Introduction: Financial Independence Retire Early (FIRE) and home solar panels
When we ask customers why they decide to go solar, most customers respond that they went solar for financial reasons. Residential solar and batteries help homeowners reduce electricity costs, increase a home's value, and potentially get a significant tax credit. The financial benefits of adding solar are why people in the Financial Independence and Retire Early (FIRE) are starting to catch on that solar is one of the best FIRE hacks available to homeowners.
What is Financial Independence Retire Early (FIRE)?
Financial Independence, Retire Early (FIRE) is a financial idea that is focused on extreme savings, budgeting and focused investment that will allow for an earlier retirement age compared to a traditional savings strategy.
How did Financial Independence Retire Early (FIRE) start?
Since the release of Vicki Robin and Joe Dominguez's seminal book, Your Money or Your Life, in 1992, many people have gathered around a movement to increase financial independence and early retirement. The community rose in popularity in the early 2010s as online blogs (Mr. Money Mustache being one of the most famous) and discussion forums educating people on becoming more financially aware to help them increase their quality of life.
FIRE stands for Financial Independence, Retire Early, and in many ways, goes hand in hand with the primary driving force behind why so many American families have chosen to go solar.
Financial Independence, Retire Early is based on the idea that life does not have to be based around working into your old age unless that brings your joy! FIRE wants people to consider if the hours they spend at work provide them with the highest quality of life. Financial Independence, Retire Early has caught on with millennials who watched older generations work long hours into older age and have decided that limiting expenses now will provide a higher quality of life later in life.
How FIRE (Financial Independence, Retire Early) works?
Before we get into why FIRE and residential solar go so well together, it is essential to understand better why people are interested in the FIRE movement and how the FIRE movement recommends people accomplish their goals. For example, when some people think about FIRE, they focus on the freedom to not have to work a job that they do not enjoy (something many people, unfortunately, spend most of their lives doing). In contrast, others love their job but like having the freedom to pursue other passions, travel, other business ventures, extra family time, etc.
Regardless of which camp someone falls into, people committed to FIRE are focused on building assets that provide a passive income that generates enough money to cover living expenses.
The FIRE focuses on passive income because it requires little management or effort but can drive consistent and lower risk returns if set up correctly. Most FIRE community members invest in stock portfolios with low fees and high dividends or rental income.
Although some debate exists, the objective for many FIRE believers is the 4% rule. The 4% rule comes from a paper written by three Trinity University professors published in 1998. The professors examined various stock and bond mixes between 1925 and 1995 and modeled project payouts and withdrawal rates over fifteen to thirty years.
The model attempted to find a "safe withdrawal rate" for retirement portfolios to allow retirees to cover expenses without harming their long-term financial well-being. The Trinity Study found that a person has sufficient savings in assets if 4% of their assets can cover one year's worth of expenses.
The 4% rule sets a savings goal equivalent to twenty-five times a person's annual salary. This number can seem astronomical, and it is high. However, people dedicated to FIRE can go to "extreme lengths" to achieve their financial goals, live in vans, or give up their cars.
Regardless of how they get to their goal, achieving the savings rate needed to reach FIRE comes down to two things:
1) Increase Income
2) Decreasing Expenses
Increasing income can come from negotiating with your employer, switching to a more lucrative career, or finding a "side hustle" that works for you.
Decreasing expenses can take many forms. Many people new to FIRE start with minor spending changes, like eating out less frequently or not using services like Netflix. For others willing to take more extreme actions, some people live in a van or will only eat food that they are growing.
So while installing solar at your home will not increase your income (we should stop to mention that solar panel careers are high paying and the solar jobs are expected to increase in the coming years), it can help you decrease your expenses.
Electricity expense: The danger of utility power and raising rates
When people think about expenses, they usually fall into a few categories, Housing, Trenspaertaiton, Food, insurance/Taxes, Childcare, Lifestyle/Entertainment, and savings. However, when it comes to things like utility expenses, finding practical solutions to help reduce them can appear to be more complex.
Even though homes have become more efficient in the past decade, we add more appliances requiring electricity. The increased need for electricity to power our lives makes reducing electrical usage to decrease expenses challenging.
Simultaneously, the utility rates, on average increase yearly, with Southern California Edison (SCE) increasing by 7% in 2020. This increase means for homeowners that even if they can flatten or slightly reduce electrical usage, they will still be SPENDING more on electricity year over year. Let's take a look at some numbers to illustrate this point.
5% Yearly Utility Rate Increase on $250 a Month Electricity
2020) $3000 a year
In this example, if a homeowner stays with utility electricity and manages to keep their electrical usage the same, in 5 years, they will be spending close to $1000 more on electricity a year. An increase of $1000 would significantly damage a FIRE member's savings or the return they would need to achieve to remain at the 4% rate. Luckily for homeowners interested in FIRE or homeowners who want to increase savings, solar can help address this issue.
Residential Solar: The ultimate FIRE Hack
Because most homeowners only have access to one utility provider, they are at the mercy of rate increases and additional charges that utilities force upon them. Residential Solar systems allow homeowners to remove themselves from this one-sided relationship and decrease their electricity spending, giving them more money to invest or reduce the expenses they have to cover.
