operational. We went live on March 26, 2019. Our check arrived less than one month later:
Before receiving this check I was asked to supply my SSN. Apparently, there is some fine print. I am going to get a 1099 for this and may owe taxes on it – one of the items the sellers neglected to mention.
My county will also kick in a $2,500 credit on my property taxes. Some fine print here too perhaps – I recently received a letter from the county acknowledging the credit – which is to be applied to the house portion of my taxes, not the land portion. I believe I pay less than $2500 a year on the portion of my county property taxes that applies to my house – not sure if the rest will roll over to next year or will be lost – stay tuned!
Post-installation Incentives
Once your solar system is producing electricity you may qualify for some additional incentives, based on the amount of electricity you generate. My solar system qualifies for two post-installation incentives, net-metering and SRECS.
Net-Metering: If your state allows net-metering, they will install a special meter that runs forward and backwards. As your rooftop panels produce electricity over and above what you consume, the excess is sent to the grid and the meter runs backwards. Note that the exact details on how this works varies by state.
In my state, the cumulative surplus, if any, is cashed out once per year. This is not true in all states, so please do your research.
Solar Renewable Energy Credits (SRECS) – one credit is issued for each MegaWatt Hour of electricity produced by your system – the value of these SRECS varies by state and over time.
In Part 2, I described both of these concepts in more detail.
Payback – how long until I break even?
A solar system is not a cheap investment. Before considering this expense, please take the time to estimate how long it will take to get your money back, AKA, your Payback period.
To calculate the payback period, you will need to know:
Your annual usage (in MWh) of and expense for electricity.
Your expected annual production in MWh.
Cost of your system (up front).
The total amount of your purchase incentives.
The total amount of your production incentives.
You will have to estimate some of these numbers, just do the best you can.
Calculate your net cost:
Net Cost = Purchase Price – Purchase Incentives
Calculate your annual savings:
For simplicity, assume that you produce more each month than you consume or that previous credits cover the difference so that you never pay an electric bill.
In my case, the Net Cost will be about $15,400 after purchase incentives, including federal tax credit (30%), state payment of $1,000, and county property tax credit of $2500.
The TDSF annual net savings is $1748 (based on assumptions described in Part 2).
Payback = Net Cost/Net Savings per year
$15400/$1748 = 8.81 years
So if our assumptions prove correct, our Payback Period will be less than 9 years. The system is expected to last about 25 years (it is warrantied for that). In effect, we will be getting free electricity for about 16 years, should we remain in our house that long.
Use this Payback Estimate, along with the other data you are collecting, to help you decide if this investment is good for you. This is, of course, a personal decision. For us, the idea of no longer having an electric bill for the next 25 years (or occasionally a very small bill), and the idea of generating some income from this investment was a compelling argument for our purchase.
As we approach retirement we have looked for ways to reduce our fixed expenses to free up funds for things or experiences that bring us more joy, and to make it easier to ride out any rough stock market periods that may be ahead. We look at this as a form of investment diversification, something I wrote about in an early posting on this site.
Can You Afford It? (What questions should I ask about my finances?)
You have done your research – you know what your Purchase Incentives are, you know what your Post-Purchase Incentives are, you have a Payback Estimate and an idea of how much cash you will have to lay out (some of these numbers will only come into play once you meet with some sales teams, a process I will describe in another post). The big question now is Can You Afford It? Here are some questions to ask yourself to help you figure out the answer:
How long do you plan to live in your current house? While no one can say with certainty, it might be foolish to install solar panels if you know you’re moving (or planning to move) in the next few years.
What is your financial situation now, and what does it look like for the future? If you’re deep in debt or have a low income, solar panels are probably not financially the right move for you.
The federal, state, and local incentives favor those with at least a strong middle to upper middle class income. Mathematically, if you don’t pay much in federal income taxes, the federal tax credit can’t save you much. While the tax credit can roll forward (the unused portion can apply to your taxes in future years), in any one year it can only bring your taxes down to zero (again, I’m not giving tax advice — as always, consult your adviser and do your own due diligence).
Does it make sense to pay up-front for future savings that are likely, but not guaranteed? You are putting up money now (either cash you already have or money you are borrowing) to pre-purchase the ability to generate an expected but not exactly guaranteed amount of electricity for the next 25 years, more or less. To make this decision, you need to understand how much you spend on electricity now (I show you how much we spent over the past 15 months in part 2 ), and what you’re likely to spend in the future. Hopefully the information I’ve covered will help you to start collecting the numbers you will need.
