Investments and Emergency Funds Dependent on Your Career

How Much Emergency Savings Should I Have? Should I invest in more stocks than bonds?

Every personal finance blogger has their own opinion about this. Most of them say you should have at least 3-6 months if you are single, and up to a year if you are married with children. The best strategy that works for me is the one from the New York Times in their story: Legacy of a Crisis: A Generation Shy of Risk.

Basically, it says that your investment risks should reflect more on what you do for a living than your risk tolerance or time horizon. If you work in a steady income, tenured field like teachers or government employees, then your investments can have more risk since you are less likely to lose your main source of income. Your raises are likely to be steady, but not earth shattering. If you work in a volatile field like a broker or technology, then your investments should be more stable. Bankers and tech workers tend to have boom and bust incomes just like the stock market - time of plenty, and time of starving.

I fall into the latter category. I have done this intuitively for some time, but the NYTimes article is the first time I've seen it explained this way. I have a higher than normal emergency fund to cover basic expenses for a year. I could stretch it out even further if I needed to. I have zero debts - no student loans, credit cards, mortgages or car payments. The reason is because the fewer liabilities I have, the less likely I am to run into trouble if I am laid off. It also affords me some mobility. If jobs dry up in Seattle, I can move where there are jobs. I save my money in cash until I can afford to buy a major purchase. This allows me to dip into the washer/dryer fund if I ran into a hardship year, instead of being saddled with a payment due for the washer and dryer.

My retirement investments are on the conservative side; index funds that are a mix of some stocks and mostly bonds. Once again, this is due to the volatility of my profession. If I end up on the wrong side of a down cycle at retirement like we're seeing now, it could be disasterous for my plans for a cabana, botox, and leisurely days in Margaritaville.

Since I make a higher than average salary now, I opt for a wealth preservation strategy while times are good. My skills could be completely obsolete in 20-30 years. If I end up in a down cycle year at retirement, I may have a very tough time even choosing to delay my retirement. Technology is an industry that favors the youthful, unfairly as it is. In order to keep my income growing, at some point I will need self sustaining income not tied to my employment. Thus, my retirement income is designed to be from more stable sources (not just 401Ks and IRAs), while my career is more volatile in my prime income years.

This is could apply to anyone, but if you work in a field with highs and lows, this is especially important. I've seen more than one tech worker surprised by a layoff with a nasty Audi payment and no savings.

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Commentary on Ramit’s Book “I Will Teach You to be Rich”: What if You are Dumb Dan?

In Ramit Sethi’s new book I Will Teach You To Be Rich, he demonstrates the power of compound interest with the example of Smart Sally and Dumb Dan. (There is an error as of this writing as mentioned in Calculation Error in Book I Will teach You to be Rich, but the point and the correct calculation is still relevant). What if you are Dumb Dan? You are in your 30s, and you haven’t saved $100 monthly for the past 10 years.

The first thing to realize is if Smart Sally is out there right now doing this, barring any stupidity like getting entangled with a financially irresponsible boyfriend/spouse, she will always be younger, smarter and and probably richer than you. She has the advantage of time. You, Dan, can’t change the past, but you can change the now and the future. And you can lecture the whippersnappers like Sue not to be like you.

So congratulations, you’ve realized the error of your ways. You are going to be Smarter Dan. Download this Smarter Dan Spreadsheet. “Smartest Sally” never stops contributing every month, and increases her contributions by 5% every year until retirement. She has approximately $624,158,39 with 8% interest compounded over 40 years. (The 8% interest is a toy problem – we will discuss real world returns from index funds later.) What a nerd. <insert dripping envy here>

Dumb Dan – you blew it. You’re in the 30 something club with no real savings to speak of. The good news is you can still benefit from compound interest. You just have to put more money up front in a shorter period of time. If you start off by contributing $600 every month, then decrease your contributions every year, you can still end up near Sally’s balance at retirement. (“Decrease?! What?!” See note below.) You will have to delay buying your first home, drive a beater car, and take modest vacations. If you have a hardship year, you’ll have to sacrifice more. Yeah, $600 per month for the first year. $7200. That’s a lot of freaking money.

