Rainy Day Pennies

Investments and Emergency Funds Dependent on Your Career

2009-03-25T12:11:00.000-07:00

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.

Conversion to Wordpress Coming Soon

2009-03-24T12:49:00.000-07:00

It's time for me to move my content from Blogger to Wordpress on a hosted domain. I'll be making the switch soon. Stay tuned!

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

2009-03-23T08:00:00.000-07:00

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.

Rainy Day Pennies

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

2009-03-21T15:48:00.001-07:00

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.

Decluttering by Selling Stuff to Replace Stuff

2009-03-20T07:00:00.000-07:00

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

2009-03-17T23:17:00.001-07:00

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

2009-03-15T16:00:00.001-07:00

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?

2009-03-10T08:00:00.000-07:00

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

2009-03-09T09:58:00.000-07:00

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

2009-03-06T14:26:00.001-08:00

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

2009-03-05T10:40:00.001-08:00

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

2009-03-01T19:26:00.001-08:00

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.

The Lending Club Primer, Part 2

2009-02-28T19:03:00.001-08:00

In my first installment, I gave a brief introduction on how to become a borrower or lender. Today I'm going to talk more about it as an alternative to a traditional bank loan, and an investment alternative or supplement.

Alternative to a Traditional Bank Loan. In order to borrow from Lending Club, you will need a minimum FICO score of 660. If you have good credit and payment history, this may be a good alternative to a traditional bank loan. The rates are competitive, but more than that, you might be able to get a loan for things most banks won't give you money for. A lot of banks have tightened up lending, and aren’t lending for even things like small business growth. If that is the case, you can take your plea to Lending Club and see if a community of lenders are willing to invest in you. Banks usually won't give you an unsecured loan for things like cosmetic surgery, but it is a request I see frequently on Lending Club. Many from people with birth defects or accidents. Some from strippers looking for a career enhancement. Hey, as I said before, we’re only here to judge your FICO score. If your FICO score is good, you will usually get the money.

All loans from Lending Club are fixed rate on a three year term. The minimum payment includes principal and interest. At the end of three years, your loan will be paid in full. There are no prepayment penalties. If you want to borrow the money and pay it back in a month or two, you can. If you are late on a payment, you will be charged a late fee. If you default on the loan, Lending Club will report you to a collections agency, and you will suffer the appropriate credit penalty.

Investment Alternative/Supplement. Most "High Yield" bank accounts are anything but these days. CD rates are pathetic. I need a place to stash my short term money that isn't tied to the stock market performance. I think of Lending Club loans like a 3 year CD that might terminate early (if my borrower pays in full early). When my borrower makes his/her monthly payments, I get back my proportion of the principle I contributed to the loan, plus interest earned.

Are there risks? Sure. You are counting on your borrower not defaulting. Lending Club puts a few restrictions on how much money a borrower can borrow (we’ll talk about that in the next installment). There are a couple of ways to diversify your risk.

Look at the FICO scores of the borrower, and determine your level of risk. A+ borrowers rarely default. If you want to play it safe, you can choose to lend only to A+ borrowers.
Diversify with a mix of low/high risk loans. You can improve your average rate of return if you choose a few higher risk loans. This is how banks used to make their money. They would have a collection of loans from people who were pretty much assured to always make their payments, plus a few 'risky' borrowers whom they would charge higher interest rates so they could make more money.
Loan a small amount of money among many loans. I usually loan $25-$50 per loan over many loans. This way if one or a few of my borrowers default on me (three years is a looong time), then I won't miss it. This Is also the way banks used to make the majority of their money. If their high risk borrowers defaulted, they could still count on their low risk borrowers to stay ahead.

In the graphic, you'll see that Lending Club shows you charts with your risk diversification and your average rate of return based on your portfolio. You'll see how many of your borrowers have been charged late fees, defaulted, or are uncollectable. If your borrower is late, you will get a proportion of the late fee in your monthly collections. If your borrower is in default and given a penalty, you'll get a portion of the collection fees. If your borrower defaults and Lending Club is unable to recover, then you and everyone who contributed to the loan will lose what they put into it.

There aren't any fees for lenders, except Lending Club retains 1% of your earnings. So when calculating your earnings, factor that in.

I've been lending on Lending Club for about a year, and I've found it to be an easy, straightforward process. I browse loans, read the descriptions, and diversify the money I want to spend over many loans. When I receive my earnings, I transfer them to my regular bank account. You may also reinvest your earnings into new loans (minimum is $25). Your earnings when they are not invested into a note will not collect any interest, so it's best to move them into a new note, or into an interest bearing account as soon as possible.