How do you know if you will benefit financially from pre-paying for electricity? If you’re not moving immediately, if you see a benefit in reducing your electric bill, if you’re already well-invested in other markets (e.g. retirement funds, after tax stock investments, real estate) you can think of this as another kind of diversification. It will also reduce the cost of your monthly expenses in the future.
How will this impact the future value of your home? It’s possible that solar panels will make your home more attractive when you sell it sometime down the road. This paper discusses serious research on this topic: https://emp.lbl.gov/sites/all/files/lbnl-6942e.pdf.
Warning 1 – it is complex.
Warning 2 – many other sites quote from this paper – this is the source. If a site is trying to sell you solar energy they may cherry-pick the numbers they reference from this paper. For example, I see a number of sites using $4 per watt for additional home value.
But it’s not that black and white in the original paper. If you read the full paper you’ll see that California homes come in a little above $4 per watt added value, but homes outside California are closer to $3 per watt additional home value. There are other variables that affect the value of your solar panels as well, like how old the system is when you go to sell your house.
Should I worry about my solar panels being an eyesore? There is an emotional component to the aesthetics of solar systems. Some people just don’t like the way they look. Some are ok if the panels are on the side or rear of the house, but do not want them facing the front of the house. These opinions could limit the pool of potential buyers. On the other hand, some potential buyers may appreciate having solar panels already installed, and that could make your house more attractive.
Solar panel salesmen will present you with multiple payment options. Like all salesmen, their goal is to make a sale, and if you can’t pay in cash they will be happy to present you with several payment options. I strongly suggest that you pay in cash (OK, I did put part of the cost on a credit card to get some points, but I paid that off immediately).
Here are some of the payment options they’ll offer you, and why I think they’re a bad idea:
They’ll offer toarrange the financing. You’ll pay for the panels over time, with interest. Their rates may be less than a credit card (if you have a good credit score) but they’re still not low – I am no expert, but I see rates from 5% (best credit score and shortest term of course) to 17% and higher advertised on the internet.
Arrange your own financing. You could probably get a lower rate by taking out a home equity line of credit with about 4% interest. Even though 4% interest sounds better than 17%, remember that if you finance $25,000 at 4%, you will pay almost $1000 in interest the first year.
Now think back to your annual electric bill – how much will you actually save? Our bill was $1433 per year, so this interest would have reduced our savings to perhaps $450 the first year.
Even if you pay this off in 5 years, you will not start seeing real savings on your bill until year 3 or later. And that is a best-case scenario. If you finance at 8% you may pay more in interest the first couple of years than you paid in electricity on your electric bill. (8% of $25,000 is $2,000 – compared to an annual spend of $1433 on electricity).
Since these systems have a useful life of about 25 years, and the first few years are the most productive,* why would you borrow to do this installation?
Note: If you’re building a new house and the panels are an expense that ends up rolled into your mortgage, you may not notice a significant difference in your monthly payments.
* Solar panel output tends to decrease about 2% the first year and roughly ½% every year thereafter (your mileage may vary). So after 25 years, you can reasonably expect your panels to produce about 85% of the electricity they produced when they were initially installed. So they may still be useful, but after 25 years the newer technology is likely to be both better and cheaper.
The company will arrange for someone else to buy the panels. Basically, you end up in a lease or power purchase agreement where you’re committing to buy your electricity from whoever purchases the panels, at a specific rate (that may increase by a known amount over time).
While this is a zero-down option, the real purchaser gets all the tax breaks (and the SRECS), and you still have an electric bill. You’re also setting yourself up for a headache when you go to sell your home, because these leases don’t always transfer easily.
In case I am not being clear enough already, I am very muchagainst these alternative options. If you don’t have the cash on hand and the income to support the tax credits, solar panels are probably not a wise financial choice for you, at least not right now.
In the words of Suzie Orman, ‘YOU CANNOT AFFORD IT – DENIED.’ If you prefer the words of Dave Ramsey, ‘I never agreed to borrowing to pay for (solar panels) and I’m not going to start now.’ Okay – he inserts car purchase or college here, but you get the idea: pay with cash or don’t do the deal!
Stay tuned for Part 4, where we will discuss how to choose a company to buy your solar panels from.
In Part 1 I explained the mechanics of how solar panels
work, and how they connect to both your house and the power grid. In Part 2 I’ll
explain how solar panels can save you money on your monthly electricity bill,
and even generate some income (depending on your local rules).
Let’s start by defining some terms you’ll need to understand,
and then we’ll use those terms to talk
about how solar panels can save you money.
What’s a kilowatt
hour?
Watt – a basic unit of electricity that plugged in items consume.
