Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Friday, October 18, 2019

Let The Sunshine In!


For quite a while, I’ve been interested in solar. Fifteen years ago, when I began investigating, there was no one in Mississippi selling or installing solar systems. It seemed just a pipe dream.

Lately, more and more companies are popping up to provide this service. So I decided it was time to get serious. The other thing that pushed me to pursue this option was the lucrative tax credit offered on a solar installation and the fact that this credit was disappearing at the end of the year.

I had to convince my husband to go down this path. Wouldn’t the panels on the roof of our house detract from its appearance? Would future buyers really care about having solar panels? Did this really make financial sense?https://www.nerdwallet.com/blog/finance/save-money-putting-solar-panels-roof/

We met with two different companies. The first was all sales. There was no schematic showing where the panels would be located. No spreadsheets showing usage and payback period. Just a promise that the sun would provide ALL our electricity, and we would only pay a small connection fee each month. Wow! That sounded great.

Of course, if you install solar panels on your roof, you need to consider the age of the roof. Solar panels are designed to last about 25 years, which matches the age of a new roof. If you put on a new roof 10 years ago, this changes the calculation. Most installers prefer to put their panels on a new roof. So now you’re not just paying for solar panels, you’re paying for a new roof.

Of course, we were told if you couple the two, you may be able to get the tax credit applied to BOTH the panels and the roof. That sounded appealing. What is the tax credit, and when does it expire? It’s 30% of the cost, and it IS a credit, not a deduction. That means a dollar for dollar savings on about a third of the project. To qualify for the year-ending tax credit, I would need to sign up quickly (or so I was told).

A few qualifiers…

You are only supposed to take the credit on roofing for the portion of the roof actually under the panels. And in order to get the full advantage of that credit, you need the income (and the tax associated with it) that is big enough to offset that 30% break. Many retired people don’t have enough tax to pay now to take full advantage. Again, a change in calculus.

The second guy showed up with a laptop full of charts and graphs. He pointed out the direction the house was pointing, how the sun changes during the year, and the many shade trees surrounding our roof. He climbed on the roof with his many gadgets to verify his estimates. Full electricity? Not so much. He expects we could supply about half of our electricity with solar, and this would take many more panels than the first group suggested.

And now we’re confused. I really wanted to go solar. It seems like a great idea. We would be using a renewable resource. If the power company keeps getting rate increases, won’t that eventually pay off?

Turns out our payback period would be about 12 years, under a generous set of estimates. Also, we would have to load up our roof to get the most of the system. My husband is shaking his head now. Ultimately, the overall cost of panels and a new roof was now hitting the $40,000 to $50,000 range. Even with a generous tax credit, the dollars made my head spin.

One caution—many solar companies sell customers on a system by offering financing that matches what you were paying on an electric bill. Sounds good, right? But the rate on those financings is in the 7-8% range—not cheap! Also, what happens if you sell the house before you pay off the loan? Maybe you move, but you still have to pay that monthly bill.

We planned to pay the full bill up front to make this a purely economic decision. The problem we encountered is that our electricity is pretty cheap. The price per kilowatt in our area makes going solar unreasonable. I tried. I really tried, but in the end, it just didn’t make sense.

So we’re not going to spend $40,000 to $50,000 on an environmentally friendly and sustainable source of energy. We’re not going to be the progressive family in the neighborhood doing our part on climate issues. I had to give up my pipe dream.

Instead, I’m going to redo the kitchen.


Monday, September 16, 2019

Looking at the Numbers...

The Consumer Price Index (CPI) rose 0.1% in August. This is a measure of inflation and indicates prices are rising. Of course, that increase changes depending on the composition of the basket of goods being measured. Leave out food and energy and we see a higher number (0.3%). Rising oil prices should hit this stat in September.

Retail sales increased a healthy 0.4% in August. Consumers are holding up the economy as they keep their wallets open. Consumer Sentiment came in at 92.0, higher than the 89.8 measure in July. This helps to explain the higher retail numbers. Whether this trend continues will determine the Christmas retail season and the health of the economy in 2020.

The Empire State Index fell in August, dropping from 4.8 to 2.0. This is a combined stat that measures sentiment among executives. The drop is significant but is still in positive territory.