Update: Fixed error in term rate. Terms are fixed at three years, not five.

Read: The Lending Club Primer, Part 1 and The Lending Club Primer, Part 3.

Frugality Means Efficiency

2009-02-27T16:52:00.001-08:00

Frugality to me means efficiency. I use as much as I need because it's efficient.

There's been a lot of discussion lately about stupid frugality and such. Take Trent from The Simple Dollar's response to Ramit from IWillTeachYouToBeRich.com's The Challenge. I draw the line at rewashing ziplock bags. Rewashing and reusing ziplock bags is not efficient or frugal. Why? Because you're using something disposable that is easily replaced by a high quality, truly efficient and reusable alternative.

Back in 2000 I went to a friend's Tupperware party. I bought two 'leftover lunch' containers. One was compartmentalized into two sections. They both had tops with a small vent that opened to let steam out while microwaving. I love these things - I still have them to this day.

Here is their new version of the Tupperware lunch container. Mine doesn't look like this but close enough. Look at the price - holy crap! $15!

Yep. $15. That's about what I paid for mine. Let's figure this out. I bought them in 2000, and of course, I haven't used them every single day. Let's assume that I only used them 40% of the time over the years.

365 days/year x 8 years = 2,920 days
2,920 days x .40 = 1168 days
$15/1168 days = $0.0128 per day

So it's cost me a little over a penny per year to use if I only used it 40% of the time in a year. A rewashed ziplock baggie has an environmental impact - you have to throw it away at some point.

I also bought a Zojirushi Lunch Jar. I love this thing. It's easy to put together a well balanced lunch. I put a salad in the big jar, protein in the small jar, and a starchy food in the medium jar. It's been fabulous for my diet to manage portion control and carb/protein/fat ratios. It's fun putting together bento lunches.

Note that I bought very high quality containers. Tupperware lasts forever. They were made to survive children torturing them for goodness sake. My mom's Tupperware she bought in the 70s survived me, and she still uses them to this day. Don't buy those crappy ziplock containers at the supermarket. I've done that and they last me a year tops before they become so mangled their lids don't fit anymore.

Smart Frugality = efficiency.

Two Minute Update: What's with all the Toilet Paper Stories?

2009-02-26T11:14:00.001-08:00

The war on toilet paper is ON. Take it like a man, you yank snowflakes, and not only use less toilet paper, but like it rough n tough to save the world.

American taste for soft toilet roll 'worse than driving Hummers'

The Lending Club Primer, Part 1

2009-02-25T12:56:00.000-08:00

With the economy in an uncertain state, I've been looking for avenues to invest my money that is not related to the stock market. One of these is through the peer to peer lending site LendingClub.com. I've been a member since about April 2008, so here is my brief take on how it works, and how well it works.

What is Peer to Peer lending? Lending Club is a social network like Facebook or MySpace, but it connects people for borrowing or lending money. Borrowers and lenders are average citizens, not a banking entity.

Cool. What are the requirements to be a lender? The requirements are similar to opening any other bank account in the United States (US citizens only - Zopa.com is the equivalent in Europe). You must be at least 18 years of age and have a social security number. There are no credit checks for lenders. To transfer money, you need to setup a link to a bank account that is verified through random deposits.

Update: Since the time I first signed up, Lending Club has changed its filing with the SEC and their requirements for lenders is different. You now need a minimum income level and net worth. It is not available to residents of all 50 States yet. Read the details in their Lender Requirements FAQ. I suspect a lot of these changes are due to lobbying by 'them'. I don’t know how they are checking income levels and net worth, and how strict they are about it. Please let me know if you sign up.

I need some money to visit my alien cousin on Mars. What are the requirements to be a borrower? Ok...that's cool. We're not here to judge. Well that's not entirely true - we're here to judge your FICO score. I've seen some funky things being funded that a traditional bank wouldn't approve you for. You tell everyone why you're asking for a loan. They may ask you questions about it (like, if you've seen a psychiatrist lately). Most likely, though, we're going to want to know how you're going to make your payments if you're on Mars. Do you have direct deposit from the mothership? Fax the stub to Lending Club and we'll check it out.