Sally will still be ahead of you. She will have earned more money that she didn’t have to put into her retirement funds and could invest the excess elsewhere, bought her first home with 20% down at 28, paid for her new $18,000 car in cash, and vacations in the Bahamas. If she had a hardship year, she had more money to fall back on.

I agree with Ramit’s point. If you’re a 20 something, be Smart Sally. If you’re Dumb Dan, be Smarter Dan. You’re just going to have to put in about 6 times as much upfront. It may not be possible depending on your income potential and obligations, and you’ll just have to adjust to realistic levels for you. If you missed out on your youthful compound interest years, it doesn’t mean that you can’t have a wonderful and meaningful retirement. Don’t compare your success with Sally’s. Be proud of your own accomplishments, the wisdom to recognize your past failings, and the smart decisions you’ve made moving forward.

Note: The point of this toy spreadsheet exercise is to show that even if you are starting late, it is possible for you to ‘catch up’. You just have to put a lot more upfront into it. The point remains the same – Sally benefits from compound interest with less upfront and lets time do its magic.

Update 3/23/2009: Corrected spreadsheet formula in C row.

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Rainy Day Pennies

Calculation Error in the book “I Will Teach You to be Rich”

I have the privilege of being a part of Ramit Sethi’s private book launch community for his newest upcoming book, I Will Teach You To Be Rich. The first chapter is available for free at SlideShare: First Chapter of I Will Teach You to be Rich book. As pointed out on Lifehacker: Read the First Chapter of I Will Teach You to be Rich for free, and the book launch community, there is an error on the section demonstrating the power of compound interest on page 5. There is a mistake in the calculations matching the story.

The story says Smart Sally contributes $100 every month to a retirement account with 8% interest for 10 years, then stops contributing. She lets it compound for another 30 years until she retires. Dumb Dan starts contributing $100 every month for 30 years. The end result is supposed to show that Smart Sally still ends up with more money than Dumb Dan because of compound interest.

Here is Ramit’s table with the error:

The error is this. The compound calculation for Smart Sally never stops contributing $100 every month after 10 years. The total $349,856 is the approximate total if she had continued to contribute $100 every month for 40 years. The error for Dumb Dan is a little odd. The value $271,879 matches if the contributions for 30 years is adjusted to $182 per month, or $100 per month for 37 years.

I’ve attached a spreadsheet that shows the error calculation and what the numbers should be. Smart Sally should have $200,065 and Dumb Dan $149,036 if you follow the story.

Smart Sally vs Dumb Dan Spreadsheet

Read the full Review of Ramit Sethi's Book: I Will Teach You to be Rich.

Update 3/23/2009: Corrected error in spreadsheet where Sally was still contributing $100 in the first month after year 10. Corrected formula in C row for consistency.

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Rainy Day Pennies

Decluttering by Selling Stuff to Replace Stuff

For the past year, I’ve been trying to follow the one-in one-out rule.  If I buy something, I have to take something old and throw it out or donate.  Pair of shoes in, old pair of shoes out.  An area that I make the most progress on is books. 

I used to be proud of filling my bookshelves with as many books as possible.  I dreamed of having a study/library packed with books.  Then I had to move across the country.  Packing and moving my books became the most dreaded part.  There were so many heavy boxes to move!  Especially the tech books.  How many of those books have I gone back and reread?  Very few.

I very rarely buy brand new books anymore.  I have a rule for movies and books:

if read/watched more than twice, buy (used if possible);

else rent/borrow

I still have stacks and stacks of fiction books from my past.  There are specialty books that are hard to find at the library or used book store, and have to be bought new.   Current programming and technology books, for example, are rotated in and out most frequently.

