Investing in solar energy

Solar Energy Investment 5

Save Invest your money!

 

I’m a big proponent of investing money. While a lot of personal finance books and blogs usually focus mainly on cutting down your expenses and living within your means, I don’t think anybody ever got to financial independence solely by clipping coupons.

No, I’m not saying you should not save money. Saving money is great, but I think it’s just a part of the puzzle. If we ever want to reach financial independence, we need to wisely invest our money so it multiplies many times over. This is why I’ve always thought that part of our income should go towards investing.

This is way we’re putting down $10,000 (holy crap, that’s a lot of money!) as an investment. The documents have been signed and mailed, cheque cleared, and soon we’ll receive share certificates along with our first monthly distribution.

 

Investing in solar energy?

 

My investment of choice is Solar Income Fund.

Solar Income Fund (or SIF) plans on acquiring/developing and operating a number of solar energy farms, mostly in Ontario. Some solar farms will be brand new, some will be existing operations. Just like income-producing rental homes, once built solar farms can be bought and sold by companies involved in investing in solar energy.

 

Investing in Solar Energy

Investing in Solar Energy

 

In case you’ve been living under a rock, solar farms are awesome and environmentally friendly way of producing electricity. An array of solar panels is installed on rooftops, farmland, or just open space to convert solar energy into electricity. Electricity then gets transferred into provincial electricity network and the owner of the farm gets paid for the amount of electricity produced. Solar panels don’t need to be maintained and are very self sufficient. They’re even insured against catastrophic events which would stop them from producing electricity and thus income.

 

Investing in Solar Energy

Investing in Solar Energy

 

The Solar Income Fund management team will select solar farms based on their viability, location, power-purchase agreements in place, and long term sustainability.

What makes investing in solar energy in Ontario appealing is the fact that Ontario government guarantees their feed-in rates for 20 years. This means once the purchase rate for a solar farm has been established and the system has been hooked into the system, the price Ontario government will pay for the electricity produced is guaranteed for two decades. Power purchase agreements (PPAs) remove a lot of risk associated with investing in solar energy simply because it makes the investment very predictable.

Why would Ontario government do this? This was part of Green Energy Act that was passed in 2009. Basically, Ontario plans to get away from energy produced by coal to solar energy because solar energy is much cleaner and efficient. They already shut down 19 coal units and remaining coal plants will be shut down by the end of 2014. The energy they have been producing will have to be replaced by solar energy farms. This is where third-party investors such as Solar Income Fund come in and invest their money into solar energy installations and start producing electricity.

 

 

Returns and exit strategy

 

The investment pays 9% annual return on investment paid out monthly via cheque or direct deposit. This is what’s called “hurdle rate” – until the company pays this out, the management of the company doesn’t get to enjoy the profits. In other words, it is in management team best interests to exceed the 9% rate of return on investment.

Any income in excess of 9% is split between the investors and the management team with investors getting 60% of the extra income (while management gets 40%). The excess income is distributed annually to investors.

This is not a liquid investment that you can buy and sell any time you want. Unlike public company stock that can be bought and sold on the open market, this is a locked investment. Once the capital is raised, the fund is closed for further investments and money is put towards purchasing of solar farms. The management plans to sell the fund to an institutional investor (bank, investment company, pension fund, or anyone else looking for a stable income producing investment), and return the capital to investors with an upside profit.

Income produced with this investment is very tax-efficient. Capital gains are another story though.

 

Risks and concerns

 

Just like any investment, Solar Income Fund comes with risks and concerns. After mulling them over, I still went ahead with the investment since I think risks are well managed and thus minimized. But here are a few things that crossed my mind:

 

– Ability to produce consistent income.

 

This was my first concern about this investment. Nine percent return seemed high comparing to other dividend paying companies, right? But after looking at some numbers, nine percent looked very attainable. Solar power installations are money making machines! Once they’re built, they don’t require any expensive maintenance. Solar panel manufacturers guarantee their performance. The amount of money solar farm can produce can be predicted in advance given location and technical data.

Once the solar farm has been purchased or built, the money just keeps flowing in. Imagine being an apartment building landlord with extremely predictable tenants. Also, imagine that the government of Ontario guarantees that rent checks will keep getting mailed to you. All of a sudden, the risky business of being a landlord becomes very predictable and profitable.

 

– Flavor of the month investment?

 

As soon as I heard “solar energy”, I thought I’m about to hear a lecture on how green this investment is and how awesome it is for the environment. Solar energy has been around for ages by now, and always been a bit of hype. But solar energy in Ontario is there to stay. Ontario government guarantees their solar energy rates for 20 years, so the income that can be produced with solar energy isn’t going anywhere any time soon. Yes, it is a green investment, and will make a huge difference on Ontario’s environmental footprint. I’m super excited to be investing in solar energy because it’s green and pollution-free. But it will also produce income and hefty return for investors in the mean time.

Since 2003, Ontario reduced their coal-fired power use by 90%. By the end of this year, they plan to shut down remaining power plants, and make up for the loss in their energy output with solar farms. Almost 90% of solar farms installed in Canada are located in Ontario. Given all of this, investing in solar energy doesn’t sound like flavor of the month, more like a fundamental change in energy business in Ontario (with rest of Canada to follow, I hope).

By the way, the biggest players in solar energy market in Ontario are TransCanada and Enbridge. I don’t think they’d invest over one billion dollars combined in solar energy if it was just a flavor of the month investment 🙂

Heck, even Dragons Den moguls agree that they missed out on a great opportunity when it comes to investing in solar energy (scroll to 10 minutes 30 seconds mark):

 

Experienced management team?

 

You can have a great business model and awesome prospects for profit, but an inexperienced team can ruin any business and you’ll kiss your money goodbye. After watching enough Dragons’ Den episodes, the role of the management team seems like a paramount factor in business success. This is why you should only invest in companies that have excellent management teams with lots of experience.

It just so happens that these cats have plenty of it. This is not the first solar energy fund they’re starting in Ontario. Including this one, they’ve started five solar energy funds; some of them already exited (have been purchased by an outside investor) with hefty returns touching on 18-19% (not too shabby!). While past performance doesn’t guarantee future results, this still instills confidence in their management team for me. I think my money is in good hands!

 

What’s next?

 

Now we’re just looking forward to receiving monthly checks in the mail that will put to use by investing it further into something else. When the fund exits and gets sold to an institutional investor, there should also be an upside return, which will come back to investors along with principal. It might take a while, but it sounds like the money will be hard at work all this time.