When looking at solar homeowners, they have a few options for adding solar energy and battery energy system to their homes. Although all solar options can help homeowners save money when designed correctly, depending on the specific FIRE objectives, each solar financing option has different advantages. Let's look at how purchasing solar cash, with a Monthly Power Purchase Agreement PPA, or a Prepaid PPA can help someone accomplish their goal of early retirement.
Monthly PPA: $0 Down Day One Solar Savings
Many members of the FIRE community are trying to avoid touching their investments to help ensure that compound interest, dividends, and market growth can help them reach their financial freedom goals as quickly as possible. As a result, they look for ways to change behavior or use different products to reduce their spending and save more money.
The objective of reducing spending without reducing savings is what makes a Monthly Power Purchase Agreement (PPA) a desirable option for people on the Financial Independence journey.
With a Monthly PPA, a third party like our partner Sunrun maintains, monitors, warrants, and guarantees the solar panel system's production. Because solar electricity can be produced at a low cost and incentives are available for adding renewable energy, the PPA provider can give the homeowner a lower cost of power than the utility price of utility electricity without the homeowner paying anything upfront to have the solar system installed.
Monthly PPAs allow homeowners to see savings from solar starting day and understand their electricity payments be going forward while avoiding the continued increase in utility energy costs for the next twenty-five years.
Day one savings and no out-of-pocket expense make a PPA an attractive option for anyone in the FIRE community who might not be in their "forever home."
Solar Ownership: Great savings and tax benefits
Some people on their Financial Indpenedince Retire Early path are looking to minimize expenses as much as possible. For these people, solar ownership will lead to the best returns.
The benefits of solar ownership:
1) Eliminating the electricity bill: By replacing utility electricity payments and avoiding the future increases in costs associated with utility electricity, homeowners who purchase a solar system can get rid of their electricity payment for twenty-five years (this is the length of time most solar panels are warrantied for, actual solar production will be longer).
2) Federal Solar Tax Credit: When a homeowner purchases a solar panel system, they can take a 26% percent tax credit on the solar panel system's entire cost. The tax credit helps improve the ROI of the solar system and provides additional value to those in the FIRE community looking to minimize their yearly tax liability.
3) Additional incentives: Depending on the state or municipality a homeowner lives in, they may qualify for other incentives. For example, in some states adding solar allows a homeowner to claim a state tax credit. In others, additional incentives have been put in place for residential solar battery systems (Self-Generation Incentive Program (SGIP) in California, or the Demand Response Battery Bonus program in Hawaii, for example). These also help reduce the overall cost of the solar panel or solar panel and battery storage system like the Tesla Powerwall 2 or LG Chem RESU 10H.
4) Increased Home Value: For many people, their home is one of their most valuable assets. One of the additional benefits of purchasing solar is that it has been shown to increase the value of a home and help it sell faster once put on the market.
While purchasing solar increases the home's value, it will take time to recoup the initial investment if a system is purchased with cash. Solar financing is available, but it is essential to work with a company like Alchemy Solar that can provide a low-interest rate solar financing option to avoid harming financial returns because of high interest rates.
Prepaid Power Purchase Agreement (PPA): Maximizing ROI
Some people in the FIRE community are only interested in looking for the best financial investment possible. When people think about the solar option with the best ROI, many assume that solar ownership is the best way to maximize a solar investment. In reality, that might not be the case. A Prepaid Power Purchase Agreement is an option that allows customers to pay for 240 months of electricity at once, providing customers with the lowest electricity kilowatt price. Homeowners replace expensive electricity from the utility with the electricity produced by the solar panels, helping them avoid the increases in the cost of utility power.
FIRE focuses on taking into consideration all the costs associated with a purchase. For people looking to simplify the solar process and the headache of going solar, the Prepaid PPW provides homeowners with the lowest cost for electricity and provides the added value of removing the hassle of applying for the Federal Solar Tax Credit.
The Prepaid PPA also comes with the peace of mind coverage that a monthly PPA provides. That means that the system is covered for monitoring, maintenance, and warranty, for the agreement's life. If a homeowner wants to add a battery, this can add tens of thousands of dollars of additional savings. For people looking to minimize costs are much as possible, this adds enormous value to someone passionate about Financial Independence Retire Early.
The Prepaid PPA options also provide additional savings that many homeowners are not aware of. Because the PPA provider owns the solar panel system, it is responsible for insuring it. This fact provides additional savings to homeowners that can add up quickly. For most homeowners, the savings on homeowners insurance is around $5-10 a month, during the 25-year agreement, the savings on the homeowner's insurance alone can lead to an additional $1,500 of savings.
Conclusion: Solar and Financial Independence Retire Early: One of the best paths to financial savings and retiring early
When designed correctly to address a homeowner's needs, solar can be one of the most effective ways to help a homeowner save money. With the variety of solar financing options available, almost every person, in a solar-friendly state, on the journey to Financial Independence Realy Early can find a solar solution that helps them achieve their financial objectives.
If you are on the path towards FIRE or just interested in learning how solar can help you save money, please schedule a free consultation with Alchemy Solar today.