Thus, if I want to buy a new book, I try to sell my old ones on Amazon.  This usually works out to about a 3 to 1 ratio.  At that rate, I make rapid progress on decluttering my bookshelf.

I’m not quite there yet.  My goal is to fit only the essential books that I need in a couple of book boxes.  I try not to buy fiction books anymore, and opt for the library when I can.

I doubt I could be a true monetary monk minimalist, but I’m sure I can have a neat desk and bookshelf with items that I truly need.

DIY Packaging When Selling Your Stuff

If you’ve ever sold anything on Amazon.com, Half.Ebay.com, or Ebay.com, you know that one of the biggest overheads to sink your profits is packaging and shipping costs. You buy the box, the packaging popcorn, then finally ship it. Who knows how much extra you’re paying to ship air and excess packaging.

I save money on packaging by custom fitting a box to my item using an old box. Here’s how I do it without a lot of measurements or an advanced engineering degree.

Step 1: Get an old box you have lying around from your last Amazon.com order.
Step 2: I just sold one of my old books and have it ready to pack.
Step 3: Unfold the box completely.
Step 4: Lay the book inside. Looks like it should fit nicely with a few cuts.
Step 5: Push the book’s spine against the box’s fold, then make a crease and fold on the opposite edge.
Step 6: Fold the box against the top cover.
Step 7: Make a crease and fold the box so that it is enclosed except on the top and bottom edge. Note I haven’t made any cuts in the box yet.
Here’s the book with its folds and creases. See? No cuts yet. The creases will give us some guides to follow when cutting.
Step 8: It’s time to start cutting. Fold the box’s existing flap and trim it to the width of the book.
Step 9: Cut vertical lines at the corner approximately the same width of the book.
You should end up with a flap that folds along the bottom of the book.
Step 10: Repeat the cuts on the remaining 3 corners so you have 4 flaps.
Step 11: Cut off excess from the flaps. I have approximately 1/2 inch flaps here.
Step 12: Fold the top and bottom edges over the flaps.
Step 13: Repeat on the other side. Fold all your edges over and cut off any excess.
Step 14: I taped the bottom edges together once I had them folded over the flaps to hold them tight. The box is almost done. Just pop the book in and fold the top flaps and edges. Tape all edges tightly with good quality packing tape.
Step 15: The finished product! Just need to put the shipping address on, and drop it off at the Post Office on my way to coffee in the morning.

I consider the cost of this negligible since I’m using a box and tape I already had lying around the house. It’s a sturdy box with no excess packing materials. In the past when I bought envelopes from the Post Office, it would typically cost me about $2.30 to ship the book, then another $1.35 on the bubble wrapped envelope. If I had $5 profit after Amazon took their cut, that would leave me with $1.35. Lame. I could buy a short Americano with that; barely enough to annoy David Bach with. I need a real latte. Now with my custom box, I get to keep $2.70. Yay! Double tall mocha, please!

I learned this method from Instructables.com: Build a Cardboard Box. Try reading there if my instructions seem confusing.

Update 3/17/2009: Fixed numbering problems – oops. Reformatted steps for easier reading.

Saving on Beauty: Do it Yourself Eyebrows

One of the most important aspects of defining your ‘look’ is your eyebrows. Like many girls, though, trying to do it myself is intimidating. I’ve had many moment of “oh sh*t – I overtweezed!” followed by weeks of attempting to patch it with eyebrow pencils. For a while, I was paying about $28 including tip every other month to keep my eyebrows neatly trimmed. However, when I found the Sephora Brand Arch It Brow Kit, I thought I would give it a try.

The Sephora Arch Brow kit comes in a leather case with 3 stencils (natural, sophisticate, and glamour), clear mascara, tweezers, and eyebrow powder. I use a dark eyebrow pencil in addition to this. I hold the stencil to my eyebrow, then fill it in with the eyebrow pencil. Tweezing then becomes as simple as plucking outside the eyebrow pencil line.

I’m probably not doing it right – I have no idea what the clear mascara is for. I just read on the Amazon review that it’s supposed to hold your hairs down. I’ve never done this – I just use the eyebrow pencil and fill in the stencil. It works fine for me.

Does it give me the highly stylized brows the eyebrow artiste at the salon used to give me? Definitely not. But it is actually very good, and keeps my brows well maintained and groomed. I’ve been using this for about a year now, and am happy enough with the results. No one has ever commented on my eyebrows looking odd – they don’t seem to notice. I no longer run into panicked accidents that lead to filling in with the eyebrow pencil.

My savings:

$35 eyebrow kit used monthly for a year = $2.91 per month

$28 including tip with salon stylist every other month for a year = $14 per month

In addition to the money savings, my eyebrows are better maintained because I do it monthly with stencils, instead of every other month with the stylist.

What Lessons Will Today’s Youth Learn from the Economic Tragedy?

They called my generation “Gen X” or the “MTV” generation.  My generation learned to be wary of company loyalty.  We never learned to be loyal to a company because we saw our parents laid off from their jobs where they worked for 15 or more years. We never expected to be with the same company forever.  Working at the same job for 5 years made you an old timer.

Worldcom was my employer’s client during the dotcom boom and crash.  Many of my friends were legacy employees from the MCI days, who saw the company they were loyal to destroy their retirement pensions in scandal.  Many people may say it was their fault, and should have diversified better.  However, these were real people who did nothing wrong other than be loyal and trust their employer.  They didn’t cook the books, nor could they have known.  They paid a terrible price.

I learned to be wary of company loyalty.

The current generation graduating college today is entering a period of financial hardship far worse than the tech bust.  Pensions are rarely offered these days.  401Ks and IRAs have taken over as the retirement of choice.  They were sold as being able to make your own choices about retirement.

Great idea.  However, with the job market shrinking during this massive economic contraction and retirement funds down 40% or more, I wonder if the current generation will view the stock market with the same skepticism I have about working with the same company for 15 years.  A lot of these kids’ parents will be unable to retire when they originally planned.  They will need to stay in the work place longer to make up for the lost funds.  Many children will need to financially support their parents.  The baby boomer crisis with social security just became a lot worse with them now also losing their 401K and IRA values.   We will all collectively be responsible for paying down the debt, fairly or not.  Will there be such a thing as retirement for most of us?

Many people are selling the down stock market as a great time for young twenty somethings to invest.  They may have the best opportunity to make lemonade out of Wall Street lemons.  I hope, though, that there will be a lesson not forgotten.

Recognizing Your Success or Failure

I recently read an article Incompetent People Really Have No Clue, Study Finds. It's a rather blunt way of putting it, but it’s what we all knew; incompetent people don’t know they are incompetent.    The main point I got out of it is, you have to be able to recognize what you do badly. Then learn from it.

6 years ago I was 40 pounds overweight and obese.  I was in denial about it.  When I looked in the mirror, I didn’t see a fat person – I was thin and active in my teens.  I blamed ‘slow metabolism’ for my lack of weight loss.  It wasn’t slow metabolism – it was lack of exercise and too many empty calories.  I started logging my calories and was horrified to discover the truth.  I was in fact responsible for my own situation.

There was a correlation between how I was managing my diet and my finances. I wasn't paying attention to either.

I started dieting and getting my debt under control at about the same time.  I don’t think this was coincidental.  I sat down with both of them and analyzed what I was doing wrong.  Then I changed.  If the scale (or balance ledger) didn’t budge, I kept analyzing what I was doing.  If I was eating right and exercising, I kept at it.  If I was eating too much happy hour, I cut back (which worked to save both calories and money – double goal efficiency). Neither of them gave overnight results, but over time I made progress. I still haven't reached all my goals, but I'm working on it.

