p2p lending

i had been experimenting with prosper for some time, but they've been essentially closed to new funding due to some sec quiet period, so i've just signed up with lending club. the two are fundamentally the same, but here's an interesting thing to note with lending club -- you can fund your loans via credit card! that's just amazing if you ask me.

anyway, if you are interested in signing up and want to take advantage of a $25 bonus, click here.

end of the year tax moves

it's time to say goodbye to 2008 and time to make some last minute moves to help soften any tax burdens for the year. there are a few easy things that i'm going to do this year . . .

take some investment losses. i got into some financials at the beginning of the year that looked good and were paying a good dividend (c, aig). these stocks are at historic lows, now unfortunately. by realizing these loses, i can take that right out of my bottom line and pay less in taxes. now, i don't generally suggest spending a dollar to save twenty-five cents, but in this case, there is a key advantage to selling now. if i believe that these stocks are going to come back, i can sell now and get back in after a 30 day wait (wash rule), if i think the stock is poised to go back up. that way, i can take the losses and benefit from a longer term holding strategy.

make donations. i've got hundreds of dollars of baby gear that my kid has outgrown. a few trips to the local goodwill will take those right off my bottom line.

ira contributions. you've actually have some more time to make these contributions (until the april tax filing deadline), but nonetheless, making an ira contribution reduces your taxable income by the amount of your contribution (with certain income and contibution limits). so, if you're stashing away money for retirement, you might as well plunk it down in your ira.

well, that should do it. that'll take a few grand off my taxable income without any real measurable effect to my real holdings.

mortgage rates at historic lows

now that rates are at all-time lows (well, at least -- to borrow a sports term -- in the modern era -- since 1971), i decided to pull the trigger on a refi at 4.75%. we were at a pretty attractive rate of 6% before, but by getting a 1.25% discount, we will be saving a good deal of money in both the short and long term. a number of online calculators indicated that it would take less than 6 months for us to break even, our monthly payments would be a couple hundred bucks lower, and we'd end up saving tens of thousands in interest payments.

it was a no brainer!

now, the only question is, what do we do with the extra cash? spend it? invest it? save it? put it back into the mortgage?

things you don't want to buy on credit

for me, there are very few things that i don't buy on credit because i pay off my balance every month, no matter how painful it is (some months, like january after christmas purchases are more painful than others).

my understanding is that this is not the norm. here are the things that i would hate to go into debt to buy:

1. food. unless you really are in extremely dire straits, i'd say buying food is probably a very bad use of credit, but it's something that i'd guess happens pretty often. i've personally observed a lot of my friends that dine out every day, morning, noon, and night. for the most part, these folks are buying meals that they aren't going to remember after a few hours, but they'll be paying for them for a lot longer. you think that $1 value meal is a good deal? what about after your revolving debt, late fees, and interest turns it into $25? you could have had a gourmet meal!

2. entertainment. this is the same story as above. it's already way too expensive to go watch a movie, but to put it on a credit card that you are only making minimum payments for? i hope the dark knight is worth $25.

3. gas. paying for gas at the pump is really convenient. but with gas at $4 a gallon, it costs me about $50 to fill up. how about twice that amount if you just making minimum payments?

now, i'm exaggerating a bit, but a good rule of thumb on revolving debt is that making just the minimum payments is going to end up costing you at least twice the amount of your original purchase. that's just the high level, though. think about the opportunity cost -- you could have put those fees to work for you, instead of paying someone else!

attentive spending

i came across an article by one of my favorite personal finance writers, scott burns, today entitled the power of attentive spending. he gives some examples in that article on what a typical family can do to save $500 a month.

this comes out to $6,000 a year of after tax "earnings". to put it in perspective, he notes:

Suppose, for instance, you have the good fortune to live in a no-income tax state and want to get all your return from a portfolio of common stocks. At a 15 percent tax rate on dividends, you’d have to collect gross dividends of $7,059 to net $6,000 a year. With the S&P 500 index yielding 2.29 percent, you’d need to have $308,246 in your portfolio.

that's a lot of money.

while i'm not sure that i can find $500 a month to trim out, i would say that finding any reasonable sum would certainly be worthwhile in light of that comparison.

the moral of the story: a penny saved is more than a penny earned (after tax implications).

summer vacation

we're going on a vacation this summer to aspen, colorado, and i've been running the numbers as to whether it makes financial sense to drive rather than fly. given the cost of gas and airfare these days, it's probably going to cost a lot either way.

here's the breakdown:

flying:
airfare to neighboring vail for 2 - ~$700
car rental for a week - ~$200
-----
~$900

driving:
gas (~2000 miles @ 25 mpg * $4/gal) - ~$320
2 overnight stops (lodging & meals) - ~$400
-----
~$720

it's only a difference of $200 -- but the trade off is two nights on the road and hours of driving. of course, i'm not accounting for the new cost of baggage handling on flights or other incidental costs associated with flying (i'm assuming that will come out in a wash).

i was pretty set on driving, but now that i see the numbers in front of me, it's really hard to refute them.

1.65% return with cc

i have been carrying and using an amex cash rebate card for quite some time and have been pretty happy with it -- last year, i got a refund of some $750 by putting absolutely every purchase on the card.

well, thanks to the handy tools available right on the amex website, it was easy for me to calculate that i actually earned a 1.65% return on that money. i pay my balance in full every month, so it's really free money.

cd ladder

over the past several years, i had built up a cd ladder that ended up with me owning 12 one-year cds that were maturing each month. i thought of this, in part, as my emergency fund. if we ever were strapped for cash because of loss of income, we could tap into the cd that was coming to maturity that month. well, my cds are now coming off of 5+% yields and renewing to 2-3% yields -- terrible!

what i decided to do was nothing at all. i still think of the cds as an emergency fund, so i need it to be pretty liquid, so putting that money into the stock market was out of the question. i thought about putting it into a money market or savings account, but with the fed cutting rates, those returns are getting trimmed, too. for now, money markets do seem to be returning a little bit better than cds, but it's not really significant enough for me to do anything about right now.

yup, i decided to be lazy. and to me, that's just about right for my emergency fund.

529 plans

well, it's time for me to open and start contributing to a 529 plan for the new addition to my family. after some deliberating, i've decided to go the savings route rather than the pre-paid. the 529 college savings plan allows after-tax contributions into a savings vehicle that grows tax free when used for college. this is good stuff for something that i am going to have to pay for anyway.

there are also pre-paid tuition plans covered under the 529 tax code, but i feel that they are more rigid and limit your choices down the road.

in researching this, i found a great comparison tool that helped me out to arrive at the utah 529 plan (you don't have to live in the state to sign up, in most cases) -- it's got a low expense ratio index fund that i'm going to go with.

emergency cash on hand

so, i've talked about having a cash reserve in liquid investments to cover several months of living expenses in the event of an unforeseen change in employment status, and i think it's pretty clear and reasonable why such a fund would be necessary. there are even some pretty clever ways to do that with little or no money, if you decide to go that route.

another idea that i've been bouncing around is to keep more cash on hand. what?!? why would you want something turning into cat food or burning a hole in your pocket? the main rationale for this is in the event of an actual emergency (flood, hurricane, or other natural disaster) that takes out some part of the atm or credit network fails and you can't tap into those would be liquid assets? you may need cold hard cash to buy food, water, and other survival items for a few days or maybe a week to cover your living expenses before the world rights itself again.

now, i've flip flopped on this several times -- should a big crisis come up, who knows, maybe i'd be out there looting, or maybe cash may been seen as suspect, but i figure a couple hundred bucks stashed in the fireproof safe at home in small bills has at least some merit. and, honestly, there is something quite intriguing about having a stack of twenties in there. not quite gangster lifestyle, but pretty compelling.

emergency fund

i was reading a forum the other day where a lot of people were advocating keeping an emergency fund in stocks! they even had elaborate mechanisms to make sure that they would be able to stop losses. i can't say how bad an idea i think this is.

for one, an emergency fund should not be thought of as an investment vehicle. it is a pile of money that is ready so that it can be tapped into in the event of a big surprise -- loss of income or some such.

additionally, your emergency fund should be at little to no risk and be extremely liquid. now, i find that all of my stock holdings are pretty liquid, but you never know if you end up buying into a low volume stock or if a some sort of trading block happens on your stock the day you need it.

if you keep your emergency fund in a stock or stocks, you have a few issues that you have to contend with. one is that your ef may be very volatile. how can you bank 6-12 months of expenses in something that you don't know the value of day-over-day? the other thing is that if something should befall you, you stand to lose a substantial bit of money, if you have to break into your fund on a down day. even if you have standing stop loss orders in place, you bear the burden of commission charges and -- more importantly -- you have to determine another stock or set of stocks to put your money.

i keep about 1/2 of our emergency fund in cash in a checking account. the other 1/2 is in staggered 1 year cd's that mature each month and renew if i don't need them. it's valued at about 12 months of family expenses, but i'm sure that if we found ourselves suddenly unemployed, we could actually stretch that to 20-24 months.

i've heard people say that credit is good enough to use for an emergency fund. i've actually used that tactic, with extended 0% financing, but i disagree that a credit card should be used for that role, as it really only buys you about 1 month and then it's time to pay the piper.

etrade

i opened up an etrade savings account the other day. i hold a good bit of money out of the market waiting for a good opportunity to buy (while at the same time diligently dollar cost averaging into the s&p 500). i heard a quote the other day -- it's better to be out of the market wishing you were in it and in it and wishing you were out of it.

retire young

years ago, i decided that i wanted to retire young with a nest egg that i could reasonably live off of for my remaining years. well, i've decided to look back now to see where i was and how far i have left to go. i've never been fond of sites that post up net worth numbers or things like that, so i'll try to speak in generalities.

one key thing that i aim to achieve is for my investment/passive income to surpass my expenses. at that point, i'll feel comfortable quitting my day job, even in the face of rising inflation. currently, because we have a pretty substantial house payment, that horizon is out pretty far.

from about 2001 til now, our household income has more than doubled, but our housing expense has followed that increase in income -- but not exactly in the same scale. our liquid net worth from that time until now has increased about 10-fold. thanks largely to the increase in income and continued saving and investment.

of course, back in 2001, i was expecting to retire in 15 years. now, at about the half way mark to that goal, i just wanted to take some time to reflect -- without looking at lots of figures and stats -- to see how realistic it would be to retire in 7 years. just ballparking it, i'd say it would require some pretty aggressive measures to make it happen, but it would not require a lottery winning experience.

if we stay the course, i would say just from a back of the napkin type calculation, that we could achieve the break-even point somewhere out about 10 years, at which point our amassed principal might just be enough to produce an income stream approximately equal to our current expenses. so, i would say that we're not far off, especially considering that i am being very conservative in my approximations.

but, what it took to get to this point was to achieve a level of automation in my life that takes decision making out of the saving and investment process and to never waver from that.

bonus time

i was surprised to find out a few weeks ago that my company decided to pay out bonuses this year. it wasn't a huge windfall, but amounted to about an extra month's worth of take home pay. so, what did i do with that money? absolutely nothing. it just went into the bank and has been sitting there. that's where it'll probably stay. in the past, when i have been fortunate enough to receive a bonus, i was pretty diligent about putting some of it away into a separate account.

times have changed for me, however. my saving is so automatic these days, i know that each month i'm socking away a good percentage of my pay into investments, savings, and more discretionary accounts. it's a great way to live.

prosper

i've been sitting on the sidelines on this whole prosper thing for a while now and i'm finally going to jump in and see what the hoopla is about. the story behind prosper, if you don't know, is that it's a web site that allows people to lend or borrow money from other people and they handle the collections, credit scoring, and the whole infrastructure behind setting up and servicing loans. all you have to do is put your money in, set your terms, and approve or deny loans.

i don't know what kind of return that you really could expect -- especially after calculating for losses from defaults, but i do understand that prosper would be able to cut the fat from some of this process and, as such, be able to offer lower rates, which would be interesting to me from a borrower's standpoint.

the problem is, as i see it, that in order to make money, you'd want to service loans on the lower end of the credit spectrum and that would likely open you up to higher risk. if you can balance that and set rates accordingly, it may be a decent place to park some cash.

dinner conversation

we had dinner with some friends last night and one of them made a comment: "you know i think you guys are probably like us. we don't have a whole lot in savings, we have some in retirement, and got some credit card debt . . . ". i don't recall where the conversation went from there, but i thought it was a pretty accurate picture of the average american.

well, i didn't correct him and tell him that we have a fully funded emergency fund, save and/or invest a good chunk of our take home, and carry no debt except our mortgage. i really don't know how i was instilled with this sense of right and wrong when it comes to my finances -- i suppose it must have been my upbringing, but it really is alarming how the everyman must live.

the way people spend, i have no idea how we, as americans, can afford to retire. are we banking on social security? are we going to work forever? win the lottery?

savings vs eliminating debt

a friend of mine jokingly said to me the other day that he wished he had some high interest credit card debt because that would be an easy way to 'make' 10-20% on his money with no risk. it's funny, but if you get down to brass tacks, it's entirely true. a lot of people ask should i be saving money or paying down debt? well, to me it comes down to the rates on each -- if you can make more in interest in your investments / savings (factoring in your risk) than the interest demands on your debt, you should save, otherwise you should pay down your debt.

the interest you avoid paying by paying down your debt is identical to money that you actually sock away in your savings account.

tax break

sounds like we're all getting checks (unless there's an income limit put in place) from the government this year -- in an effort to stave off recession. last i heard it was something like $400 per person, but could be higher, depending on what comes out of congress.

the idea behind it is that since we as americans spend every penny that comes our way and then some (we had a negative savings rate last year, if i'm not mistaken), and this would stimulate the economy and get money moving around.

i'm not an economist, but i'm all for getting more money.

passive income

i'm interesting in how to generate passive income. that is, income that you can pretty much rely on without having to work. an example of this would be interest income -- if you have $100,000 in a bank yielding 5%, you'd net $5,000 per year without having to do any work at all. Of course, that's a lot of cash to be sitting around idly.

the point of having passive income streams is that at some point, if you've got enough money in the right places, is that you can live off your passive income entirely. this is the point that i call my retirement horizon -- if i can achieve that, it'll likely be goodbye to my 9-to-5. i'll probably still work to some degree on projects that i'm particularly interested in, to keep busy, that type of thing.

but to really know what your retirement horizon is, you have to have a clear picture of what your spending is and what you expect your spending to be. i don't keep too tight a budget, so i only have a general idea what this amount is, but since retirement realistically is a long way off for me, i don't spend too much time fretting about it. my bank does a nice job of displaying a spending report, but that includes transfers into other accounts as spending, so it distorts the amount of 'spending'. it does a decent enough job to show a general guideline, though.

early retirement

i've been thinking about retirement a lot recently. i'm a ways off in terms of normal retirement age, so there are probably more variables for me to think about than your typical retiree. what it comes down to is whether my savings and investment return will be able to at least break even with my spending. since i would be an early retiree, there are some things that i need to consider that other retirees may not have to worry about:

1. mortgage. we recently built a new home and while we did put down 20% on it, we are nowhere near owning our home free and clear, so that means that i'll have to cover my mortgage from savings and/or investments. i don't know about you, but the notion of doing that just seems wacky to me. if i were realistically considering retiring tomorrow, i'd really have to put a lot of thought in selling the house and moving into a place that we could easily afford the mortgage or rent on.

2. college savings. we have a new addition coming into the family soon, and i was planning on saving toward college. i'd have to be able to fund that.

3. medical expenses / insurance. we currently have insurance through our employers, a large portion of which is paid by our employers. something else that would eat away at our savings.

4. a longer timeline. i'm relatively young, so i'd have to cover another 10, 20, or even 30 years more than the typical retiree.

just adding these few things up in my head, i'd be pretty comfortable with about a million dollars in pretty safe and pretty liquid investments to retire tomorrow. so, by the sounds of it, it'll be back to work for me -- at least for another few years.

moonlighting

i was listening to some financial self-help show and after a lot of mumbo-jumbo, the bottom line was that we all need to find ways to boost our income. so, i took a look at myself to see what other things i could do to generate income outside my primary job. here's what i came up with:

1. moonlighting. by networking i can try to pick up some contract work on the side. i do this every year about this time -- many companies are doing the same things we are doing at this time of year, which is resolving to make big differences. you can tap into that behavior and get in and do some side work.

2. rental property. you can generate some side money by renting out property. of course, there's an investment involved and the returns usually don't come until after a year or two.

3. credit card / banking plays. by risking your credit score, you can sign up for credit cards or bank accounts that are giving out bonuses.

4. revolving credit plays. again, by risking your credit score, you can take advantage of 0% credit cards and stash the amount into something that returns better than 0%.

any other ideas?

money leaks

ever *know* you have twenty more bucks in your wallet and go to get it and find that it turned into a five? it happens to me more often than not -- i have to pay to park, so i usually try to carry a little bit of cash with me. well, it turns out that little bit of cash is a really easy for me to loose track of -- a sandwich every now and again here, a coffee there, and *poof* my parking money is gone.

anyone have any tips on plugging these money leaks?

how to save money

i tried searching for some interesting ways to save money this morning. it turned up the usual suspects: quit smoking, pack your lunch, make your coffee at home, drive less, and blah, blah, blah. most of these don't apply to me, and i get tired of reading how to save 10s of thousands of dollars a year with methods that simply won't work for me.

i've found that the key to saving money is stashing it away before you get a chance to spend it. whether that's increasing your 401k contributions, set up a second direct deposit from your paycheck, or whatever other automated method you have before you to divert the money before it gets into your hands.

2007 returns

so, 2007 is closed and you should be able to see how well you did. we returned a paltry 5% from our brokerage account and performed similarly in our retirement accounts -- we ended up doing better in CDs and some savings than in investments, but, we're in the market for the long term, and i think our holdings are positioned well for the long term. for what it's worth the s&p 500 returned around 3.5% for the year, so we were able to edge out that index.

even though we're long term investors, i think it's a good idea to check our returns from time to time. this allows us to balance our investments and also make a determination as to whether the time that we spend in investing is worth it -- if we were simply performing as well as the s&p 500 or worse, it would likely be a good idea to rework some of the investment choices that we make and weigh them more heavily to an index fund.

i know there are some people talking about a potential upcoming economic downturn which would impact the stock market. don't be afraid of these downturns, they are perfectly normal and are buying opportunities -- historically speaking bear markets are far shorter in length than bull markets and in the long run, the bulls have won the tug-of-war.

how to make money online

i'm always looking for ways to supplement my income, whether that's by picking up some contract work or selling something i don't need anymore on ebay, but those opportunities aren't always available. recently, i've been trolling the web for things that i can do to to make an extra buck or two. here's a summary:

1. open up bank accounts. i have several bank accounts that i have opened whenever i have found the opportunity that have signup bonuses. these don't generally end up paying off a lot of money, but it's hard to resist a free hundred bucks.

2. surveys. i take a few surveys online that pay a few bucks a pop. it doesn't amount to a lot of money, but at a few bucks a pop when i'm not doing anything, it'll pay for a burger or something else when i'm running around.

3. 0% interest balance transfers. i've just recently started signing up for some 0% balance transfers and putting the money into cd's.

that's what's on my radar right now, and it's important to know that some of these will have an impact on your credit score.

retirement horizon

so, i've been thinking about retirement, but i'm nowhere close to the standard retirement age. i imagine -- and i have a pretty vivid imagination -- that it might take me anywhere from 5 to 10 to 20 years to build up the savings and investments that we would need to retire. but, why the big range? well, it's all about a standard of living in retirement. i imagine (again, don't forget about my vivid imagination) that we could retire today if we drastically downsized, took the occassional part-time, temporary, or contract work, really lived frugally, and gambled our futures by neglecting medical, life, and other insurances, but that's not really the type of living that i think i'd enjoy in retirement.

i've punched in some numbers on various online retirement calculators, but arriving at a 'what do i need to retire' amount is a problem that's bigger than the sum of its parts.

for one, there are a lot of unknowns -- what age do you want to be when you retire? well, the sooner the better is probably the answer for a lot of people, but that begs the question -- what's the soonest i can retire? that depends on what your income requirements are in retirement, the rate of inflation, the return on your investments, and how long you'll live. these are not the easiest things to arrive at, especially if you're not close to the traditional retirement age.

let's say you have got all these things answered, or at least approximated. that means you have a total dollar figure that you need to retire and a withdrawal rate that will allow your money to outlive you. well, next that means that you have to plan on how to position your investments so that you can safely earn the return you expect from the previous exercise while minimizing risk and having at least some part of that liquid enough so that you can draw from it.

even if you've got all that figured out, you have to account for some level of risk -- medical surprises, downturn in your investments, spiking cost of goods, any number of things that could throw a monkey wrench into your plans.

in the face of all that, people do it every day -- not millionaires -- normal people retire everyday. so, take a deep breath and smile, it can't be all that hard if everyone's doing it. just wait and see -- here in 5, 10, or 20 years, we'll be one of them!

happy new year

hooray, 2008 is upon us! what this means to many is that it's time to make some resolutions -- get fit, quit smoking, get our financial lives in order and all that. i'm not a big believer in resolutions and i don't remember the last time i made one, but i stopped in at costco the other day and knew that people around me were certainly going to be doing some resolutioning -- the first display was for weight loss, the next display was for the same, then protein shakes, powers, and bars, anti-smoking products, and everything you could imagine to build a better you.

well, i'm sure when the smoke clears and the gym quiets down here in 2-3 weeks, everything will be back to normal, but until then, i'd like to embrace this time of year and offer hope and encouragement to those that do really want to make a change for the better. let's get out of debt, start planning for retirement -- or better yet retire, start saving more, start earning more, or do whatever it is that we all need to do to make 2008 and our future better!