You meet a minimum set of requirements to become a borrower. You submit information for a credit check. Your FICO score needs to be a minimum of 660+, which is a little over subprime. Your debt to income ratio is below 25% (excluding mortgages). Your revolving credit utilization is less than 100%. You have no bankruptcies in the past 7 years, or collections in the past 12 months. There are a couple of other minor details, but those are the biggies. If these things check out, you'll probably get your money and you're going to Mars!

How do I sign up? Use my referral link, you'll get a signup bonus of $50 to try out. Score!

Scored! So how do lenders and borrowers meet up? I am a lender. As a lender, I browse 'notes' from borrowers. I can browse their requests for average rates of return, credit score, debt to income ratio, and delinquencies. Basically, I can choose the risk level that I want. There's a chance that my borrower could default on his/her loan. Looking at the overall picture of their credit history, I can guess how likely they are to pay me back. Just like how loan officers used to do it before they went all "Banks Gone Wild". I can lend my money to only A+ borrowers if I want, or diversify with a few more 'risky' borrowers. By lending a portion to higher risk borrowers, I can increase my average rate of return.

The graphic illustrates what browsing notes looks like, and how to define your search criteria for your risk tolerance. I'll explain more in the next installment.

Read: The Lending Club Primer, Part 2 and The Lending Club Primer, Part 3

Preparing for The Unthinkable

2009-02-24T15:46:00.000-08:00

I recently read Trent's story from GetRichSlowly's Where can you Turn if You Lose it All and it made me think about all the reasons I've worked so hard to be self sufficient.

The summary:

I received a long email recently from an utterly despondent woman (that I’ll call Ellen) who was caught in a devastating situation. A year ago, she was a stay-at-home mother with three preschool-aged children. Her husband worked at a high-paying job that seemed to have great long-term potential and it seemed as though their life was set.

Then, very suddenly, her husband died in a car accident, and there wasn’t much life insurance money. Within months, she was back in the workplace at a fairly low paying job, her family had moved into a tiny apartment, and the house was up for sale. Then, just as quickly, she was laid off from that job and the house sold for roughly what was still owed on it. Within a year, she was back living in her parents’ basement, a single mother with three young children and few assets to her name, searching for any job in her field of expertise while working as a gas station attendant.

There are many families who choose to be single earners while one parent stays at home. There are many good, and valid reasons for doing so. However, there is significant risk of a catastrophic situation described by Ellen. The stay at home parent has been out of the work force for a long time, and is behind in skills and work experience. The health insurance they depended on is suddenly gone. The assets they had saved isn't adequate, and she realizes it too late.

No one can see the future, however, everyone can assess their risk areas. For single earner families, what happens when your husband is suddenly out of the equation? Gets fired from his job? Dies in an accident? Decides he's just not in love with you any more? Plane crashes on a weird tropical island and he can't escape?

Emergency Fund. Yeah, you knew I was going to say that. No matter whether you are a single or dual income family, you have got to make sure you have enough money saved that will take you through 3,6, or 12 months worth of bills. That will buy you some time if one of those situations occurs. You can focus on your grief and getting things in order for your next step. If you have children, this is your number one priority.

Keep working on your skills. In today's internet age, there's no reason why you can't keep current on some of your area of expertise or learn a new skill. If you were a web designer before quitting your job, keep designing. Learn a hobby or skill where you can make side money that can turn into a career if need be. JK Rowling is the ultimate inspiration for this. Some professions will be easier to do this than others.

Life insurance is a tricky one. Not everyone will qualify. It is not easy to get, but it's easy to get trapped by a scummy plan. I would rather rely on my own income potential and investments. You can withdraw from Social Security, 401Ks, and IRAs in some dire circumstances. I would rather put money I would pay to a life insurance policy into one of these instead, but your mileage may vary. Of course, a 401K or IRA won't help you if you don't have them or are not a beneficiary. If you are dependent on a single earner, make sure you are involved with this.

I know it sucks to think about whether the one you love is going to be suddenly gone. But if you realize you would be sh*t up the creek instead of grieving, and think you could handle it, you need to start thinking about it.

In Defense of Stupid Frugality

2009-02-22T13:52:00.001-08:00

I use 2 tablespoons of cocoa. I conserve toilet paper. I am, what you would call, a stupid frugality person.

Why do I like stupid frugality tips like use 2 tablespoons of cocoa instead of 3? Conserve toilet paper? They can't save you more than pennies. What's the point? Use as much as you want, they'll make more!