I lost 30 pounds and have kept it off for about 3 years (am working on the last 10).  I got my debt strategy under control about 3 years ago and have been debt free for almost a year.  I have not reverted back to either of my bad habits that lead to my weight gain or debt accumulation.  I recognized what I was doing wrong.  Then I recognized what I was doing right.  There are some things that are beyond your control, as I’ve written previously in Half Dozen Finances Within Your Control.  Recognize the things that are within your control, and do your best prepare for the “Oh crap” situations that you can’t.

Strapping Down to the Minimums

With the US jobless rate now at 8.1 percent and no sign of ending soon, we all know someone who has been laid off, or is facing a lay off.  That someone could be you.  We all want to know how we can make most efficient use of what we have until we can make it to the next job.  I’m going to suggest a few ideas.

Let’s assume you are in a nightmare scenario.  You are laid off.  You have a mortgage, credit card debt and a small amount of money in an emergency savings fund.  You were just starting to pay off your bills, and save in your fund.  You could be out of work for 6 months to a year, and you only have 1-3 months of money in your savings account.  There’s not much you can do.  You have to figure out how to stretch what you have.

It’s great that you have that emergency savings.  Try to minimize the use of your credit cards (stop altogether if possible) and stretch that money out as far as you can.

Get a list of all your recurring expenses.  If you have cable, usually people would say this is the first to go.  I say it depends.  If you live in an area where cable is your only choice for high speed internet, then you should probably keep it.  I live in Seattle where there is an abundance of free WiFi coffee shops, so I would cancel my service.  Losing internet is not an option in today’s world.  It’s a necessity to find jobs competitively.

I would not drop my cable and switch to another carrier.  There will be signup fees and a new modem purchase for DSL (or other).  These are expenses cannot be afforded at the moment.  Drop the cable to basic and keep the internet.  Cancel TiVo or On-Demand subscriptions.  I watch my favorite shows (Lost, Heroes) and movies when I want on Hulu.com or Netflix.

Don’t cancel Netflix.  Same with the World of Warcraft subscription.  This is different than what most people would say.  Why I say that is because I’d go crazy if I don’t have something fun to do.  Also, if there is entertainment at home, I am less likely to spend money at the bars and club, which are clearly a must-go expense.  If you have the discipline to dust off your old stand alone games without a subscription, canceling your WoW account would obviously be even better.

If you have an expensive cell phone plan, this can be tricky.  Normally, this is also an area that you would want to trim back on.  It gets tricky because of contract terms.  This is why I don’t have an iPhone – I don’t want to be locked into a 2 year contract for this reason.  Here is what I would do.  The contract should be for service with AT&T, not the iPhone itself.  Even the cheapest iPhone plan ($60) is more expensive than basic AT&T mobile phone service.  I would see if I could buy a cheap basic phone, and have AT&T transfer your phone number and contract to that phone, then end your iPhone service.  Sell your iPhone.  I don’t have an AT&T phone or iPhone, so I’m not sure if this will work.  Call AT&T and ask.

Eat at home.  I've started a series on Recession Recipes at my Calorie Crunch blog. These are designed to be easy, minimal cooking skill (can you boil water and chop an onion?), economical recipes that almost anyone can fit in their schedule.

You’re going to have to find creative ways to stretch your money to pay your mortgage.  I am assuming that if you hadn’t been laid off, you would already be fine with your mortgage payments.  If you have a spare room or basement with junk, empty it and rent it to a college student.  There’s still high demand for rentals.  Your new housemate can help subsidize a fraction of your mortgage.  It will at least stretch your savings a small bit, buying you a little more time.

Pay the minimums on your credit card and do not miss a payment! You cannot afford for them to assess penalties, late fees and increase your interest rate. As soon as you get the bill from them, send the minimum immediately. Do not try to float close to the due date and earn a little more interest on your savings – it’s not going to help you at this point.   You need to make sure that payment gets there on time.  If you miss a single payment, it’s game over.  You will go into the credit card debt spiral with no near term end. 

Do not use credit cards for emergencies.  This is why you need an emergency savings account with good hard cash.  If you do not have an account with cash, how are you going to make the minimums on your credit cards?