The typical incandescent light bulb that we all grew up with used 40 – 100
watts per hour.
Kilowatt – 1000 watts
Kilowatt Hour (KWh) – What your electric meter measures. If a 100
watt bulb burned for 10 hours that was 1 kilowatt hour (10 * 100 = 1000).
A few other examples of 1 kilowatt
hour:
If you have 10 lights, each with a 100 watt bulb, on for one hour
If you have 25 lights, each with a 40 watt bulb, on for one hour
Using a 1000 watt hair dryer for one hour
Using a 1000 watt microwave for one hour
Megawatt Hour (MWh) – 1000 Kilowatt hours
So, how many KWh does a typical household use? Well, I can’t speak for every household, but
here’s our recent usage:
TDSF household electicity usage based on due dates
Note 1: The cost of the meter is rolled into the electric bill calculation. The real spend for determining our payback is about $100 less per year, as I will get an $8.26 charge per month for the meter, even if net consumption is 0. So, as of now, I think about our annual spend as about $1433.
Note 2: We used a lot more electricity in January and February of 2018 than in 2019 because of extra work in taking care of a senior pet. I believe the rolling 12 month number (10,560 KWh/year) is more indicative of our annual usage, which is still decreasing from month to month compared to last year.
Pause here to deep dive into an electric bill. If you are able to, please get one of your bills to see how this deep dive applies to you. Here is the electric usage details portion of our last bill before we went solar:
Last bill before going solar!
First, note the meter readings – there are two of them – the
last conventional reading, at 625 KWh used and the first reading from the new
meter at 12 KWh, for a total usage of 637 KWh for this billing cycle.
On Monday, March 25th about 7:30 AM a guy from our electric utility knocked on our door to let us know he was replacing our meter with the newer two-way net-meter. I asked if I could throw the switch to turn on the panels, but he explained that they still had to do the paperwork back at the office to get me on the new billing system. The new net-meter started at 00000. So by the time they closed out the last bill and started me on the new billing period, we had used 12 KWh.
As you can see, our electric bill is divided into 3 parts:
Supply – About .09 per KWh these days (price can vary)
Delivery – About .04 per KWh (plus the meter charge of $7.90).
Taxes (AKA, the government’s share) – a little over .01 per KWh
Unlike pizza, there is no option to pick up the electricity,
we have to pay the delivery fee. This
supports the infrastructure that connects us to the power grid.
The government gets a piece of almost every transaction – check
out your phone bill, internet bill and/or cable bill and you will see taxes and
fees there as well.
Except for the 2 meter readings, your bill should look
something like mine.
How much will we save
on our monthly electric bill?
First the simple answer: if our system produces enough
electricity each month to equal or exceed the production we’ve seen so far, and
we hold at current consumption levels, we’ll save $1433 per year.
But life is not that simple.
Each month that we produce more KWh than we consume, the
extra is retained by the utility company as a credit, just like the old cell
phone plans with rollover minutes (except these are rollover kilowatt-hours).
If we accumulate a surplus one month, and then have a deficit (meaning, we use
more electricity than the panels produce) the next month, the utility company
applies our “rollover KWh” to our bill. We only pay for electricity if we’ve used
more KWh than we produced, AND we’ve used up all of our credits from previous
months.
Because the billing calculations are done monthly, we can
still end up owing money to the utility company some months, if we use more
electricity than we’ve produced that month (and didn’t have any “rollover
credits”). If that happens, it would subtract from our annual savings, even if
annually, the total amount of electricity our panels produced is more than the
annual amount of electricity our household used.
Wait. What happens at the end of the year if you still have extra “rollover credits”? Do they roll into the next billing year? Unfortunately, no. At the end of every billing year (every April), the utility company cashes out our extra credits. I don’t know how much they’ll pay for them (yet), but my understanding is that they’ll pay a wholesale rate. When this payout happens, we start our next billing year at 0 credits.
Because our electricity company buys electricity wholesale and sells to us at retail, I am expecting that they will pay us perhaps .05 per KWh or $50 per MWh. They only compensate us for the energy supply portion of the bill, not the delivery or taxes and fees portions.
One last factor: SRECs – these are Solar Renewal Energy
Certificates – we earn these for each MWh our system produces. The price will
vary over time. For the purpose of this exercise we will use $20 per MWh.
If our solar panels produce 12 MWh per year, we would earn
$240 cash for these SRECs.
Putting this together, our projected annual savings is the sum of:
Electricity generated (and therefore not billed), plus
electricity sold back, plus SRECs. For example, if we consume 10.5 MWh and
produce 12 MWh this works out to:
$1433 – amount we would have spent on electricity
+ $75 – payout at .05 per KWh for the extra 1.5 MWh
generated.
