Beating Broke

Are You Guilty of Short Term Financial Thinking? Here’s How to Fix It

May 3, 2013 By MelissaB 9 Comments

Let’s be honest. We’re all a little bit irrational with money.

Think of the person who drives 5 minutes out of his way to buy ten gallons of gas that is 2 cents cheaper per gallon. Was the additional .20 cents savings worth 5 minutes of his time? No.

What about the person who buys clothes she had no need for just because they were on clearance 75% off and were such a great deal? Is spending money for something you don’t need ever a good deal? This person just spent more than they would have if they hadn’t run across the “bargain”.

Stop Short Term Financial Thinking In Its Tracks: Do The Math

The best way to stop short term thinking in its tracks is to do the math.

Take the person who drove 5 minutes out of his way to save .20 cents on gas. An easier way to see how worthless this endeavor was is to compute an hourly wage for his savings. There are 12 five minute increments in an hour. Twenty cents saved per 5 minute increment gives us an hourly wage of $2.40. If you’re always chasing the gas bargains, ask if it’s worth $2.40 an hour.

Nope.

Of course, only you can decide when an endeavor to save money becomes worthwhile, but doing the math will help you decide.

A friend was recently asking me whether she should refinance. She just refinanced a few years ago, and as part of the deal, she opened a high interest rate checking account that nets her about $200 in cash back a year. If she refinances with another company, she’ll lose the high interest rate checking account, which she didn’t want to do.

However, she found a new company that offered a mortgage interest rate that is 1.5% lower than her current interest rate. In addition, she would have no fees to pay to refinance. We did the math and found out if she refinanced with the new company, she would save $700 in interest on her mortgage in one year.

Not refinancing to keep the high interest rate checking account was essentially costing her $500 a year, but in her short term thinking, all she could focus on was the “loss” of $200 a year in cash back.

Take the Emotions Out of Your Financial Decisions

Have you ever noticed that it’s much easier to tell other people what they should do with their money rather than figure out what we ourselves should do with our money? That’s because we’re not emotionally tied to someone else’s decisions.

Too often our emotions muddy up our financial decisions.

If you’re contemplating a major financial decision like buying a house or refinancing your home loan, first do the math. Look at hard numbers to see which decision would benefit you most. In my friend’s case, refinancing is the clear winner. Over the course of her 10 year home loan, she’ll save $5,000 total by refinancing rather than keeping her current loan, even when factoring in the high interest rate checking account. It’s hard to argue with the numbers.

If you’re still unsure, talk to friends about your decision. Just make sure to talk to friends who are financially savvy, not those who are broke. As Dave Ramsey says, “Broke people giving financial advice is like a shop teacher with missing fingers.” Take the advice from those who will steer you toward the right financial decision.

We’re all guilty of irrational money decisions. Recognizing this weakness and taking the time to do the math and seek other people’s opinions can help each of us make smarter financial decisions.

What irrational money decisions have you made?

Original Image credit: Burning Money Isolated on White by Images_of_Money, on Flickr

The New Retirement

May 1, 2013 By Shane Ede 7 Comments

I recently had the chance to chat with Todd Tresidder. If you don’t know the name, don’t worry. Up until about a year ago, I didn’t either. But, the short of it is that the guy is retired. In fact, he retired much earlier than most will. At the ripe “old” age of 35, he retired. Which must mean he’s off golfing around in the Arizona heat, right? Or down, sipping OJ at some southern Florida retirement village? Not likely.

Todd is retired in the sense that he doesn’t report to a boss. He does what he wants, when he wants to. One of the things that he wants to do is write books that help people like you and I become better financially. He’s got several that he’s written so far, and I’m sure he’s working on more. During that first meeting, Todd and I spoke for a while on retirement. Speaking with another financially minded person, I usually expect to hear people talk about 401(k)s, IRAs, and stock purchasing. I don’t discount those tools, but I just don’t feel that, like Social Security, you should be depending on them for your whole retirement. Surprisingly, Todd agrees. The longer we spoke, the more we found that we agreed on. At the end of our conversations, Todd offered me a copy of his book on retirement. I accepted.

Long story short, I finally read it. It took me a while, but I’m glad I got around to it.

If there’s anything that stands out about the book, is that Todd knows what he’s talking about. He’s got the experience behind him to talk about the subject in an informed and educational manner, and technically, probably knows more about some of his subject matter than I ever will. He spends the first several chapters of the book dispelling a few myths about retirement, and about the way in which most people tend to think about it. He then takes off on a few chapters of some of the math and logic behind the different ways of calculating your retirement needs, and calculating that mythical “number” that everyone seems to be seeking out that will indicate that they’ve saved all that they need to save for retirement. Not only does that one perfect number not exist, he argues, but the calculations that we make to arrive at it are completely flawed.