Friday, September 06, 2019

Working for a Living


Unless you inherited a pile of cash or you’re retired, you need a job to survive. It’s universal. We are all working for a living. The income from our jobs determine our lifestyle— the house where we live, the car we drive, the colleges we send our kids to.

And while Americans are notorious for spending more than they make (via credit cards), we don’t pull out the plastic unless we feel sure about our jobs. The current income from a job, the future income from that job, even possible raises/bonuses, all have an impact on our spending. So any data that tracks our work tells us something about the state of the economy.

The Bureau of Labor and Statistics and the Department of Labor produce data on a schedule which gives guidance to policymakers (and investors). One set of data is published on a weekly basis, and two are done on a monthly basis.

The number of new unemployment claims is reported weekly and comes out each Thursday. Weekly numbers can be very “noisy,” meaning fluctuations from one week to the next are not necessarily meaningful. Trends in data are always important, so we focus on the 4 week moving average for a better picture of conditions.

Weekly unemployment claims increased by 1000 this week, not terrible. The 4 week moving average shows the increase is 1500. Again, not terrible but it shows a trend of increasing unemployment. This is something that bears watching.

Monthly employment numbers are published on the first Friday of each month. BLS produces two reports. One is for the unemployment rate, and this month’s rate remains at 3.7% (very low). This data is calculated through a household survey. For an interesting look at this data over a period of years go to https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm#.

While the unemployment RATE tends to be the popular one to report on the news, it’s not the one that investors pay attention to. We focus on the number of jobs added in the previous month. It’s done by surveying business and is a more reliable measure of job growth. In August, we added 130,000 jobs.

First, know that we need to add about 150,000 jobs per month just to keep pace with new entrants to the job market. Next, we also look at trends in this data. In 2018, the average number of jobs per month that were created stands at 223,000. For 2019, that number is 156,000. 

The second thing you need to know as an investor is that it’s always about expectations. This month, economists expected the number to be 150,000. It was less and leaves investors with the feeling of disappointment. That often leads to a pullback in markets as we factor in fewer jobs in the future.

Thirdly, because the government is the government and this data MUST be produced on a schedule, previous published data points are often revised. Revisions tell us a lot about the direction of the economy. If you read the full report (and you SHOULD read the full report), you’ll note downward revisions for both June and July.

Finally, there is one other quirk to this month’s number. The report breaks down numbers by industry/employer. Mining jobs are declining, and retail jobs are being gutted. But the federal government added 28,000 jobs in August. Sounds good, right? But 25,000 of those are census hires. We know these are temporary jobs, so expect them to disappear in a future report.

There are some bright spots in this month’s report. Average hourly wages are increasing, and the participation rate is going up, meaning more people who want to work are working. But part-time workers are bumping up, and the number of long-term unemployed is holding steady.

What does this tell us? We are “slowly” slowing down. Eventually, this will translate to a higher unemployment rate. For investors, it means we need to prepare by adjusting portfolios. For consumers, it means we need to pay off those credit cards and build cash to get ready for leaner times in the job market.

Thursday, August 01, 2019

You Can’t Always Get What You Want

So, the highly anticipated announcement surrounding interest rate cuts was finally delivered yesterday. Chairman of the Federal Reserve, Jerome Powell, graced us all with a .25% (25 basis points) interest rate cut. This announcement effectively cut overnight lending rates to the range of 2% to 2.25% and was the first rate cut in a decade. Lower rates equal easier access to money through lower lending rates. Typically, the market tends to rally following a rate cut.  Cheaper money means more business investment, easier spending, and more money flowing through the economy. Good for investors, right? Yes, logically one would think this would be the case, but no, no, no, investors wanted more.

Prior to the announcement, investors had expected more rate cuts this year, and their valuations represented these further rate cuts. However, Powell made it clear this was a mere “mid-cycle” adjustment, and further rate cuts this year were unlikely. Investors wanted more, but Powell felt this was all they needed.  As a result, the market’s initial response was rather negative. The market, in essence, threw a temper tantrum, because they wanted either a higher cut, or more than one cut this year. Investor valuations were thrown for a loop, and with the likelihood of further rate cuts reduced, reported earnings were overstated. So, the market reacted strongly to the disappointing news and was forced to correct itself.