Do not listen to people who say if you don’t spend, then we can’t revive the economy.  If you lost your main income and are living on savings, you are in survival mode.  You are in no position to be a consumer.

For those of us who still have jobs, keep pushing down that debt and put as much as you can into the emergency savings account.

How to Cook When You’re a Single Professional

We all know we should eat at home more often, but it’s difficult to juggle when you’re a single career professional.   It is possible though.   With the economy the way it is, a lot of people are wanting to know how they can eat at home more often.

Let’s go over some of the basics.

It saves you money.  This is true.  I can buy a grass fed prime steak with asparagus, mashed potatoes and a glass of wine for less than half of what it costs to eat out at a comparable quality restaurant.  My average prime steak dinner with the fixings costs me an average of $14 per plate, including the glass of wine.  Increase to $16 if I have 2 glasses of wine.  Tipping is not necessary, but compliments ensures there will be no crying.  This dinner with wine at my favorite restaurant in Seattle would cost me close to $60 per plate.

You don’t need to be ultra frugal to do this.  Whole Foods isn’t known for being cheap eats, but grass fed steak is delicious.  If you want to save a few bucks, meat from the chain supermarkets are fine (but rather bland).   If you are just learning to cook, don’t practice with the finest steaks from Whole Foods right away.  Cooking steak to temperature is an advanced skill that takes some practice to learn to do right.

I buy my veggies and produce from farmer’s markets, which are in abundance in Seattle. 

The wine usually comes from Trader Joe’s.  A good bottle of wine doesn’t have to cost a fortune.   It’s even easier to get a great quality wine for under $10 if you live in wine country like Washington or California.

You know what ingredients are in it.  I’m certain there’s never any spit in my food.  Or food coloring, or pig feet, or whatever.

It’s Healthier.  Most restaurants go very heavy on the fat and oil.  It tastes gooood, but it also packs on extra calories.  Most of us have desk jobs, so this is a bad combo.  Restaurants typically serve portions 2-3 sizes larger than we need.  This can also contribute to the ‘spread’.  Over the years, I’ve become very good at making single serve portions for 1 or 2 people.  My food waste is down, not to mention my girly waist.

So those are the basics that are usually covered by most personal finance enthusiasts.  How do you find time to do this as a young career professional?

Cooking Classes.  First, you need to learn how to cook.  You need to know how to use your knives and pans.  If you have a good paying job, look around in your area for cooking classes taught by chefs.  They are not cheap, so pick wisely when you are first starting out.  I recommend classes with knife skills, and cooking basics to start with.  Cooking classes are also great to mingle, at least, in the Seattle area.  A lot of single professionals here take cooking classes to network or meet other singles.  With the economic downturn, this is probably a more expensive option that can easily be replaced with alternatives.

If your budget is tight, there’s the Food Network on cable TV.  I learned most of my cooking skills and techniques from Alton Brown’s “Good Eats” and Rachael Ray’s “30 Minute Meals”.  I’ve now graduated to Martha Stewart.  Rachael Ray’s methods works really well for what I’m talking about here.  Chop stuff up, throw it in a pot, and eat.  Plus she shows you how to multitask many dishes.  Start the pasta boiling while chopping up veggies for your sauce.  Alton Brown is geeky fun that you can eat.

If you canceled your cable because you’re so bogged down in debt and are cutting out lattes, then there’s the internet.  Search on YouTube for free videos on how to dice or chop an onion.  Then go to All Recipes and find recipes for stir fry.

Once you have a few basic skills, you can make almost anything.  I still can’t make Indian curries.

Get a CrockPot. They’re not just for church picnics and soccer moms!  They are so freaking easy.  Chop an onion (see YouTube above), chop a carrot, celery, potatoes, stew meat, a can of tomato sauce, 1/2 cup water, salt/pepper, and throw it in your pot section the night before you go to work.  Put in the the fridge.  In the morning before you go to work, put it in the crockpot base and turn on low.  When you come home, dinner’s done!  Get a bowl, a spoon and your Netflix.