Both my grandmothers grew up in the post war Depression era. One in the United States; the other in Korea. While their circumstances were different, the lesson taught to me by both of them is waste nothing. Both my grandmothers used every scrap they had, whether it was food or clothing. They were remarkably resourceful. They conserved salt or tea because they were incredibly smart women who knew how to make efficient use of anything they had.

I'm always horrified when I go to restaurants and see people leave a table of uneaten food. It could have easily been boxed up and taken home, but they don't care. It gets thrown away because it's so plentiful, it's not valued. When I drink a cup of tea or cocoa using one or two spoons instead of three, I think of my grandmothers. They conserved it because they didn't have much, and it was a precious. It's not going to save me millions of dollars, and I'll retire a millionaire because of it, but does that give me an excuse to throw it away callously?

I don't do it because I think this will save me riches. I do it because I don't want to be wasteful.

Jewelry Making Success!

2008-12-02T07:13:00.001-08:00

Handcrafted Jewelry by Cathy!
Originally uploaded by Cathy Braun

My first attempt at making jewelry since 3rd grade art class turned out surprisingly well, and easy! Just needed to learn how to make a couple of knots. I did a search for fishing knots, which I found attractive for jewelry, and incredibly sturdy.

I also made a bracelet that I need to go to the craft store and buy clasps for. This turned out to be a keeper project with results I'm pleased with.

Making Jewelry

2008-12-01T14:28:00.000-08:00

I'm trying something new this year for the holidays. I'd like to give David's brother's wife a casual necklace for when we go to Mexico. Instead of buying one at the mall, I bought a semi precious gemstone, jewelry rope, and clasps. I'm going to try making it! If this works out, it will have cost me $13. I looked online and I found a number of different jewelry patterns that were exactly what I had in mind. I also bought a bead kit to make a bracelet for myself that cost $3. I haven't made bead jewelry since I was in 3rd grade - let's see how it goes!

I've bought a couple of handcrafts from Etsy.com. I found a couple of unusual gifts there for less than $20. Now I just need to figure out what to get the boys...

Cya Bank of America, I'm Free!

2008-04-01T08:26:00.001-07:00

For the first time in five years, I am debt free again. What a big difference not owing a darned thing to anybody makes.

It all comes at a really good time too. With the words of a recession looming, housing bubbles a burstin', presidential elections, banks begging for a handout from the feds, value of the dollar dropping, and inflation rising, it's not a good time to owe things to a bank. Banks are in a pickle with the mortgage fiasco, and some seem to be passing the "value" onto their responsible customers.

Take Bank of America for example. I never wanted to be a BoA customer, but unfortunately they acquired my oldest credit card account that I've had open since 1993. If I cancelled, I would take a FICO hit. So reluctantly, I'm stuck with them.

A couple of months ago as I was paying down the last of my debt at 1.99% balance transfer rate, I received a letter in the mail from them saying they would be raising my purchase interest rate from 9.99% to 18.99% because of my "high balance". What the heck? I always paid on time, more than the minimum balance, and my credit to debt ratio was consistently falling each month.

Seems I'm not the only one with prime FICO score of 675+ getting hit with a substantial rate hike, according to The Consumerist's article Bank of America Angers More Customers With Unjustified Rate Hikes. Reasons sound similar - BoA says your balance is too high, you've been paying on time so they can't hit you with late penalties, therefore they'll find another way to make you pony up.

I don't know if they were trying to evoke this response in some masterminded scheme to get some liquidity out of prime borrowers, but I called up my parents and asked for a short term loan of $3000 that I would pay back in 3 months. I paid off BoA and the last of my credit debt.

One of the things I'd like to be the goal of this blog is to help people get out from under the thumb of credit card companies. I know how terrible it was for me and the many times that I thought I would never get out of it. Despite the best efforts of BoA and others to try and force fees out of me (changing my billing dates/cycles, reducing my grace period terms, increasing rates, etc) I did get out of it. I've been "there", and I hope as many people as possible can get "here" too.

5% Cash Back Promotion from Discover Card

2008-01-30T18:13:00.000-08:00

You can earn an additional 5% cash back on purchases with a Discover Card in the month of February for:

Restaurants
Florists
Candy Shops
Bookstores
Pet Stores

The cashback bonus is capped at $200 on purchases, so basically a $10 rebate. However, that does work out to a 5% net discount on dining and books - two of my admitted weaknesses. Just don't forget to pay off the balance! Note that not all Discover cards are applicable.