Also, next time I’m in Ontario, I really want to visit some of these solar power farms in person just to see my money at work! If this ever happens, I promise to post a picture of me right next to a solar panel! 🙂

 

 

Overdraft fee? Are you #$!@% kidding me???

Overdraft fee 9

Overdraft fee on our account?

 

I am truly embarrassed. Just few weeks ago I rambled in lengths on how you should avoid getting overdraft fees by knowing when payments are supposed to come out of your account, and always making sure you have enough money in it. “Oh, only extremely dense people would let their account get overdrawn! You’re better than this!” 

Well, guess what. I log into Mint.com (which is the best money management website ever, just FYI) on Friday, and I see that we’ve been charged an NSF fee. What the hell?

 

Overdraft Fee

Overdraft Fee

 

Why did this happen?

 

For ages, my paycheck came into our account on Thursday night. On Friday morning, our mortgage payment would leave our account. I specifically picked every other Friday for our mortgage payments just so it is the same day as payday and I knew we would have money in our account. It’s always been like this, and it never changed once.

In fact, I started counting on this lately. Because we have rather aggressive savings goals this year, last few weeks I’ve been living a bit on the edge. I would move money between our checking and saving accounts trying to hit our goals rather aggressively, to the point that sometimes I would leave almost nothing in our chequing account. Out of my determination to hit our goals which borders on stubbornness, I flew a bit close to the sun. Counting once again that my paycheck will appear first in our account followed by our mortgage payment, I left our account too skinny.

But this Friday Murphy’s Law prevailed, and our mortgage payment showed up before my paycheck. Boom!

It doesn’t matter that my paycheck arrived shortly after. We didn’t have enough money in the account to cover the mortgage payment. And as a result, our bank refused the payment, issued an overdraft fee, and when I saw this I almost spilled coffee on myself. After all the hard lessons that I’ve had in my life when it comes to finances and preaching on my part how you should always be aware of your cash-flow, did I just cause an overdraft fee on our account?

 

Whose fault was this?

 

I’m not going to make up excuses for myself. It was 100% my fault for letting my stubbornness get the best of me. Yes, it’s great to have goals for your finances, and work hard on hitting them. But you should never leave your net empty, when you send your best players across the field to score some goals (yes, this is a hockey reference). This can have very dire consequences.

To add insult to injury, just few weeks ago my wife checked our account and noticed we’re flying unusually low to the ground – meaning we have unusually low account balance. She expressed concern about it, but I brushed it off. “- Don’t worry, honey. Your man will never let anything bad happen, I’ve got this!”

Overdraft Fee

Overdraft Fee

What a perfect I-Told-You-So moment. Kill me now.

 

First results:

 

$45 overdraft fee courtesy of President Choice Financial (our checking account) already been charged.

$75 NSF fee courtesy of Macquarie Financial (our mortgage holder) that will follow.

A huge load of embarrassment for me. Is this what crow dinner tastes like? Yuck!

 

I jump into action!

 

Fueled by my own embarrassment, I jump on the phone. Obviously, I can’t just ignore this rather negative event, but I also know that if I’m pro-active, it’s possible to avoid paying some of the fees. My plan is to beg for forgiveness until they stop me!

First I call our mortgage company and explain the mix-up to the best of my abilities.

Me: – Hello! My deepest apologies, but it seems to me that we’ve bounced a payment this morning. I just wanted to let you know that I’m truly sorry about it, and you can already debit our account for the full amount.

Very nice CSR: – Oh, I see. Thank you for letting us know and saving us time. We’ll debit your account shortly, and since this is the very first time you’ve bounced a payment, we’ll waive the NSF fee.

Me: – OMG, thank you so much!

 

Next, I call our bank and talk to them:

Me: – Hello! I just wanted to apologize for overdrafting our account this morning.

Very tired and emotionally withdrawn CSR: – Uhmmmm…ok.

Me: – Any chance you can remove the overdraft fee? This is the first one on our account.

Very tired and emotionally withdrawn CSR: – Not really, no.

Me: – I’ve been a client of this bank for a very long time; we have a number of products in our name. What can you do for me?

Very tired and emotionally withdrawn CSR: – Well, let’s see. I can probably meet you half-way. How does $20 instead of $45 sound?

Me: – Not nearly as good as a zero charge. Give me a break, it never happened before.

Very tired and emotionally withdrawn CSR: – Oh, fine. But next time you overdraft your account, this trick won’t work.

Me: – You’re the best. Won’t happen again!

 

Final results:

 

– President Choice Financial reimburses the overdraft fee within days:

Overdraft Fee

Overdraft Fee

– Our mortgage company sends us a postcard. How nice:

Overdraft Fee

Overdraft Fee

We avoid paying $120 for my stupid mistake.

Lesson #1: No matter how bad I want to hit our financial goals, I can’t live on the edge, and we should always have buffer in our daily account. Ideally, at the beginning of the month I’d like to have enough money in our account to cover all our expenses for the month. This way we never have to “time” our bills and paychecks.

Lesson # 2: You can talk your way out of some overdraft fees. Of course, this won’t work if you constantly overdraft your account, but if you make a stupid mistake once in a while, banks can be surprisingly forgiving.

Lesson # 3: My wife is one smart cookie 🙂

 

Overdraft fees by the numbers:

 

Average overdraft fee charged by major banks is $34.

– Overdraft and non-sufficient funds fees accounted for 61 percent of total consumer deposit account service charges in 2011

– The amount in annual fees, on average, for accounts that had at least one overdraft or non- sufficient funds fee – $225

 

My 13,940% risk-free investment

returns 2

What if I said there is a risk-free investment with 13,940% profit over time?

 

Now, at this point you would probably laugh at my face. First of all, the return figure is way too high and comes close to that of Apple. Second, there is no such thing as risk-free investment besides GIC’s and money market accounts (and they return around 2% these days – barely keeping up with inflation).

But my investment does exist. And the returns are real. And they are indeed risk-free! And I’m not even Steve Jobs.

 

My 13,940% investment

 

Risk-free Investment

Risk-free Investment

 

Now, before you close this page and/or start writing me an angry email about being misled, hear me out:

– I’ve always had short hair, at least since high school. Longer hair doesn’t look good on me. So, at some point I just started getting my head shaved. Every two weeks, I’d stop by a barber to make sure it doesn’t get out of hand – but then an idea of doing it myself and getting an electric razor popped into my mind.

– My initial investment on it was $20. You can get it cheaper, but I went with quality in mind. And the quality paid off – the thing never let me down.

– I used to visit a barber to get my hair trimmed every two weeks, or 26 times a year. Each barber visit costs roughly $12.

– For the last 9 nine years, I’ve been trimming my own hair thus saving me $2808 in total (26 times * 9 years * $12)

Let’s plug these numbers into investment calculator to find out the return on my initial $20 investment:

 

Risk-free Investment

Risk-free Investment

 

Total investment return: 13,940% (just below Apple’s stock returns of 15,000%)

Annualized return: 73.2% (average stock market return – 11%)

Risk factor: NONE (but the risk of being mistaken for Bruce Willis still exists!)

 

On a more serious note

 

Of course, I’m not trying to say that buying an electric hair trimmer is a real risk-free investment. The whole thing is meant as a joke, relax.  It’s not really an investment, it’s just a razor that happens to save me money because I’m not very touchy about my looks and it makes my life easier. And I’m not trying to say that everybody should start shaving their heads to save money! I sure would not like if my wife started shaving her head – even if it made her look like Sinéad O’Connor (not that she would ever willingly do that no matter how much money it saves).

I think my main point is that if you are struggling with money or have goals of reaching financial freedom one day, you have to start thinking with long term in mind. I didn’t have a good start when it comes to finances, but I’m still trying to reach my goals by changing my financial habits.

Every single transaction/event in your life is either a benefit or a detractor to your financial well-being. You have to pay attention to them and know their long term effects when it comes to your financial picture. For example, ask yourself how these events affect you in the long run:

– Does getting your daily morning coffee on the way to work benefit you financially?

– What would going back to school and getting an advanced degree mean to your income and how it would stack up against the short term expense of school fees?

Is getting a brand new car a sound financial decision and can you truly afford it along with higher expenses it brings?

– What makes more sense – paying off your mortgage earlier by throwing more money into it monthly or investing extra money and getting a higher return on it?

– Is commuting 50 kilometers every day to a higher paying job worth it despite higher transportation costs?

 

Biggest mistake people make

 

Just from talking to people and observing their decisions, I’ve noticed that most people don’t think their financial decisions through, no matter how big or small they are. Most people act on impulse, follow the herd, and don’t really pay attention to their financial picture. And this is the biggest mistake people make – not paying attention.

Maybe all of us should become a bit financially nerdy – start paying attention to our expenses, weigh options against each other, and think of long-term repercussions of our actions. You might not want to calculate the return on investment of a simple hair trimmer like I did today or calculating amount of money lost on smoking, but just paying a bit more attention to your financial health will be beneficial to you and your family in the long run.

 

Do you calculate returns of your everyday “investments”?

 

Financial lessons I’ve learned in my 20’s

Financial Lessons 2

Financial lessons can be learned in different ways

 

Just like all life lessons, you have to learn financial lessons somehow. Life lessons can be taught by your parents if you’re open to them. They can also be learned in school if the school program includes financial basics for youth. Unfortunately, in my case I had to self-teach myself financial literacy through trial and error. This usually is accompanied by great financial pain.

As I’ve explained before, I didn’t have a good starting position for myself in my life journey when it comes to financial literacy.  Being an immigrant from another country where economy and money function in a completely different fashion, it was literally like being an alien from another planet (but no lightsaber). I didn’t have basic knowledge of personal finance when I’ve arrived. I didn’t know what one is supposed to do with money. Economy as a whole was a complete mystery to me. Unfortunately, my parents were in the exact same position so they couldn’t teach me Personal Finance 101. I was also too old for high school where they teach it.

When it comes to personal finance, some of the concepts that are familiar to any average  Canadian were in fact completely foreign to me. For example, I didn’t know how credit cards work and how much they can cost you if you don’t pay attention to your balance. I had no idea bank will lend you the money for just about anything as long as you pay it back with steep interest. Saving for the future retirement seemed unnatural since my grandparents back home were enjoying government provided pensions for life. All of a sudden, I had to learn all of it – and sometimes through great financial pain.

Financial Lessons

Financial Lessons

But sometimes pain is exactly what you need. If you burn yourself on a stove once or twice, you learn to avoid touching it at all cost. Your brain will scream at you “Hold on there, sport. Last time you did that it hurt like hell!” Financial lessons for me were exactly the same. Sometimes painful, but as long as they taught me something they were be quite useful. I’m glad for all the pain they caused me; I just wish I could have learned these financial lessons sooner:

 

Live on a budget

 

As a young man of twenty something, living on my own and fresh to this beautiful country, I didn’t know how to handle money. More importantly, I didn’t know how to control what little money I had. Money was coming in, bills were coming out. It was a never ending cycle of debits and credits to my account with no rhyme or reason.

My only limitation to spending money was my bank account. If I had money in my account on Friday night, I would go on spending it. If I didn’t have any money in my bank account, I would stay home. Same principle for all purchases, really. Basically, I would make my decisions on what I had at the time. As a consequence, sometimes my expenses would be much higher than my income.

Then I discovered a new way to live financially. I’ve started to base my decisions off what I had coming in. If I had $2,000 coming on one particular month, I would map out how I would spend this money ahead of time without paying attention to my bank account. Two thousand dollars comes in, two thousand dollars get spent. Bank account money doesn’t get touched as it would mean spending more money than I have coming in – and that is unacceptable.

People usually cringe when somebody mentions “budget” because budget means limits and boundaries. But if you think about it, budget just means putting together a plan on spending your money. It’s actually quite liberating.

Once I’ve learned how to budget and changed my perspective on spending, I’ve started putting more thought into planning my everyday finances. Saving towards big purchases became a second nature to me as I’ve started automatically set saving goals for myself. Need a new laptop for school? Figure out how much you want to spend on it, how much time you need to save it, and how much you should be putting away monthly towards it. Now some of my paycheck is going towards the laptop – instead of me just checking my bank account to see if I can buy this laptop right away or even worse – borrowing money for it (more on this later).

I didn’t learn budgeting overnight. Little by little, I figured out what works for me and what makes most sense. But if I could have learned about budgeting earlier, I bet me and my family would be further ahead in life right now. But hey, as long as we’ve learned it at some point.

 

Say “NO” to acquiring stuff

 

You don’t really need a lot of stuff in your life. Some items are quite necessary such as transportation, shelter, and basic clothes. But anything above your basic needs is not essential and spending money on acquiring more and more stuff can turn your happy existence into a vicious cycle of never-ending work and spending.

Imagine yourself camping and sitting next to a fire. A few small logs can provide you with ample heat for the night. You don’t need to shove more and more logs into the fire; while big fire might be impressive, it doesn’t match your needs. On top of it, you’ll have to work very hard on controlling it and continuously running into the woods to get more firewood. Why bother?

Same approach with money. You can make your life all about earning more and more money, and spending it all. Your 4,000 sq. feet house will be surrounded by beautiful landscaped land, German cars will sit in your 5-car garage, and you will spend 360 days at work while stressing over your financial situation and never seeing your family.

Financial Lessons

Financial Lessons

I’ve learned that I prefer simple life (and I don’t mean that awful TV show with Paris Hilton). It doesn’t mean that I want me and my family to live like monks. But driving a used car with much lower expenses as opposed to leasing a new BMW can be quite beneficial as it gives me more money to invest, and lowers the stress by improving our financial situation.

We can probably afford a bigger house for ourselves if we borrow as much as bank will give us. Still, we’ve decided against it because living in a nice condo meets all our needs. Sure a big house would be nice and would probably impress our friends – but big houses come with big problems and higher expenses, once again. For example, we can easily repaint our little townhouse ourselves over one weekend. What if we lived in a 4,000 sq. feet house? Repainting it would probably require hiring professional painters and thus opening our wallet and saying goodbye to a considerable amount of money. Simple just makes more sense for me.

 

Invest early and regularly

 

It took me quite some time to understand the importance of investing. For this, I had to completely change the way I was thinking about investing.

This is the way I used to think about investing:

” You work all your life and get a paycheck every two weeks. You put away money for your retirement. A little of your paycheck goes towards your life in your senior years. You slowly build up a retirement fund for yourself and your family, and once you have enough you start taking from it and can stop working. As long as your money outlives you, you’re golden!”

But what twenty something person really thinks about senior years? The prospect of buying something cool right now outshines any future needs. Especially when you’re talking about your paycheck – after all, we all work very hard for our money and want to enjoy the paycheck right away. My senior years are so far ahead of me that saving for them just didn’t make sense. Let me in my 20’s enjoy life a little bit, perhaps me in my 30’s or even me in my 40’s will take care of me in my senior years! For now, New Sony Playstation, here I come!

Here’s how I think about investing now:

“You work every day and get a paycheck every two weeks. A little of your paycheck goes towards your freedom fund. The money collected in your freedom fund starts producing income. If you have a little freedom fund, it produces a little stream of additional income. If your freedom fund is substantial, it produces a substantial stream of income. Whether or not you still work, it still produces income. If this income is high enough to live off, guess what – you can stop working and still receive paychecks in the mail every two weeks. Income without work is a beautiful thing!”

For some reason, this way of thinking about retirement really changed my perspective about investing. Imagine being able to cover all your living expenses with your investment income instead of working to pay your expenses when you’re old and retired. If you live a simple life, you don’t really need a lot of money to retire – a moderate stream of income will cover all your expenses without waiting till you’re in your 70’s to retire.

So now I think of investing as building that addition stream of income. Saving money towards it feels meaningful and investing became one of our primary goals.

 

Never borrow money.

 

The concept of borrowing money from a financial institution was quite foreign to me when I arrived in Canada. Up until then the only borrowing I’ve done was through friends – very small sums of course. My parents would sometimes borrow money from their friends when our funds run out at the end of the month to buy groceries. But Canadian borrowing is much different.

Here you can borrow money for pretty much anything. School classes, everyday purchases, vehicles, clothes, housing, and even home pets. Yup, apparently some pet stores will lend you money to buy a puppy.

What did it all mean to me back then? FREE MONEY! Everybody wants to give me money so I can buy stuff, how awesome is this? I can buy stuff right away, and pay it back later once I make money by working! I’ve borrowed money for night school – and boy, was it easy. First day on campus, a major bank was giving out credit cards – and I’ve signed up right away. Then I borrowed money on it to buy everyday things – as long as I could afford minimal payments on it. My paychecks (already pretty low) were spoken for by the time they hit my pocket. Fairly soon, I’ve started falling behind. Soon after, I’ve learned what it’s like to receive a phone call from a collection agency.

Just like the proverbial hot stove, I’ve burned myself on borrowing money a few times before I’ve learned my lesson – never borrow money. If you have to borrow money, it means you’re broke and don’t need whatever you’re about to buy. If you can’t pay for something in cash, you can’t afford it, so move on. Major financial institutions make serious money by lending it to people, and by borrowing money you’re willingly handing over your cash to them just to enjoy something right away.

You don’t need to hand over your cash to a bank just so you can buy a puppy – just save money, and buy it yourself. Remember that when you borrow money you have to pay it back. If you want to buy something for $100 but choose to borrow it, you have to pay back the original $100 PLUS $20 in interest. Interest becomes an additional expense to you and a nice source of profit for your bank. Don’t you have better use for your $20?

I don’t know about you, but I don’t like my bank enough to give them money for nothing. Housing would probably be the only exception to this rule.

 

 

 

 

 

Five Useless Financial Products

Useless Financial Products

Let’s start a list of useless financial products

 

While some financial products can truly by lifesaving, not all of them are. Some of them are truly useless in my opinion, and I can’t figure out why people even consider purchasing them.

 

– Personalized cheques ($60)

 

I can never figure out why anybody would pay extra money to have personalized checks. I understand that some people feel the need to express themselves, but I can’t imagine form of payment being a good medium for it. We already have plenty of questionable ways to express ourselves –  bumper stickers and stick figure families on your cars. But personalized cheques? Whom are you trying to impress with your dolphin-themed cheques? Your local ATM machines? Most cheques you send through mail to pay bills (if you’re one of the seventeen remaining people that do it) get deposited automatically without people even looking at them.

 

Useless Financial Products

Useless Financial Products

 

On top of everything personalized checks cost money. In my mind, you might as well burn $60 (the average cost to order customized cheques) and be done with it. Or send it to me, I’ll find a better use for them.

 

– Overdraft protection ($5/month or more)

 

Overdraft protection works like this: If you run out of money on any given day but another expense comes in, the bank still processes the payment and charges you a small fee per day until your bring up your balance (in addition to your monthly fee). In reality, you’re paying your bank a fee to cover your ass.

Here’s a simple solution – keep an eye on your bank accounts, and make sure you have enough money to cover all expenses. Granted, we all been there. I’ve bounced a few checks myself when I was broke and an unexpected utility bill would show up out of nowhere. But in every single case, it happened because I wasn’t paying attention – and paying your bank more money to cover your butt is a terrible solution. A better solution is to start paying attention.

Ideally, you want to have enough money in your account to pay for all your monthly expenses at the beginning of the month. This way you never have to worry about dipping below the liquidity line. But if you’re not quite there yet, figure out when your bills clear your account and be proactive.

 

– Mortgage life insurance

 

I’ve already covered mortgage life insurance in one of my earlier posts. It’s designed to pay off your mortgage if the mortgage holder (you or your spouse) suddenly passes away. Sounds like a good idea?

In reality, mortgage life insurance protects your bank more than it protects you and serves as an additional revenue source for your bank.

– Mortgage life insurance is not flexible enough.

– It is generally way too expensive when compared to a simple term life insurance.

– You can run into problems with collecting money from it.

 

– Christmas dinner prepayment plans

 

Recently, I’ve seen an ad on TV for prepaid Christmas dinner. The plan is pretty simple – the company debits your account once a month twelve times straight, and once Christmas comes it delivers a beautiful dinner to your door – complete with turkey, wine, gravy, and all the other fixings. Sounds delicious, but is it a good financial product?

 

Useless Financial Products

Useless Financial Products

 

First of all, you’ll be greatly overpaying for this dinner. Not only you pay for all the products at inflated prices, but you also pay company profit (they wouldn’t do it just for nothing, am I right?), and marketing costs including the cheesy ad on TV. Second, you’re basically hiring somebody to take money from your account and put it aside for later use. Isn’t that something you can easily do yourself?

Simple solution: figure out the cost of your Christmas dinner, divide the amount by twelve, and setup an automatic bank transfer into this savings account. Takes about 10 minutes! Twelve months later you’ll have the money ready for your Christmas dinner without overpaying for it. Same result at much lower expense. In our family, we take the exact same approach with gifts and presents, and it works out beautifully!

 

– Extended warranties

 

Last time I bought an MP3 player at a local electronics store, I was surprised to be offered extended warranty for it. Seems to me they now offer extended warranties even on smallest items imaginable – from toasters to shoelaces. The salesperson explained in lengths how extended warranty protects my investment (by the way, it’s not an investment!). Being a big financial nerd, the whole premise of extended warranty is laughable to me:

 

Useless Financial Products

Useless Financial Products

 

– Most products these days are fairly reliable, especially if you go after higher quality brands and do your homework. They might not last you a lifetime and get passed on to your kids (not that they’ll want it anyway), but most likely they will last past the date the warranty expires.

– Most likely, you already have extended warranty with your credit card (provided you pay for things with credit cards). Most cards issued today automatically double the manufacturer warranty offered for the product making extended warranty somewhat useless.

– A lot of stores offer hassle-free return policy that once again makes extended warranty useless. If you have Costco membership, you can bring any item you’ve purchased back if you’re not happy with them, and they’ll refund your purchase without asking questions. No need for extended warranty.

Overall, extended warranty on smaller items became yet another highly profitable revenue source for stores and provides very little benefit to an everyday consumer. To me, extended warranty on cheaper items is one of the most useless financial products.

 

I’m sure you can think of few more. Share them in comments!

 

 

 

How I puffed away (some of) my retirement – and other benefits of quitting smoking

Benefits of quitting smoking 2

My history of smoking

 

Just recently, I’ve celebrated five years of being a non-smoker. Five years ago, I’ve decided to quit this nasty habit, and puffed away my last cigarette. It wasn’t easy, but after some serious thinking about smoking and its benefits (none), amount of money I was spending on it, and countless other benefits of quitting smoking – I’ve made my choice and threw away my last pack of cigarettes along with my lighter.

As I might have mentioned before, I grew up overseas in Russian Siberia. Unfortunately, smoking is much more prominent there as it is in Canada, especially among youth. Just to give you an idea, according to Wikipedia people smoke 3.5 times more as they do here in Canada. Good news for Canada is that smoking rates have been plunging steadily as more young people don’t even try smoking and don’t get hooked on cigarettes.

 

Benefits of quitting smoking

Benefits of quitting smoking

 

Unfortunately, I was one of the kids who picked up smoking somewhere in high school. Since almost everybody smokes in Russia (at least this is what it looks like), smoking seems fairly normal, and hence it’s one of those things kids want to try. First it was few smokes in between classes (mostly to look cool). Then it became a social habit of smoking while hanging out with my friends. After becoming an adult, it became an everyday habit. I just had to have a smoke in the morning with my coffee, one at the end of the day “to relax” (which by the way is a complete lie), and countless others in between. By the time I was in my mid-twenties, I was smoking roughly two packs a week. It’s pretty light by most smokers’ standards, but nonetheless it was still a nasty habit, and it was starting to affect my health.

I’ve noticed regular headaches that would always creep up on me towards the end of the day. My blood pressure was above the norm. Sometimes, I had troubles sleeping and would venture outside for a smoke in the middle of the night. On top of everything, I almost always lacked energy and felt depressed. Ask any smoker, they have probably experienced these exact symptoms.

But it all changed as soon as I quit smoking.

 

Financial benefits of quitting smoking

 

Since I mostly ramble about financial matters, let’s take a look at how much money I have wasted by smoking. Let’s say I’ve been regularly smoking two packs a week for five years. Presently, the cost of cigarettes is around $9.00/pack.

 

5 years of smoking = 2 packs @ $9.00/pack * 52 weeks * 5 years = $4,680

 

This means I puffed away roughly five thousand dollars in just five years when I was smoking regularly. Now, before you say that $5,000 isn’t really a retirement fund, plug that number into any compound interest calculator – and you will find out how much money I’ve really puffed away by spending $5,000 on cigarettes instead of investing this money:

 

Benefits of quitting smoking

Benefits of quitting smoking

 

What does it mean? It means that by smoking 2 packs/week for only five years, I’ve puffed away $325,000.34 that I would have had in 40 years if I simply invested that $5,000. Not exactly a retirement, but a very good chunk of it, don’t you agree?

Just in case you need some visualization, here are just some of the things I could buy in 40 years with my cigarette money:

 

4 bedrooms, 3 bathrooms, 3,100 square feet house in San Antonio:

Benefits of quitting smoking

Benefits of quitting smoking

 

Lotus Elise (zero to 100 km/h in 6 seconds, baby!):

Benefits of quitting smoking

Benefits of quitting smoking

 

LeBron James’ engagement ring:

Benefits of quitting smoking

Benefits of quitting smoking

 

While I wasn’t spending a lot of money on cigarettes, quitting smoking still benefited us financially as it gave us more cash in our pockets without doing more work. It was like getting a small raise without asking for one. More money means we can invest more money towards our goals, and hopefully reach the proverbial financial independence sooner. At the end of the day, quitting smoking is like finding free money every week.

 

Other benefits of quitting smoking

 

Aside from financial benefits of quitting smoking, there are myriad of others.

1. I smell nicer (please don’t ask to verify)

2. My wife has one less reason to complain

3. I no longer experience crushing headaches and my blood pressure is perfectly normal

4. Running up the stairs doesn’t make me lose my breath for 10 minutes

5. I don’t have to stand outside in exile while everybody is enjoying a party inside.

6. Food tastes better

7. People no longer regard me as the worst person on this planet when I happen to walk by their kids

8. No need to see scary pictures they put on cigarette packs (seriously, they’re disturbing)

9. I save 5 minutes a day now by NOT coughing my lungs out every morning.

10. I can finally recognize basic shapes and patterns

 

Why you should quit smoking too

 

I hope you’ve opened your mind to how much smoking is costing you in the long run. Even if you only smoke for 5 years like I did, you will miss out on huge pile of money at the end of your working career; and the longer your smoke (or the more you smoke) the bigger that pile gets. Every time you light up imagine the house you’re puffing away, or a nice retirement fund. Somebody who smokes a pack a day will smoke through almost $2 million by the time they hit retirement age:

 

Benefits of quitting smoking

Benefits of quitting smoking

To be honest, I feel like nobody has the right to complain about not having enough money if they still smoke. You can give yourself an instant raise – if you quit this nasty habit. You’ll have more month left at the end of your money, and you can take care of your retirement by simply redirecting your existing funds.

Besides money, think of all the other benefits of quitting smoking. By quitting, you will improve your quality of life tremendously at no cost to you. This is a great investment right in front of you!

 

Do you smoke? What are you thoughts on this? Please leave me a message below.

 

My wife bought me a motorcycle. Kind of.

My wife bought me a motorcycle 2

For as long as I can remember, I always wanted to have a motorcycle.

 

I guess it’s one of these things guys like – motorcycles, battleships, machine guns, greasy burgers, and other gender stereotypes. Loud things and complete disregard for safety are very appealing to us – no wonder men don’t live as long as women.

When my wife asks me what I want for my birthday, I always say: “- No need to get me anything, unless you want to buy me a motorcycle.” I’m kidding, of course. And she always says, “- One day, when we have enough money, I’ll buy you a motorcycle for your birthday.”

And we laugh and go back to our daily lives.

 

However, for my birthday last week my wife gave me this:

 

My wife bought me a motorcycle

My wife bought me a motorcycle

 

You’re probably now wondering if Mrs. Financial Underdog has somewhat cruel sense of humor. While she does tell me from time to time we’re having pie for dinner just to see me get excited for no reason, she’s generally a very kind non-cruel woman.

 

Then why would she give me a toy motorcycle?

 

As she quickly explained, while a real motorcycle is not exactly possible, it’s not always going to be this way.

And I completely agree with her.

See, right now we’re not financially set. We still have to go to work, have to make our own coffee because it’s cheaper this way, have to choose slightly cheaper detergent just to save $0.99. Every month we have to plan our spending – because we don’t have stacks of money lying around –  and have to watch where our money goes.

At the same time, we’re doing everything we can to grow our investments in hopes that one day our money will be working for us harder than we have to work for our money (boy, that’s a bit wordy!). Every month we put a good chunk of our money away towards investments, throw some extra money towards the mortgage (more like bondage), and enjoy our simple lifestyle. No new cars for us, simple pleasures here and there, and a whole lot of dreams of things to come.

 

But one day it will change.

 

One day we’ll reach that financial independence everyone is talking about by following our plan. One day our investments will be producing a steady stream of income and work will become something we choose to do – not something we have to do. We will be able to take off and visit cool places once in a while. Maybe we’ll choose to buy ourselves some toys. And one day, I will choose to own that fancy motorcycle – and proudly ride around knowing that we did all the right things in the beginning of our journey, and now it’s time to enjoy the fruits.

We have to keep the future in mind – and stop focusing on today’s problems only. You can’t always look under your feet – once in a while you have to look up and see your destination getting closer and closer. Because this will give you energy and motivation to keep doing mundane “Left foot, right foot” routine every day and say “- Hey honey, we’re almost there. We’ll get there soon!”

 

My wife bought me a motorcycle

My wife bought me a motorcycle

 

So, for now this little toy motorcycle will sit on my desk and remind me of our destination. Think of it as a symbol of that future, or a small advance against it. To be completely honest, I’m not even sure I’ll want to buy a motorcycle when we get there – maybe by that time flying cars will be all the rage. But it will sit here for now and remind me to keep going.

Left foot, right foot, left foot, right foot…

*****

PS: For those of you who thought this post is way too long to read, here’s a musical rendition of it featuring scenes from TV show “Kings of Queens”:

 

Three things I wish I knew before investing in mutual funds

Investing in mutual funds 2

Investing in mutual funds is a great idea

 

One of my core beliefs is that you have to put money aside and invest it to make it grow. Mutual funds were my first choice for investing back when I’ve started educating myself about investing money in general.  Simply saving the money in your bank or purchasing GIC’s is a sure way to lose money because of inflation. Inflation will slowly eat up your savings, and Guaranteed Investment Certificates (GIC) returns are extremely low and won’t protect you.

Investing in mutual funds

Investing in mutual funds

Investing in mutual funds sounds like a great idea for beginners, and in most cases mutual fund investing is a very appropriate choice. Mutual funds are extremely easy to purchase – if you can do online banking, you can purchase mutual funds. They’re diversified and in general it’s hard to lose all of your money with mutual funds. And what’s most appealing to me – you don’t need to manage them. You basically buy into a fund that is managed by a professional team; you personally don’t need to do anything but open up statements once in a while and watch your money grow (hopefully).

These were the reasons why one day I’ve decided that mutual funds are the best thing since cheese you put on sliced bread, and searched for a mutual fund company representative in my area. After sitting down with him, most of my savings that were sitting in the bank were used to buy mutual funds, and for the next little while I felt like Gordon Gekko in the making – after all, I now owned tiny pieces of some very large companies and large pieces of very tiny companies.

And in all honesty, it was a good learning experience for me – but I wish some of the things I’ve learned later were known to me before I bought my first mutual funds.

 

Mutual fund salespeople have to get paid

 

When you walk into a brokerage company ready to start investing money in mutual funds and start talking to an agent, make sure you know how they get paid. While it might be an awkward question to ask, I think this is one of the most important questions that need to be answered before any transaction takes place because not all mutual funds sales reps are created equal.

Quite a lot of them are paid on commission – these are usually employees of larger brokerage firms. They won’t charge you anything to do an analysis of your financial situation, and will purchase mutual funds for you through their company. Now, since nobody is working for free, the question is how do they get paid? They might receive a salary from the brokerage company, but in most cases, the majority of their income comes from commission paid by mutual fund companies for recommending their product. In some cases, sales commissions are their sole source of income.

This is where things get interesting –  depending on the mutual fund their commission may vary. Some mutual funds choose to pay a higher commission for recommending their products, which in turns creates a conflict of interest, at least in my mind. If product A pays me $5,000 commission and product B (which may or may not be a better product) pays $2,000 commission, can you trust my opinion? My spider sense is tingling, and so should be yours.

Others are “fee only” consultants which means you pay them an up-front fee for doing an analysis of your financial situation, and making recommendations – which funds to purchase or how to re-balance your portfolio. This is more a “do-it-yourself” approach as then you can purchase recommended mutual funds through an online broker (which isn’t that hard) or your bank. Personally, I’m more comfortable with this approach because one might argue the advice you get from an independent consultant isn’t affected by commission payments.

If I was to go back in time and start investing in mutual funds all over again, I would try to deal with “fee-only” consultants simply because of trust issues. It is my personal opinion (underline “personal opinion”) that when somebody gets paid a set fee, their recommendations will be less biased, and geared towards products that are better for me, not the ones that pay higher commission.

Word of advice: when investing your money in mutual funds, make sure you know how your broker or consultant is getting paid. While it might be an awkward question, you must know this and keep it in mind when making your purchasing decisions. 

 

The fund management needs to get paid too

 

All actively managed mutual funds charge for their services. After all, people who make buying and selling decisions around the fund can’t do it for free. They also need offices, marketing budgets, and fancy coffee for visitors. In most cases, mutual funds pay a percentage of their assets to a management team and that amount is called MER (management expense ratio). You can find the percentage paid to management in the prospectus document given to you (or find it online). Here’s a typical breakdown of management fees:

Investing in mutual funds

Investing in mutual funds

You have to be aware of the MER charges when investing your money in mutual funds because they do affect your returns. After all, if your fund gained 10% last year, your actual return would only be (10% – expense %). Some funds have higher expenses, some have lower ones. For example, index mutual funds almost always have lower expense ratios which make them far more appealing than mutual funds pushed by big brokerage companies, sometimes as high as 2.7%. You might not think this is a huge amount, but over the long period of time even 1% difference in MER charges makes a huge difference on your overall portfolio. If you feel like playing around with numbers, check out this calculator to get an idea how MERs can affect your portfolio performance.

Also, keep in mind that fund’s management team gets paid either way. Whether your fund loses money or makes money, the MER amount is being taken out of the mutual fund and transferred to mutual fund management team. While some people might say that actively managed mutual funds deliver better results and thus make up for higher expenses, a number of studies find that only a minority of mutual funds beat the market.

Personally, I wasn’t aware of management expense ratios when I was taking my first steps into investing world. To me all funds sounded the same, and the only number that mattered was their performance. If I was to start investing in mutual funds all over again, I would stay away from funds that charge high MER and instead look into cheaper index funds or ETF funds.

Word of advice: when investing your money in mutual funds, be aware of management expense ratios (MER), look for them in prospectus documents, ask your broker about them, and keep them in mind when choosing between funds.

 

 Some funds have deferred sales charges (DSC)

 

Most mutual funds have sales charges associated with them. Sometimes they’re charged right away and taken out of your investment thus reducing your buying power (these funds are known as front-loaded). Others charge you a sales charge when you decide to sell (back-loaded) and the amount  is prorated to the length of time you’ve been holding your investments in this particular mutual fund. Believe it or not, there are also no-load mutual funds that don’t charge sales charges when you sell them.

Here’s a typical deferred sales charge (DSC) schedule for an actively-managed mutual fund (keep in mind that numbers might differ from fund to fund):

Investing in Mutual Funds

Investing in Mutual Funds

What does it mean to you? This means that if buy $10,000 worth of back-loaded mutual fund and decided to sell it the next day, you will get charged 6% of your investment. Most of this sales charge pays for the commission the mutual fund paid out to your broker when you put the transaction through.

Now, is this a big deal? If your investment horizon is several decades and you’re in for a long haul, the deferred sales charge might not be a big deal to you. But if you’re just starting investing in mutual funds and you’re not sure how long you want to hold this particular fund, you might want to go with no-load funds. In my case, I had to pay deferred sales charges when I’ve decided to change my investment strategy and ended up selling my mutual funds.

Word of advice: before you complete the transaction, make sure you’re aware of any DSC charges attached to funds you’re purchasing. Ask your broker – are these funds back-load, front-load, or no load at all? If your investment horizon is short, you might want to look into purchasing no-load mutual funds.

 

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Mortgage life insurance is an awful financial product

Mortgage Life Insurance 8

Mortgage life insurance seems like a good idea

 

At first glance, mortgage life insurance obtained from your bank sounds like an excellent idea. You’re buying a home for your family and sign up for a loan that will take decades to repay. While you’re signing documents for your mortgage, your bank rep mentions the benefits of getting mortgage life insurance – peace of mind, complete repayment of your mortgage in case you or your spouse pass away, and relative low cost (when compared to your mortgage amount that is). Sounds like a responsible thing to do to protect your family, right?

Mortgage Life Insurance

Mortgage Life Insurance

When we bought our home few years ago, we had this exact conversation with our mortgage specialist. Fortunately, I had enough brain cells to say that I needed more time to research it, and I started digging around. After looking into details of the mortgage life insurance offered by the bank, I found several reasons why it’s an awful product, and should be avoided at all costs – unless your hobbies include wasting money.

 

Mortgage life insurance is too expensive

 

Just out of curiosity, I’ve looked up the cost for mortgage life insurance on TD Canada Trust website. For example, you’re buying a small house and taking out a mortgage of $400,000. To obtain life insurance for a mortgage of this amount, you and your spouse (in my example you’re in your 30s) will have to pay $105.00/month (after generous 25% discount). If your mortgage amount is higher or if you and your spouse are older, the monthly expense will be higher.

 

Mortgage Life Insurance

Mortgage Life Insurance

 

This is extremely expensive when compared to simple term life insurance that can be obtained through independent brokers. Similar coverage of term life insurance would cost you less than $40/month and offer more to you – as I discuss it late. Even our life insurance policy offers superior coverage and flexibility.

While $105.00/month might not seem like a big deal when compared to your mortgage payment, the value just isn’t there. Also, keep in mind that your coverage will be going down as your mortgage is being paid down – while your premiums will stay the same.

 

No guarantee of paying out

 

Typical life insurance policy obtained through insurance broker is actually underwritten when you sign the contract and the risk is assessed prior to this. Once you enter the contract, the payout is guaranteed in case you or your spouse die. Insurance agencies take this step very seriously, and take every step possible to assess your health before the policy is signed. In our case, we had to go through a medical examination performed by a registered nurse to make sure our level of health is reasonable and we are insurable.

Mortgage life insurance is a bit different in a sense that it’s underwritten at the time of the claim. Bank won’t access your health prior to signing the documents; you simply fill out a short questionnaire about your health. If the unthinkable happens, the bank can actually deny the coverage simply because you weren’t insurable. The fact that you didn’t know about your heart condition won’t make any difference.

Check out this episode of CBC Marketplace on mortgage life insurance:

 

 

 

Mortgage life insurance is controlled by the bank

 

If I had mortgage life insurance for our home, and got hit by a bus, the payout would go straight to the bank holding my mortgage because the bank is the beneficiary for the insurance policy. My wife wouldn’t be able to make a choice on what to do with insurance money – it would simply pay off our mortgage. In case of private insurance, the proceeds would be given to my wife tax free with her choice of actions – pay off the mortgage, invest the money, or build a giant Rocky-styled statue of me.

Another thing to keep in mind is that your mortgage life insurance policy is attached to your mortgage. If you sell the house – the policy gets canceled. If you renew the mortgage – the police needs to be renewed. If you miss a payment – your policy gets compromised. In other words, you have no control over it whatsoever.

 

Why do banks offer mortgage life insurance?

 

Mortgage life insurance is an easy sell for bank employees to push to their clients as an added bonus. Any responsible adult would think about protecting their family from unexpected death. But mortgage life insurance offered by most banks is not the right way to do so. In reality, it protects the banks more than it protects you. It is also a great money maker for them given extremely high price and poor value of it to the consumer. No wonder bank employees are told to push this awful product!

 

What is the right way to go?

 

Don’t get me wrong, protecting yourself and your family is important and insurance can be a beautiful thing. It is your responsibility to make sure your family won’t suffer financially if you or your spouse suddenly passes away.

But mortgage life insurance offered by the banks is an awful product that offers very little  value. If I were you, I’d consider obtaining term life insurance from an independent insurance company. You will be able to control the coverage amount and what happens if the policy pays out. Your premiums will also be much lower than what the bank will offer you – and who can’t use some extra money these days?

My name is Financial Underdog, and I’m not impressed with mortgage life insurance!

Why I call myself Financial Underdog

Why “Financial Underdog”?

 

Underdog is defined in sports as somebody (or some team) that are expected to lose. The chances are stacked against them, and history of achievements is not quite there. In fact, it doesn’t even exist.

Financial Underdog

Financial Underdog

For example, the movie Rocky is about an absolute underdog Rocky Balboa going into a fight with a favorite (or top dog) named Apollo Creed. Apollo had everything going on for him – great track record, a whole team of coaches looking after him, great environment for training, and sponsor money to support all of this.

What about Rocky? Rocky (portrayed by Sylvester Stallone) was trained by an obviously crazy coach Mickey in a dirty gym, he jogged through dirty streets of Philadelphia dressed like a homeless person (seriously, have you seen his outfit?), punched dead cows instead of punching bag, and lived in a small dirty apartment. He was a nobody. Not exactly a recipe for championship – and because of that everybody expected Rocky to lose.

But a miracle happened – and Rocky put up one hell of a fight. Technically he did lose, but he was a true winner of the fight by lasting against Apollo this long and not going down. A guy from the streets went against the champion, and became the legend of the streets, a true folk hero.

Financial Underdog

Financial Underdog

 

 

What does it have to do with finances?

 

As somebody who grew up in a poor family in final years of USSR, I lacked common knowledge about money from day one. My parents never had much money (especially when the country was slowly breaking apart) and they couldn’t teach me how to manage it – which translated into very bad money habits for me when we came to Canada. If you can think of one stupid thing to do with money – I did it. For the most part, I simply didn’t know how money works and what to do with it.

My family came to Canada when I was in my early 20s – and I had to start my life from the very beginning with zero knowledge. Heck, I didn’t even speak English when I came here – and even right now I still have a fairly thick accent. Imagine trying to get your first job  when you can barely speak English and have social skills of a newborn – not the greatest start towards financial success, am I right?

No university degree for me – I simply couldn’t afford it. No inheritance from a helping uncle. No high paying jobs for me either as those require skills and education. No slick investments or smart money habits.

 

But the dream is there

 

But the dream of becoming financially successful despite all of this is still there. Yes, I want to put up one hell of a fight. I want to achieve financial independence for my family, and leave a legacy. I want to prove that even if odds are stacked against you, there’s still a chance to win with money by working hard, investing wisely, and teaching yourself about money.

An average person by all means can become wealthy in this country. Even if you start at the very bottom, you can get a degree in street smarts through school of hard knocks. You may need to punch some proverbial cows – but it’s just the part of the process. There are mistakes to be made, and successes to be enjoyed.  But even financial underdogs get their chance, and when it comes you have to strike hard and fast.

My name is Financial Underdog, and I’m working towards my degree in Street Smarts majoring in Personal Finance.