Grocery Shopping.  Where to find the time to go grocery shopping?  The weekends.  I buy a week’s worth of produce and meat on Sunday, which as a single person is not much.  A 1 pound steak (which makes two-three steak dinners with the proper portion control) and a package with 4 chicken breasts.   Because I live in Seattle, there’s usually 1/4 lb of fresh salmon in there too. I tend to pre-prepare my food chopping for the week.  I call it my “Martha Stewart” Sundays.  I chop up an onion and bell peppers, then put it in a container in the fridge.  When I cook during the week, I’ve already done my chopping.  I just need to throw it in the pan.  I used to buy my produce (and a croissant) at Pike Place Market in the morning, do my chopping mid morning, then meet my friends somewhere fun in the afternoon.  There is no slaving in the kitchen all day in my life.

The Downside. Now the really crappy part to all of this is the dishes.  I feel your pain – I hate dishes.  But it’s got to be done.  I find that if I wash dishes as I go, after chopping and throwing in the pan, that it’s easier to maintain.  A bit of multitasking.  A dishwasher is also a darn fine thing.

Between Rachael Ray’s 30 minute cooking style and a crockpot, I eat healthy meals at home most days of the week.  I still have time to go to the gym, read/write blogs, do my homework, have fun with friends and hold down a full time job.  I go out for happy hour or a nice dinner a couple times a week.

The Lending Club Primer, Part 3

All investments carry risk.  There are no guarantees, and Lending Club is certainly no exception.  In The Lending Club Primer, Part 2, we explored Lending Club as an alternative to a traditional bank loan, and as an alternative or supplement to your investments.  As with all investments, we must be well informed about the risks.

When someone applies to borrow money, Lending Club performs a credit check.  Based on their FICO score, debt to income ratio, and revolving credit utilization risk they are assigned a credit grade.  There is no direct correlation between FICO score and credit grade.  Lending Club factors in the whole picture on a number of variables.  Read Interest Rates and How We Set Them on exactly how this is done. Lending Club puts a cap on the maximum a person may borrow based on their grade up to $25,000 for the top tier.

Income can be verified by Lending Club by faxing a current pay stub, but this is not required.  However, potential lenders will almost always ask you to do this.  You’re more likely to get fully funded if you get it verified by Lending Club.

It’s not a done deal when applying for a loan with Lending Club, even if you have a top level FICO score.  Approximately 1 in 6 applications are approved.  I’ve read that it is more difficult to get a loan through Lending Club than through their competitor Prosper.com. Even so, defaults do occur.  Let’s take a look at the average default rates.

As of 3-1-2009 on their Historical Defaults page, average 12-month default rates based on risk grades are as follows:

Risk Grade	Avg 12 Month Default Rate
A	0.47%
B	1.26%
C	2.05%
D	2.84%
E	3.63%
F	4.42%
G	5.21%

 

Lending Club has only been open since 2007, so the broad picture is not yet known.  However, independent financial research group Javelin Strategy & Research in January 2009 published a Lending Club Investment Analysis document. In the graphic is a breakdown of the issued, late, and defaulted notes.  Of the total number of notes issued, only 2.8% defaulted.

That’s beating the credit cards by a long mile. The charge off rate for credit cards as of January 2009 is 6.8%.

So who is Lending Club?  What happens if they take my money and run off with my dog and truck?  Well, there would definitely be a tear in my beer and a WTF!  They shut down trading last year to file with the SEC.  They have completed that filing, and are now registered and regulated by the SEC.  (Assuming of course they are now awake at the wheel.)  Money that is in your Lending Club account is FDIC insured like your regular bank accounts.  Money invested in notes are not covered.  As with any investment, don’t put all your money in the same pot, and don’t invest more than you are willing to lose.

Read: The Lending Club Primer, Part 1 and The Lending Club Primer, Part 2.