+ $240 12 MWh * $20 per SREC
= $1748 per year. $315 of this is cash returned each year.
I will use this number in my next post when I discuss the economics of going solar.
Will it really be that precise or clean? Probably not. Some factors that could complicate these calculations:
If the price of electricity goes up, the amount
avoided gets larger and our savings goes up.
If we use our credits during a low producing
month and owe the electric company a small amount.
If we produce less than 12 MWh we do not earn as
much in payback credits at the end of the year, or as much in SRECS.
If the value of SRECs go down.
If our electricity consumption goes down, the amount
of extra electricity we can sell back to the utility company is higher.
The solar panel installer expects us to produce about 11 MWh per year, but they admit that they purposefully underestimate by 10%. They want to under-promise and over-deliver.
In Part 3 I’ll discuss the economics of going solar – what it really costs and perhaps some guidelines as to whether this decision is right for any one specific home.
When I mention with not a small amount of enthusiasm that we
have installed solar panels on our roof, I get a lot of questions:
How do solar panels work?
Am I using the power from my solar panels?
What happens if I generate more power than I
need?
What happens when the sun goes down (or if it’s
cloudy, rainy, etc)?
Let’s start with the basics…how do solar panels work?
As the sun shines on solar panels, the panels create DC
(direct current) electricity – the same thing a battery creates. However, you
need AC (alternating current) electricity to run your house. So the panels are
wired to a box called an inverter, which converts DC -> AC. The inverter
connects to your home’s power panel (where your circuit breakers are located).
Your house continues to operate as it always did – when you
need electricity, you draw it from the power panel.
All of this is illustrated below:
http://clipart-library.com/clipart/8TxrRX5nc.htm
This drawing came from an Australian site so the terminology is a little different. What they call the switch board we think of as the circuit breaker box or power panel. What they call the mains grid is our electric utility company. So it flows like this:
Am I using the power
from my solar panels?
If the power panel is getting enough power from your solar
panels, you do not use any electricity from the grid (your utility company).
You are using the electricity you generated on your roof.
What happens if I
generate more power than I need?
If the power panel is getting more electricity from your
solar panels than you need right now, the excess electricity goes back to the
grid – which means you are now a power plant! Your neighbors will use this
power (and pay the utility company for it). You get credit for this excess
power – your electric meter runs backward!
What happens when the
sun goes down (or if it’s cloudy, rainy, etc)?
If the power panel is not getting enough power from your solar panels, the grid will supply the difference (and you are charged for this). Your panels can absorb sunlight even when it’s cloudy or raining (though much less than on a sunny day) – UV rays get through even when it doesn’t appear sunny out. It’s possible that you’re using more power than your panels are generating under these conditions. In that case, the power to your outlets is a combination of the solar power you are generating and power from your utility company.
At some point, as it gets dark, the panels stop producing
power and all of your power needs are supplied by the grid. Basically, your
house works just like it does before you had solar panels – the power flows
from the utility company through your meter to the power panel and to your
outlets.
In Part 2 I’ll explain how solar panels can save you money on your monthly electric bill, and maybe even generate income – stay tuned for Part 2 next week!
“If you put all your eggs in one basket, guard the basket”
Conversations around diversification often revolve around which groups of stocks or mutual funds to own in what proportions:
Domestic vs International
Large Cap vs Small Cap vs Mid Cap
Stock Funds vs Bond Funds
Individual stocks or bonds vs mutual funds or ETFs
Being a Senior FI guy, I give this conversation a cranky Harumph!
This is NOT what diversification is really about.
Think of your family unit as a business, YOU INC.
Diversification is about YOU INC. creating multiple independent sources of income. The hope is that all sources will do well, but in case some do not, the goal is that at least some will in any given time period and YOU INC. will prosper as a result.
Examples:
W-2 income: This is income from your full time and/or any part time jobs
1099 Interest income: this is generated when you are the lender, whether it is checking/savings or CDs at banks*, corporate bonds, municipal or US government bonds (or t-bills), or any other type of loan that generates interest for you.
1099 Dividend income: Dividends are paid by a corporation that is sharing profit on a per share basis. If you own 100 shares of stock and it pays $2 per year per share, you will make $200 per year in dividends.
Schedule E Real Estate Rentals: You are the landlord and report income (and expenses) on Schedule E of your tax return
Schedule E Royalties: not discussed much on FI websites. May devote a separate post on this.
