I’ve been spending what little free time I’ve had over the past week kicking myself in the face (figuratively) for being very short sighted in my life.
I write 3-5 blog posts a week talking about how to be financially responsible for your life. Many of the topics I write about have to do with ensuring your financial life is okay in case of some kind of financial disaster. Here are a few examples of financial disasters and way to mitigate the risk of them causing serious damage:
- Job Loss: Create an Emergency Fund (I use my Roth IRA but other people use savings)
- Natural Disaster: Home/Renter’s Insurance, Car Insurance
- Theft: Home/Renter’s Insurance, Car Insurance
- Sickness or Disability: Health Insurance, Disability Insurance, Life Insurance
The other day I was thinking about how I spend so much time preparing myself financially for disastrous situations that I’ve completely neglected preparing myself in other ways for a disastrous situation.
While your financial life is a huge part of a responsible adult’s life, it pales in comparison to basic safety. Here are just a few of the things I’ve been thinking about over the last few days:
Situations I’m Completely Unprepared For:
A Fire in My Apartment
Let me give you a layout of my living situation. I live on the fourth floor of my apartment building. I have one door that exits to a hallway, another door that exits to my deck, and a window in my bedroom. If there were a fire in the hallway or in my apartment blocking access to the hallway door, I would basically be screwed.
While I do have fire alarms and a sprinkler system in my apartment, I don’t have a fire extinguisher. I also don’t have an escape ladder. My current (non-existent) plan to address a fire is to a.) hope the sprinklers put the fire out or b.) jump from four stories high onto a concrete parking lot and hope to survive.
Tom Cruise Movie Situations
I don’t want to sound like an end of the world prepper, but I’ve started thinking about how completely dependent I am on a fully functioning society. If something crazy happened (terrible flu/bacteria/virus pandemic, World War III, economic collapse of America, etc.) where I’m trapped inside my apartment because it’s too dangerous to leave, I have enough supplies to last me about… a week if I’m lucky.
I have no bottled water or dry goods saved up for emergencies. I usually have less than one week of food in my fridge and cabinets (of which the stuff in the fridge would go bad in a few hours in the event of a power outage). If the water goes out I’m completely screwed.
I’ll never be an end of the world prepper: if all hell breaks loose and it never goes back to “normal” then I’m most likely screwed. However, I need to at least prepare myself with enough basic necessities to allow myself to hide in my apartment for a few weeks and wait for the cure to whatever disease is killing everyone. Dry food and bottled water is also very useful for tornado/earthquake situations where you might be trapped in your house.
And worst case scenario, I eat and drink the stuff before it expires.
Financial Soundness Doesn’t Matter if You’re Dead
I’m going to keep being a responsible financial adult, but it’s time I started being a responsible adult when it comes to disaster preparedness. I’ll spend the $100-$200 it will cost for fire escape equipment and a small amount off food and water, and hopefully I’ll never have to use any of it!
Readers: Are you prepared to make it through a fire or some terrible disaster?
Sometimes when you are trying to be financially responsible you have to think about other people’s finances.
For my younger readers, think about your parents. What if Dad reached the unfortunate medical situation where he couldn’t take care of himself? Does he have the money to put himself in a home or pay for a caretaker? Do you want to drop everything in your life and start taking care of him? Do you want to foot the bill for his care?
You might consider nipping this problem in the bud early by talking to your parents about Long Term Care Insurance.
Long Term Care Insurance (LTCi) is a little complicated, but it basically provides payment for the care of anyone who cannot take care of himself. Different companies have different policies so you’ll have to do your own research, but it could be worth it.
Should My Family Get LTCi?
It’s hard to tell if you or someone in your family needs long term care insurance, but personal finance journalist Chris Farrell gives a helpful rule of thumb his article about LTCi:
A rule-of-thumb is purchasing a long-term care policy isn’t worth it for those with relatively few assets, say, less than $250,000. Odds are they’ll eventually turn to Medicaid if necessary. People with more than $2 million in assets have the financial means to self-insure. But rules of thumb are only a starting place for research. Look at your full financial picture — assets, income, and expenses.
That is a very broad, general rule so it’s important to know that it takes more research to figure out if you need LTCi for your family or not.