The rest of the book is focused on what I like to call the New Retirement. He goes into detail on the ways to properly estimate your income needs for the future, and then into ways that he believes (and I agree) that a properly diversified retirement “portfolio” should be structured. I don’t want to spoil too much of the book so I won’t say much more. What I will say is that the book isn’t terribly long. It’s not a deeply structured manual on all the different retirement accounts. And it’s not terribly expensive. It’s $4.99 on the Kindle (free for Prime members), and about $10 in paperback.

Pick up a copy of How Much Money do I need to Retire at Amazon. You can check out Todd’s site as well as the other books he’s written at FinancialMentor.com.

Lending Club Return Update 1Q13

April 25, 2013 By Shane Ede 13 Comments

If this is the first of my Lending Club return updates that you’ve read, let me catch you up a bit. It all started with a little Lending Club / Sharebuilder experiment. It’s moved on past that, to an ongoing series here at Beating Broke where I share, on a quarterly basis, how the account is doing, the things I’ve done with the account recently, and the things that I might be thinking about trying over the next quarter.

How I invest in Lending Club

Because of where I live (North Dakota), I’m not able to directly invest in fresh loans. I’m forced to use the FolioFN trading platform to buy (and occasionally sell) the notes that I’m investing in. But, based on my returns, I don’t think I’ll be complaining anytime soon. If you’d like to read more about how I select my Lending Club notes, you can read my post on that subject here.

Lazy Lending Club Investing

While I consider investing in peer-to-peer investing to be a nearly passive income source, it isn’t a pure passive income source. What I mean by that is that it does require some active management in order to keep the money invested in loans, and not just sitting fallow in your account. Without meaning to, I put that to the test this last quarter. In February, I don’t even know if I logged into the account. I certainly didn’t buy any new notes. What that means is that for the better part of February, the money that I had coming in just sat in the cash account not doing a darn thing. By the end of February, the cash account was nearly 10% of my Lending Club portfolio. I invested all of that back into notes in March, but it was a lesson in needing to log in and check the account once in a while.

Lending Club Loan Analysis

Analysis might be a bit too strong of a word. At the end of the quarter, I had invested in a total of 62 notes. Of those 62 notes, 19 had been paid off, and there have been no written off loans. There is one that has slipped into the delinquent status column, however, and is showing signs of ending up in the written off column. The balance on principle of the loan is less than 1% of my total portfolio. I might be able to sell it, but it’s far enough delinquent that I’d have to sell it at a significant discount. Honestly, I haven’t decided if I’ll do that or not. I’d rather it just came back around and was paid off, but I’m more of a realist than that. Maybe we’ll be talking about the written off loan effect at the end of next quarter.

Lending Club Return

So this is the part that everyone’s been reading for, right? If you look back at the 4Q12 update, you’ll see that my rate of return (displayed as NAR in the account dashboard) was 14.48%. I screwed up a bit and didn’t record the NAR displayed at the end of March. As of 4/24/2013, it’s being displayed as 14.63. That still includes the one delinquent loan, so it’s likely to go down some if that loan is sold at a significant discount, or if it is written off. The spreadsheet I use to keep track of the numbers shows a a return of 15.86% and 13.26% (adjusted with inflation, which may or may not be necessary).

The cash flow in the account remains pretty good. I had several loans paid off in the last quarter that was reinvested. All told, the portfolio of active (principle remaining) loans grew by 2 over the first quarter. The average amount of money churning back into the account each month is averaging well over $30 a month now allowing me to invest in one new note (at $25/each) each month and then another when the balance grows beyond $25 again. Monthly interest received is teetering around the $10 a month line. I think my next goal might be to get the interest income up to $25 a month. That would be pretty sweet. I’d be investing in a new note each month on just the interest along. If I want to do that anytime soon, however, it means I’ll have to start putting money into the account again. I haven’t put anything into it since November of last year, and I haven’t yet decided when I’ll start putting money into it again, but it will likely be soon.

Embracing Risk, and Increasing Returns

I suppose that somewhere along the way, here, I should mention risk. The notes that I’m investing in all carry a risk of potential default. If they all were to default, I’d lose every penny in my account. The odds of that happening are pretty small. But, the odds of having one or two loans default out of a couple hundred is significantly higher. If you’re going to invest in Lending Club notes, or any investment, you need to know and understand the risks. That’s your warning, and my disclaimer.

Now, take a minute and go look to see what your bank or credit union of choice pays on their savings account. How about their best rate on a CD? Now, even if I were to invest my portfolio into loans with a better credit rating (and, supposedly lesser risk), I could easily be making 6-9% if there weren’t any defaults. It beats the heck out of the rates at my credit union.

One last disclaimer. Please don’t put your liquid (or, emergency) savings into risky investments. You need those readily available, and relatively risk free. Even at a paltry 0.25% in a savings account, it’s in the best place. Every other drop of savings is fair game though. Your money needs to be working for you, not the bank.

If you think Lending Club (or Prosper) is something you want to give a look (maybe you’ll want to try an experiment like I have?) you can sign up at the following links: (Lending Club | Prosper)