Schedule C Income: If you have a side hustle or a full time business that you run as a sole proprietorship, this is where you report this income (and related expenses)
Schedule D Capital Gains: The proceeds of selling stocks or other items of value are reported here. Remember to buy low and sell high! (How to make a small fortune in the stock market? Start with a large one!) Some people have a really good sense of when to buy and when to sell. I don’t count myself amongst them. Mutual fund and ETF gains are reported here as well.
Sch K-1 (LLC, Partnerships, Joint Ventures, P.A. etc – IRS considers them all the same) – these are all various businesses that file their own partnership return and distribute the income through a Schedule K-1 to each partner. This is called pass-through income, as the K-1 will tell you which lines of your tax return to put the income on.
If you are going to truly diversify your sources of income, consider generating income from many of these buckets.
The Tie Dye family have used all of the methods above. Mrs. Tie Dye has her own business (Sch C). We participate in some partnerships that generate Real Estate and Royalty income. We have our own rental real estate. We get 1099s for credit union interest (they call it dividends just to confuse everyone) and for dividend income from stocks we own. Mr. Tie Dye is still generating W-2 income from a job.
As our mutual funds re-balance their portfolios (sell some stocks and buy others) they generate capital gains which they kindly report to us on a 1099.
I did leave out farm income which reports on other forms. I don’t see many farmers yet in the FI community.
Some of these sources of income have interesting tax advantages over others. Sounds like a future post is needed!
The point here is that YOU INC. can diversify by generating as many forms and sources of income as you want. Do not think of diversification only as a question of which stocks or mutual funds to invest in. The picture is much larger.
* I doubt most people think of their checking/savings/CD accounts as loans to banks or credit unions. That is exactly what they are. Banks pay you wholesale (lower) rates for this money and lend it out to borrowers at retail (higher) rates, making the difference on the arbitrage as one source of profit. If you want to borrow money at lower rates and lend it at higher rates, become a bank! This would be yet another source of diversification.
In the ChooseFI facebook group, https://www.facebook.com/group/ChooseFI/ , the discussion about life insurance comes up from time to time. Some important items to consider:
Like any other product, get it when you need it. In the case of life insurance, get it when someone else is dependent on your income. This could be a spouse or partner, and of course, minor children. These are the beneficiaries of your policy. Should you die, the beneficiaries will get the insured amount. If you are single and no one depends on you, you do not need this product.
How much insurance do I need?
You need enough insurance to allow your beneficiaries to replace your take home income, taking into account taxes.
How long do I need it for?
Once your kids have graduated college and your debts are paid off, assuming you have accumulated taxable and pre-tax savings in sufficient amount for your surviving spouse/partner to live off of, you no longer need life insurance. Figuring this out determines the Term of your policy.
Whole Life vs Term
Whole Life is sold as an investment vehicle wherein a portion of your premium pays for the insurance, a portion is commission to the sales team and a portion is invested in some investment of the insurance company’s preference.
The value of the investment is called ‘cash value.’ Each year the cash value builds. At some point the cash value may grow to and exceed the face value of the policy. The annual increase in cash value at some point may be more than the premium and can be used to pay the premium.
You can take the cash value out at any time, as it is your money, but you must either surrender the policy or reduce your death benefit, depending on the details.
Term Life is pure insurance. Is there any other insurance product you purchase (home, car, medical) that comes with an investment? Why should life insurance be any different?
Term Life policies are dramatically cheaper than Whole Life policies because there is no investment sold as part of the package. The field is highly competitive so commissions are low.
Term Life contracts are typically either level or declining for a certain number of years. So a 20 year level term policy gives you the same death benefit for 20 years, whereas a 20 year declining benefit policy reduces the benefit as you get older. Level term is the more common product sold these days.
As I see it: a Whole Life policy is really an expensive declining Term Life policy in disguise. Why? Because the insurance company is only at risk for the Face Value – Cash Value of the policy.
Once the Cash Value equals the Face Value, the insurance company is at risk for nothing and you have a not so great investment getting not so great returns.
Since you can do better as a smart person pursuing FI, why would you give the insurance company this large sum of money?
Buy term and invest the difference – that was the slogan of A.L. Williams, an insurance company started in 1977. While that company (now called Primerica) has had its own issues (it uses MLM techniques to build its sales force), the general concept has caught on with the public and all life insurance companies now offer term plans.
So get as much insurance as you need to protect your loved ones, keep it as long as the need exists (until you are financially independent perhaps) and then discontinue paying for it.
Note that for individuals with very, very large estates, especially illiquid estates like a large family business, a whole life policy can be part of a strategy to keep the business intact after a death of one of the owners. This probably does not apply to anyone reading this article.
