Tuesday, April 22, 2014

Prosper Account (Update) - April 2014

Given that we feel the market may be a bit overvalued at the moment, our family's primary focus right now is trying to grow our peer-to-peer lending accounts.  Our family currently maintain accounts with both Prosper.com and LendingClub.com. We are planning to report these two income streams separately and will provide monthly updates on both.


March was a very busy month for us on Prosper as we purchased an additional $1,470 worth of notes this month. At the end of March, our Prosper account balance was at $7,288.20. We received $396.20 in payments from our active notes in March; of which, we received, $45.22 in interest.  The principal balance of our active notes was $6,682.99 and a remaining cash balance of $605.31
In an effort to grow our Prosper account, we are currently re-investing all of the payments that we receive from our notes. And when the cash balance is low, we are continuing to add more funds to the account so that we may constantly purchase new notes.
Notes Criteria:
Our family has been investing in peer-to-peer lending notes for approximately 3 years now. And because of past defaults, we have now refined our search criteria. As a result, we now take a slightly more conservative approach with the notes we invest in. Currently, we only invest in notes that fit the following initial criteria:
  • Under $8,000;
  • Credit score of 700 or more; and
  • Monthly payment will be less than $275.
From those we evaluate:
  • The borrower's income;
  • Their occupation; and
  • Length of employment. 
NOTE: Certain occupations, known to be more secured, are more desirable.
We then look at:
  • Their credit history;
  • Revolving balance; and
  • Debt to income level, etc.
We do not invest in any notes where borrow is currently delinquent, of if they have had  a public record within the last 12 months.

Friday, April 18, 2014

Preface: Part 4 - Savings & Emergency Funds


Emergency Fund
There are a number of situations that arise in life that you simply do not have control over. For this reason, it is essential to have emergency savings (also known as a rainy day fund) to cover the necessary expenses for these situations. Plus, having money set aside for these emergencies gives you the peace of mind knowing that you have a little financial cushioning to ride it out.

From most articles and books that I have read, I believe the general rule of thumb is anywhere between 3-8 months of living expenses.  I believe Dave Ramsey says you need at least 3-6 months of living expenses, while Suze Orman say that you need 8 months.

It's interesting to see such a large disparity among the financial experts. I believe its because each family have different circumstances and thus their own opinion on what their emergency savings  should be.  For our family, we've estimated that we would need approx. $4,600/month to cover our basic needs (food, lights, water shelter, etc. but does not include luxury items such as cable, dining out, entertainment, etc.). For us, a 6-month emergency fund would need to be at least $27,600 and an 8-month emergency fund would need to be $36,800.

Since the current job market is a bit challenging, and we are solely dependent on my income at the moment, our family decided that we needed a little bit more set aside to feel secure. So at the moment, we have about $64,000, which would cover approximately 13.8 months of living expenses.  We realize it is more than the recommended 6-9 months, but given our circumstances and our risk meter, it is what our family needs to have peace of mind.

However, as the job market improves and/or my wife goes back to work, we are planning to use the excess money from our emergency fund to invest and build up our passive income stream with dividend paying stocks and peer-to-peer lending notes. In fact, our family eventually plan to use our Peer-to-Peer lending accounts (Prosper & Lending Club) as our emergency fund when we've hit the cross-over point where payments each month from our invested notes  is sufficient to cover our basic living expenses. At the moment, we receive approx. $700/month from our peer-to-peer lending accounts so unfortunately, we are several years away from achieving this goal.  

Lesson Learned: Having money set aside truly does give you peace of mind.
Sinking Funds
When my wife and I sat down and decided that we would keep her home a few years so she could be with our children for their first few years, we not only agreed that would have a 12-month emergency fund, but also agreed to provide additional savings in various sinking funds. We currently have:
  • A Home Repair and Maintenance Fund;
  • A BIG Ticket Items Fund;
  • A Next Vehicle Fund;
  • A Property Taxes Fund;
  • A Christmas Gifts Fund; and
  • A Vacation Fund. 

Although these items do not come up every month, they are items that can definitely impact a family's budget if you don't plan for them in advance.  By setting the money aside before you use it, you will avoid using your emergency fund unnecessarily, as well as give yourself more negotiating power when it is time to purchase a designated item.
For both our emergency fund and our various sinking funds, we maintain several online savings accounts at Capital One 360.  I know it may not be the highest yielding online account, but it is one that we've had for years. In fact it ING Direct when we first opened our accounts.

Lesson Learned: Sinking funds are great to have but make sure that you know the amount you want to save and a timeline to meet your goal. Otherwise, you may end up saving too little or too much money.

Slush Funds
Both my wife and I each have slush fund accounts. We essentially use the money from these accounts as fun money. We spend money in these independent accounts at our own discretion, without the need for input or approval from the other spouse. Typically, our slush fund money is spent on hobbies, girls and guys night out, etc.  But we both also buy each other gifts for anniversaries, birthdays, valentines day, mother and fathers day. I will admit that receiving gifts (big or small) becomes more meaningful when we know the other sacrificed a part of their fun money for the gift.

To fund these accounts, we transfer $40 each month from our family's main checking account into each slush fund account. Secondly, we both also sell things online (via Ebay, Craigslist, Instagram, etc.) so the monies we individual make go directly into our respective slush funds. Third, if we get any cash or gift cards as presents and we agree to add to family pot, the value of those presents are credited to our slush fund accounts. And lastly, we have decided that if we ever received a windfall (i.e. inheritance, income tax refund, Vegas winnings, etc.), that 10% (5% each) would go towards our slush fund accounts. 

Our slush fund accounts are maintained through a Paypal account.  We chose Paypal because it is so widely accepted both online and at brick and mortar stores.  It is easy to wire money back and forth from our family checking account. And best of all, we get cash back every time we use our Paypal debit card.  It is not a whole lot, but it is certainly better than getting nothing back at all! 

Lesson Learned: Everyone needs fun money...Plus, gifts are more special when it not bought using family money.

Friday, April 4, 2014

Preface: Part 3 - Retirement


Government Pension
As I mentioned in my initial post, I am a local government employee.  Therefore, like most government employees, I will retire with a city pension.  My pension is often referred to as a defined-benefit plan.  Meaning, the pension I receive will be mostly defined by the amount of years that I have worked for my employer.  Each city have different plans and therefore different calculations for the pension they offer to their employees.  I am blessed to be employed by a city that pays me a generous pension that is on the higher end of the pension spectrum. As a result, my pension will likely serve as the primary source of my retirement income. 

The defined benefit plan I am part of is: 2.7% at 55.  This means that if I retire at 55 or above, I will receive 2.7% of my highest annual salary for each year that I work for my employer.  At the moment, I have 13 total years of service that would be applied to my pension calculations.  However, approximately 8 years ago, I also purchased five additional years of service (also known as airtime purchase).  Airtime purchase is no longer available so I definitely got lucky to have purchase my five years beforehand. 

So if I was 55 years old this year, with my 13 years of service and five additional years of airtime purchased, I would have been eligible to retire with an annual pension equal to 48.6% of my salary. But since I am currently only 41 year old, I still have 14 more years before I can retire with my full pension benefits.  That also means that I will then have a total of 27 years of service plus my additional five years of airtime purchase for a total of 86.4% of my salary if I stay until age 55. 

There are more variables (remaining vacation and sick time, age of beneficiary, percentage of benefit to pass on to beneficiary, etc.) that goes into the overall calculation of my pension, but for the purpose of this post, I figured I'd just keep it simple.  And the reason I said "if I stay until age 55" is because there is an opportunity to retire before 55 years of age, I just don't receive my full pension benefits.  I will definitely look at this option in greater detail as I approach 50 years of age (the earliest I am eligible for retirement). 

Lesson learned: The early bird does get the worm. Not only was I able to purchase airtime, I paid significantly less for my five 5 years than most of my colleagues.

To supplement my city pension, I also contribute a small portion of my salary towards a 457k. For those unfamiliar with a 457k plan, it is a deferred-compensation arrangement for employees of state and local governments and certain tax-exempt organizations. Most 457k plans have tax benefits similar to those in the 401k retirement plans that many private employers offer.
My current employer currently provides a 2-1 match for every dollar I contribute up to 3% of my salary.  Needless to say, I am contributing 3% of my salary so I can get the entire employer match.  So in addition to my pension plan, 4 1/2% of my salary is going to my 457k.  Since I've been contributing to my 457k for the entire 13 years I've been a local government employee, I now have approximately $105,000 in my account.  And if I can successful double my money every 7 years, which I believe is the common goal for most investors, I am hoping to accumulate approximately $400,000 in my 457k account by the time I am 55 years old.

However, if I decide to retire before I turn 55, I may not have as much money in my 457k account.  I'm just hoping that because similar to a 401k, you must be at least 59 1/2 to withdraw from a 457k, my money will still continue to grow until I turn 59 1/2.  In fact, depending my retirement needs, and how my other investments are doing, I may decide not to touch this money until the I'm required to take mandatory distributions at the age of 70 1/2.  If I'm lucky enough to make this happen, and assuming the money continues to double every 7 years, this account could be at or near $1.6 million.         

Lesson learned: Compound interest is a beautiful thing...the earlier you start saving and investing, the faster you'll see your money grow.

Roth IRA
Last but certainly not least, both my wife and I have Roth IRA accounts Together we have approximately $50K in our Roth IRA accounts.  I have about $18K and my wife has about $32K.  You are probably wondering how she has so much more given that she is 10 years younger than I am.  It's because when she left her last job and became a full-time mom to our kids, we rolled her 401K into a Roth IRA.  Although we did have to pay taxes on the roll-over, we know in the long run, we will save so much more in taxes since she still has almost 30 years before she turns 59 1/2.  By the time we are ready to tap into her Roth IRA, hopefully it will have doubled several times over.  And the best part, all of it will be ours to use completely tax free
Although we continue to contribute a little each month to both of our IRA accounts, unfortunately, our currently budget does not allow us to contribute the maximum amount. