Beating Broke

Personal Finance from the Broke Perspective

Why I Like Passive Income

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When you’re in debt, and trying to escape from the cycle of debt, the one thing that seems to dominate your every thought is paying off that debt.  Far too often, those of us who talk about debt and finances regularly tend to focus on debt as well.  We focus on paying off debt, eliminating debt, and ways to spend less money so you free up more money in your budget to pay off that debt.  What we don’t talk about often enough, in my opinon, is making more money.  In many ways, increasing your income is just as important to your fight against debt as staying disciplined in paying your debt off.

I don’t know about you, but I often feel like my income is capped.  In any job, you are either paid a yearly salary, or paid an hourly wage.  In that way, you’re income is capped.  If you’re paid on a salary, it doesn’t matter how much you work, you only get paid a certain amount every pay period.  If you work hourly, there are only so many hours that you can work in any pay period.  There are always ways to advance yourself through the workforce, and up the ladder at work, but your income is still capped.

Uncapped income.

Passive Income Cash Machine
img credit: Whatleydude on Flickr

One way to increase your income, that doesn’t require that you work all hours, and that doesn’t cap your income is through passive income.  I’ve talked about it before here, and here, and here.  The ideal definition of passive income is income you earn without putting in any work.  And, maybe in an ideal world, that type of income would actually exist.  In our less than ideal world, truly passive income is very hard to find.

How I define passive income

I like to define passive income in somewhat more liberal terms.  To me, any income that I can earn with a minimal amount of work is passive income.  If I can make income off of something that only takes me 30 minutes a month, I consider it passive income.  Anything that continues to make me money long after I’ve put the work in counts too.  It’s like Ronco income.  “Just set it and forget it!”

For me, my blogs and websites are passive income.  A majority of the income I make off of them is income from posts I’ve already written.  The work has already been put in, and it would continue to pay me even if I quit writing.  My traditional stock portfolio is a passive income.  I did the work early on, earning the cash to buy the stocks, as well as doing the research to pick the stocks, and many of them pay me dividends on a regular basis.  That dividend payment is a passive stream of income.  Yet another stream that I take advantage of is my Lending Club portfolio of peer-to-peer loans.  (See my latest report on LC)

Other forms of passive income can include things like royalties, patents, and rental properties.  I’m sure if you think hard enough about it, you’ll find several other streams of potential income that would fit my definition of passivity.  (Share them in the comments!)

Why do I like passive income?

Naturally, I like passive income because I’m lazy.  😉  After all, what could be lazier than earning money while you sit on your behind and watch soap operas on T.V.?

“Naturally, I like passive income because I’m lazy.” — @beatingbroke (Click to Tweet)

As much as I like that reason, the real reason is a bit more explanatory.  I like paying off my debt.  I like the ability to do that while still enjoying life.  And, as many of you can attest, doing both of those things can sometimes be somewhat difficult.  Balancing the expenditures that can come enjoying life (even a frugal one) with paying off your debt is troublesome.  The best way that I’ve found to try and do both is to work hard at paying off debt, while working hard at increasing income at the same time.  Without passive income, the only way to increase income is to work more hours at your hourly job or to negotiate regular raises at your salary job.  Recently, it’s become even more difficult to do either of those.  Passive income becomes the last, best way to increase your income with little to no continuing work output.

Why do you like passive income?  What do you consider to be passive income?  What are some of your passive income streams?  What are some that you’d like to take advantage of?

Lending Club 2Q2012 Update

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Another three months have passed which means it’s time for another update on my Lending Club account.  If you’ve been following my LC updates, you know what this is all about.  If not, you can catch up by starting with the Calculating a Real Rate of Return on Lending Club post, followed by the first Lending Club Return Update and then Lending Club 1Q2012 Update.  If you’re interested in opening your own Lending Club Account, you can do so here.

Now that we’re all on the same page, let’s take a look at what happened this last quarter.

First Lending Club Delinquency

The biggest thing, I think, to note for this update is that I finally had my first (and second) delinquencies on loans.  The first, I sold.  I was lucky enough to be able to sell it for break-even on the remaining principle.  I lose out on the interest that it would have paid through to maturity, but if it went into collections, I likely would have lost more than that.  I should have paid a bit more attention, but I believe the first was a C grade loan.  The second, which just went into late status at the end of June, is a D grade loan.  I’m holding on to this one.  My reasoning behind holding on to it is three-fold.  First, and more importantly, is that the loan is showing as late, but it is also showing that the borrower has entered into a payment plan.  While that isn’t ideal, it does show a desire to pay it in full and avoid the collections process.  I’m giving the borrower the benefit of the doubt that they’ll be able to pay the loan off.  Second, the remaining balance on the loan, including interest, is $6.06.  If I lose that, it won’t break my portfolio, or my rate of return to any significant degree.  Third, and finally, I’m keeping it as a part of the experiment.  I’m curious to see how the process works, and how it will end up.  How it does end up will likely help me make decisions on what to do with any further late loans in the future.

Lending Club Returns Remain Above 13%

After it’s all said and done, the one late loan in the bunch could end up dropping the rate below 13%, but it hasn’t been written off yet.  If, however, it remains in a late, but paid, status, my rate is doing pretty well.  As of 7/4, my account is showing a NAR (Net Annualized Return) of 13.58%.

“My Net Annualized Return is at 13.58% on @lendingclub – @BeatingBroke”  <– Click to Tweet This

I’m still amazed by that rate of return.  Yes, I do realize that I’m likely having some luck so far.  Another factor might include the size of my portfolio.  It’s climbing, but it’s just barely over $500 total.  As the portfolio size grows, the likelihood of a written off loan grows with it.  The flip side of that, of course, is that the larger the portfolio gets, the more diversified I’ll be, and the less one written off loan will affect my rate.  One nice part of the size of the portfolio is that it’s nearing a self-sustainability mark.  Currently, the total monthly payments coming in is $23.67.  With that coming in each month, I could easily stop contributing to the account, and merely use the payments as the renewing funds for investment.  I don’t plan on doing that, but I certainly could.

Lending Club Account Dashboard
Lending Club Account Dashboard

Adjusted Lending Club Risk Ratios

Previously, I spoke about having adjusted the loans I was buying to be almost all C and D grade loans.  While I am not abandoning that idea, I’m adjusting it slightly to try and keep it slightly more balanced.  What I don’t want to happen is to find myself with ALL D grade loans.  The lower grade loans, while paying less in interest, are a lower risk.  I’m now trying to keep the portfolio to a pretty nice bell curve that centers somewhere between C and D.  One thing to keep in mind here is that it’s somewhat hard to find the A and B grade loans that have any return at all when you have to purchase the loans through the FolioFN trading platform, which tends to push the curve towards the D side anyways.

That’s it for this quarter’s update.  With a little luck, and some shrewd investing, I hope that next quarter’s update will be just as good!

Want to open your Lending Club account? Click here.

Do these updates add any value for you?  What would you like to see change in them?  What do you like?  And, what has your experience been like with Lending Club?

 

Don’t Leave Retirement Savings on the Table

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Retirement can sometimes be like that one cousin at family gatherings.  The one that nobody likes to talk about.  I think that, like that cousin, it’s easier to put our retirements out of our minds simply because, for many of us, it’s still so far away. We’ve still got 10, 20, 30, or even 40+ years before we hit that golden age of 65.5 and start living the good life of retirement.  Naturally, our nearer goals are at the front of our minds and take up most of our thoughts.  After all, which are you more likely to worry about?  Your upcoming performance evaluation next week, or your retirement in 35 years? Retirement never stood a chance. But, like that cousin, you’ve got to think about your retirement sooner or later.  And, the sooner you start thinking about it, and preparing for it, the better off you’ll be when it comes time to face it.

In fact, the sooner you start saving for retirement, the better off you’ll be.  Not only will you have to save less because of the wonders of compounding returns, but you’ll have more to show for it when it comes time to retire.  At an average of 7% return, any money that you save for retirement will double every 10 years.  What does that mean?  If you wait an extra 10 years to start saving for retirement, you’ll have effectively cut your retirement fund in half, and will need to either drastically increase the amount you’re saving each month, or learn to live on less in retirement.

Retirement © by 401K 2012

Saving for your retirement doesn’t have to be complicated either. Sometimes, it’s downright easy!  How do you make the most of your early retirement saving?  Stop leaving it on the table.  Get active with your savings.  Go beyond being active, and be pro-active.  Start with your employer.  If you’ve got a 401(k) through your employer, take advantage of it.  Contribute up to the full amount that your employer will match.  Your HR department will help you get it set up, and give you the information on the match so that you can do that.  Most 401(k) programs will have a set of target date funds that can be used to effectively set your 401(k) on autopilot.  If you don’t want to be involved in the choosing of funds for the money to go into, the target date funds can be a great choice.

Once you’ve gotten the full match from your employer in your 401(k), you might want to look into a private pension plan or an IRA as well.  For most, the Roth IRA, with it’s tax free growth and withdrawals is probably the right choice.  If you’re under 50, you can contribute up to $5,000 every year into an IRA.  Use your tax refund, if you get one, to give yourself a boost each year on meeting that $5,000 limit.  If you’ve still got more retirement saving to do after you’ve met the contribution limit, you can up your deduction into your 401(k).

If you need more help with your retirement, or help figuring out what, how much, and when to save, find yourself a retirement expert.  Your CPA or a certified financial planner should be able to give you a detailed plan for your retirement savings. The most important thing you have to remember with all this retirement talk is that if you don’t save, you won’t have any retirement funds to worry about.  Unless you want to count on Social Security to fund your retirement.  I’ve seen people who have done that.  You don’t want to be in their shoes.  Get your retirement saving started today.  It really is important.  Even more than that performance evaluation.