Through March they are still offering 5% cashback on hotels, car rentals, and travel tickets.

Discover Card 5% Cashback Bonus

Thanks to Probargainhunter.com for the info!

Taking Inventory of Unexpected Expenses

2008-01-29T23:04:00.000-08:00

On unexpected expenses last year I spent:

$260 on new car battery (long story, it should NOT have been this much!)
$500 on new bike (old one stolen - sniff)
$500 on power window motor breaking on my car (arggggg)
$500 on medical expenses (met deductible, not counting copay that I didn't keep track of)
$150 on vet bills
$1200 on dental bills (I don't have dental insurance and I hadn't been to a dentist in a very long time {blush}]

Grand Total: ~$3110

Yeeeeeesh. And I don't have kids - I can't imagine what it would be for things like swallowing a penny or day care diseases. Yeah, so glad that I budgeted a rainy day fund savings account, even though I was carrying a high balance debt. I paid for all of this in cash while paying down my credit cards. I'm convinced if I hadn't set aside the money, I probably would still be in debt because I would have underbudgeted my expenses, missed a payment, causing my low rate interest on the credit card to rise exponentially.

Officially Out of Debt!

2008-01-25T10:10:00.000-08:00

Marking this momentous day: as of today, I have no more credit card debt!

Zen Habits lists 10 actions to getting control of his finances.

2007-12-08T09:53:00.001-08:00

In article The 10 Key Actions That Finally Got Me Out of Debt", Leo lists an emergency fund as #5 in the keys steps to getting out of debt.

I'm a firm believe that you CANNOT get a handle on your finances until you have a buffer of quick cash. Desperate to get out of the debt burden, I paid a higher portion of my checks to credit card companies than almost anything else. Depressed about not having a savings, and every time the unexpected occurred, I felt I would never get out of it. It wasn't until I changed my debt strategy to include a fund for this purpose that things turned around.

Pay Yourself First

I set up automatic withdrawals from every check to go into a savings account. I started following my dad's sage advice to me years ago - pay yourself FIRST. I'm a far more important investment than any bill. Creditors and utilities get paid after I do. My account started with $260 per check.

Don't Worry about the Size of Your Account

No matter how big or small, it will be useful. It will grow with time, giving you an even larger cushion. When I looked at my bank statements and saw the looming large debt-o-meter versus my minuscule $500 savings balance, it wasn't immediately clear how it that paltry amount would help me. Proportionally, it was so out of wack. By the time I had $4000 saved, the motor in my car window broke for a $500 sum. I winced at the total, paid for it in cash and moved on. My debt continued to go in one direction - down. No further stress about it. Except maybe from now on I might think twice about getting a car with automatic windows - ouch.

Use an Oh-No-Crap Fund Only for Emergencies

Discipline, grasshopper. An emergency is anything that would make you freak out and use your credit card or call mom in desperation. But not in the Paris Hilton "But Mooooom...it's not faaaaaair!" {crycry} kind of way. Car repairs, not car washes. Doctor's bill for a freak accident while sleep walking (true story), not a Grey's Anatomy DVD collection. TV repair, not a brand spanking new HD TV. Sewage pumps backing up during a rainstorm, not a new pair of pumps. Got the idea? Great.

The Rules:

1) Freaking out? Consult the emergency fund.
2) "I want! I neeeeeeed it!" Leave it alone.

Open Another Savings Account for "I neeeeeeed it!"

Ye olde fashioned cookie jar could work, or a bank account. Fund it by selling junk you don't need. Sell your DVDs you don't watch on eBay or Amazon. Seriously. How many of those movies do you really watch and how often? If you don't watch all the movies in your entire collection at least once a year, why the heck did you buy it? Get Netflix or Blockbuster! Hollywood is so stinking rich off movies you buy for $16, open out of package when it's new, then never watch again. Oh, and it will be obsolete once they are replaced with the new HD formats and no one will want to buy your used 'ye olde fashioned' DVDs. Sucker.

Make automatic payments to your savings account. Want a new pair of pumps or HD TV? Do it the way grannie would have done it - put aside money and save for it.

I only started diligently following these rules early this year. I am certainly the rainy day fund made this all possible. As my fund grew larger and larger, I felt more confident. I can now pay off my debt in one swift karate chop at any time, however, I want to make sure I have enough of a windfall cushion at the end. Lesson learned.

Now to figure out how to stick with my diet...