Get In Early for Low Premiums
The key to getting affordable premiums for LTCi is to start the policy when the insured person is in relatively good health and isn’t too old (late 50s or early 60s). If your dad is 80 years old today there’s a good chance the insurance would be so expensive that it wouldn’t be worth it.
The key to keeping your premiums low is to get in early and then make sure to stay enrolled in the plan. Just keep paying those premiums and eventually it will probably pay off.
Do The Research and Make the Right Decision
No one likes paying insurance premiums, but paying a bunch of money for your parents to receive care instead of saving for your own family and retirement is even worse. LTCi will be right for some people but not for others.
Readers: Have you ever considered LTCi? Do you have a policy for you or a family member? Why or why not?
For those of you stock market investors out there, what is the most important thing you look for when trying to identify an online brokerage account?
In my mind there’s only two ways for an online stock trading service to differentiate themselves from the rest of the pack: they need to offer cheap trades (most important) and they need to provide good information. I was given an opportunity to try Kapitall the other day and wanted to share my thoughts on the service.
Trading Fees Could Be Better
The most important aspect of an online brokerage, in my opinion, is the cost to make a trade. The lower the trading costs, the less money you give to the brokerage and the more money you get to keep for yourself. And more money = good, right?!
Kapitall charges $7.95 per trade. Considering other places offer trades for under $5, they aren’t the cheapest guys on the block. However, they are running a promotion right now that can save you $7.95 per trade (that means it’s free!)
For one hour every day (check Kapitall’s twitter account for the hour) they offer four free trades. Free is my favorite price, so this makes me very happy. I can easily limit my trades to one hour a day to get free trades. However, I would like to see two changes to “Happy Hour”.
First, the trade fee is charged during your purchase and then credited back to your account at the end of the day. This is frustrating because 1.) I feel like I have to log in at the end of the day to make sure I got my credit (which did go through without a hitch) and 2.) Because it gives me $7.95 less to use for investing.
Second, I’d like it to be made permanent. When this promotion goes away, you’re left with a brokerage that charges $7.95 a trade. As a casual investor, pretend I make 10 trades a year; That will cost me $79.50 with Kapitall, whereas it will cost me $40-50 at a cheaper brokerage. I’d rather save $30-40.
Research is Pretty Darn Good
When I’m considering a company, the first thing I want to look at are the company’s financials. I haven’t really found a site that displays financials in a clear, easy to understand manner.
That is until I looked at the Number Cruncher on Kapitall. Take a look at this screenshot of what I get to see:
For people like me who aren’t investing experts, this is an incredible view. It gives easy-to-understand explanations of financial terms like “Market Cap” and “Book Value”. It gives a variety of different views that are very helpful when deciding if a company is a good investment.
For people who like to do research, Kapitall has really set up a great tool for that.
They have much more than financials too. They have analyst ratings, news, charts, and more. I have used a few online brokerages, and Kapitall is light years ahead of others I’ve used when it comes to research and content.
Extras Are Pretty Good Too
While I don’t personally care much about a pretty user interface when trading stocks, I do have to mention that Kapitall has some intangibles that do make it interesting to say the least.
They have a whole system of drag and drop that makes trading stocks seem kind of like a game. They also give you points and medals, which is definitely appealing to my generations of video game enthusiasts (so what if I bought the new Spider-Man video game today and played it for 3 hours???).
It is a cool way to trade stocks, although it’s a bit confusing at first and might turn some people off before they figure it out.
My Verdict on Kapitall
Overall I really like the information provided by Kapitall. It makes researching stocks very easy. However, I’m cheap and I just can’t see myself paying for $7.95 trades when I have other accounts that can do it cheaper. If they made Happy Hour permanent or dropped the price to $4.95 a trade, I would strongly consider moving my account here.
If trading costs are your most important criteria, I’d avoid Kapitall. However, if you like great information and a fun interface and don’t mind paying $7.95 a trade, this might be your next brokerage. If you do want to sign up, you can even get a $25 credit in your account!
Recently I have decided to diversify my investments by opening an account with Lending Club where I’m currently getting over a 13% return on my investments.
I live in Texas so I’m not legally allowed to originate loans. The only way I can use Lending Club is to buy loans that other people don’t want. This is obviously frustrating and I’ll be contacting my congressmen to try to get the law changed, but there is a silver lining in every raincloud.
I actually think buying other people’s loans is better than originating them myself.
Existing Loans Have a Payment History
When you originate a loan, you give $20 to a complete stranger based on his credit score, a few financial stats, and a few paragraphs about his plans for the money. That sounds scary to me.
When you buy an existing loan, you get one more vital piece of information: payment history.
When I’m looking for a safe place to invest my money, I filter the loans on “Never Late” and remaining payments of 30 at most. All loans have either a 36 or 60 month term, which means this filter will show loans where the borrower has made at least six payments on time.
Six or more on time payments gives me good reason to believe that person is going to keep making payments. Sure, you have to pay a markup of about 1-3% (meaning you’d pay $20.60 for a $20 loan at a 3% markup) which will decrease your return, but I think it’s worth it to know your borrower has a solid payment history.
Do Additional Research on the Loan and the Borrower
Once you’ve found a loan where the borrower has made at least 6 on-time payments, it’s time to look at the details. The most important things to look for are the credit score, the loan purpose, and then whatever additional criteria you want to add.
Loan Purpose: Credit Card Refinancing / Loan Consolidation
If you take a look at the Lending Club Statistics, you’ll see that “Credit Card Pay Off” has the highest return of any Loan Purpose at over 10% (as of 6/25/2012). I like funding credit card payoff loans because it tells me the borrower understands personal finance well enough to know that a loan at 15% is better than a balance on a credit card at 24%. These people are taking out loans to SAVE money.
Compare that to someone who wants money for a business that might fail, a wedding that they obviously didn’t save up for ahead of time, or a vacation they can’t afford. These people are taking out loans to SPEND money, and I stay away from these loans at all costs. It doesn’t mean they are necessarily bad; it just means I don’t like them and historically they have had lower rates of return than credit card payoffs.
Credit Score Change: Down a Little is OK
Most of the “Never Late” loans for sale on FOLIOfn are there because a decrease in the borrower’s credit score has spooked the original lender. Sometimes a person’s credit score goes down from 780+ to 750-779. I love these loans because the person still has amazing credit. It might have dropped because they applied for a new credit card to get a sweet sign-up bonus or something. No worries here.
The problem comes when they go from the 714-749 range to 600-619 range. That shows a serious change in the person’s credit and I’d stay away from that entirely. You have to set your own threshold, but if they’ve dropped more than 60 points in their credit score since origination, I avoid the loan.
Additional Criteria: Do Your Research
So far you should be here:
- A “Never Late” loan with at least 6 months of payment history
- A Markup of 3% or less
- A credit card payoff or debt consolidation loan purpose
- Credit score drop of no more than about 60 points from loan origination
Once you get this far the loans are pretty good, but you still want to get rid of the bad apples. The best way to do this is to use this great tool at Nickel Steamroller that allows you to filter Lending Club loans based on different criteria. A combination of this tool and some common sense goes a long way.
One of my rules is that I don’t lend to people from California. I think their economy is terrible and I don’t trust anyone in that state to keep their job. You might think I’m generalizing, but using the data you see that total ROI goes up from 6.90% to 7.03% when you take out California borrowers.
Another good rule is to exclude anyone whose employment length is n/a, < 1 year, or 1 year. By making sure your borrower has had a job for at least two years, you increase ROI from 6.90% to 7.17%.
Come up with some criteria in your head that you want and then use the tool to check and make sure your hypothesis was correct. Sometimes you might be wrong. For example, I thought excluding loans from Michigan would improve the ROI and it actually dropped the ROI by 0.01%. Apparently Michigan borrowers are about as good as any other borrowers despite the bad economy up there.
If Someone Misses a Payment, Don’t Panic
Even after you’ve done all your research and picked the right loans, there’s a good chance someone might miss a payment. I suggest you don’t freak out and sell the loan for 50% of what it’s worth thinking you’ll never see another dime.
The fact is that 84% of loans that fall into the grace period are recovered, and 77% of loans that have a payment 16-30 days late are recovered according to Lending Club Statistics. Lending Club will be calling and emailing these people frequently to get them on a payment plan, so I like to ride it out and hope those people get back on track.
Trading Notes in Lending Club Can Make You Money
As always it is important to remember that you can lose money when you invest. It’s also important to own your decisions; I am happy to give you my suggestions but it’s your money and you are responsible for any gains or losses you realize.
If you think you want to give Lending Club a shot, you can sign up here.
This article is for many of the men out there and a much smaller number of women. Using my girlfriend as a one person survey, apparently the following advice won’t go over well with most members of the female gender. But here is it.
Cut your own hair.
I have a feeling there are a lot of guys out there who do the same thing I used to do: spend $20 a month getting a haircut at some place like Sport Clips or Great Clips or Some Other Kind of Clips.
Why spend $20 a month on a haircut when you can spend $20 one time and buy Hair Clippers that will cut your hair as often as you want and probably last at least a year?
And if you’re going to do it, please use clippers. I don’t think this guy on the right is going to like his new haircut.
I Cut My Own Hair All the Time
When I was in college I used to cut my own hair all the time. A 3 on the sides and back, a 6 on top, and blend with the 4 and 5. I could do it by myself without anyone else’s help (although if you have a wife or girlfriend willing to help, it’s much easier). The hardest part is having someone do your neckline, but you can even do that yourself if you need to. Just put your hand where you want the line to be and use the clippers up to your hand.
It actually turns out really well. Guys hair is easy, and I never once had anyone give me trouble for a bad haircut. And trust me, my friends would have given me trouble if it looked bad.
It’s Not Just for College Students
When I graduated college, I thought I should grow up, be an adult, and pay to get my haircut like a normal person. So I did that for about 3 years and probably spent about $720 over that time on haircuts ($20 a month for 36 months). The worst part is that I probably didn’t really like the haircut about half of those times. I must be really crappy at telling hair cutters what I want, because I feel like my haircut is incredibly simple and it gets messed up all the time!
As long as it looks good when you cut your own hair, then the only reason to pay to get your haircut is if you have boatloads of money to waste and love when someone shampoos your hair and rubs your head. I will admit, sometimes I felt like the head rub was the real reason I was paying for haircuts.
So if you are a guy or girl with short hair, do yourself a favor and spend $20 on a set of Hair Clippers that will save you roughly $240 every single year.
And send me pictures of your do-it-yourself haircuts, especially if they turn out bad!
Carnival of Retirement at Making Sense Of Cents
Carnival of MoneyPros at Broke Professionals
Fin. Carn. for Young Adults at 20s Finances
Carnival of Fin. Camaraderie at The University of Money
Yakezie Carnival at See Debt Run
I paid off $33,850 of student loan debt in just over four years. Here’s Part 3 of how I did it.
My first step in paying off student loans was to aggressively pay off my high interest debt. The next step was to make minimum payments while I (unsuccessfully) invested in the hopes of higher returns.
The third and final step was:
Put Every Extra Dollar into Paying Down Debt
In August of 2011, I still had about $20,200 of student loan debt to pay off. After making minimum payments on my debt for a long time, I finally decided that my financial goals had changed a bit:
- I wanted to increase my cash flow
- I lost my confidence in the stock market
- Therefore, I wanted to eliminate all my student loan debt
On September 27th, 2011, I decided that the economy was crappy and that I didn’t trust the stock market. I would rather pay off student loans at less than 4% interest than invest in the stock market (side note: as of 6/17/12, the S&P 500 is up 15.47% since 9/27/2011).
I paid my bills, I kept investing in my 401k, and I put every other spare dollar I had in a savings account so I could stockpile cash for paying off loans.
I paid off about $4,700 worth of student loans in September of 2011. I paid off another $3,300 in January 2012. Then I paid off yet another $3,400 in February 2012.
That’s over $11,000 of huge lump sum student loan payments in six months (not to mention still making minimum payments on remaining student loans). That left me with about $7,200 worth of student loans remaining.
I had a few expenses pop up, such as a trip to Mexico and a bunch of new furniture for my new apartment, but outside of those expenses and paying bills I’ve been hoarding cash to make that last student loan payment. And I’m happy to say that on 6/15/2012, I made my final student loan payment.
I’M DEBT FREE!!!!!
It’s a great feeling to know that I don’t owe anybody anything. I know that when I earn $1 I get to keep everything the government doesn’t take from me in taxes. I know that I’m no longer working to pay off debt, but I’m working for myself.
Readers: Tell me congratulations on paying off over $33,000 of student loan debt in just over four years. Thanks!