While the stock market reacted negatively to Wednesday’s rate cut, historically, the long term effects of interest rate cuts have been positive for the market. Since the early 90’s, for instance, the S&P 500 has responded with an average increase of 0.16% on the day of a 25 basis point slashing. Furthermore, a month later, broad stock market benchmarks have produced an average increase of 0.57%.

So, although rates were lowered, and investors now have lesser borrowing costs, they were not fully content with the Federal Reserve’s decision. They wanted 3 scoops of ice cream but only got 1. Yes, they still got their ice cream, but isn’t 3 scoops better than 1? Some might argue yes, most certainly. However, you can’t just eat as much ice cream as you want all the time. In this case, Powell limited rate cuts and gave them what he felt they needed. As with ice cream, you have to limit yourself, and in the wise words of legend Mick Jagger, “you can’t always get what you want.” Powell on the other hand may think this is “just what you need.”




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Wednesday, July 24, 2019

Slow News Day

This episode of MPB's Money Talks originally aired July 23, 2019 and will be available online at http://www.mpbonline.org/moneytalks/

Tuesday's radio show didn't offer too much in terms of planned content, but as usual, our callers filled the show with excellent questions and insightful comments. You can tune in on Tuesdays at 9am to MPB, listen live online or hear the past episode as a podcast here.

Our planned topic was discussing a few back to school tidbits. Mississippi has an upcoming Sales Tax Holiday that aims at school supplies and clothes. This applies to specified items priced less than $100.

Our first caller, Dean, asked if camouflage counted in the sales tax holiday. I noted that a lot of clothing items were allowed, and it didn't specify the pattern or fashion. Hunting vests are also specifically allowed. Relevant to this, Mississippi also has a second amendment sales tax holiday coming up on August 30th. On this holiday, purchase of items related to the second amendment (guns, in the vernacular, though hunting supplies are also included) do not have sales tax due. This holiday does not have the dollar restrictions that school supplies have.

Our second caller took us back to one of the most popular topics: student loans. Sheila is retired, but still paying on a Parent Plus loan from her child's college career, over 20 years ago. She is paying only 4% interest (low!) and it is a consolidated loan. I recommended trying an income driven loan which would give her the lowest payment if there was a financial burden. She said her only income was social security. Income Driven Repayment plans limit your repayment to a percentage of your income over and above 150% the poverty level. As an example, if our caller received $2,000/mo from social security, that would be an annual income of $24,000. 150% of the poverty level is about $18,000, her income beyond that would be about $6,000. If the IDR limited her payment to 15% of that amount, her total payment would be about $900/year or about $75/mo.

A later caller recommended that she make her children pay for those loans! While this is a great point, the loans are likely legally all in Sheila's name, if the children missed a payment, it would still be her responsibility to make. This is a good reminder to carefully plan for your children's college needs, and reach an understanding with them about how it will be paid for. Generally, student loans should be kept in the student's name as much as possible as they will have the flexibility of repayment plans that fit their own income.

We had a caller, Mary, who called on behalf of her nephew. He was turning 21, at which point about $30,000 from a guardianship would come to his own name. He is currently in college and receives  scholarships. He wants to use some of the money to buy a car, but is interest in setting some aside for the long term. The desire to go ahead and get started investing is very laudatory, but I cautioned that he should make sure he has cash set aside as well. Nancy recommended that if he works at all, he should set aside money for a Roth IRA. With a Roth IRA you can put up to $6,000, or your earned income, whichever is less. If he had a summer job and earned $4,000, he could put $4,000 into a Roth IRA. After the call, I realized that others in a similar situation may need to be careful too make sure that the change of ownership of the money did not affect their financial aid situation.

Our last caller was Roderick, who had questions about a 401(k). He asked about the tax treatment of employer match funds in the 401(k). They are generally tax deferred and therefore also count as income when they are withdrawn.

Don't forget to tune in or subscribe to Money Talks at 9 AM every Tuesday on Mississippi Public Broadcasting, or online at http://www.mpbonline.org/moneytalks/. This episode is available online.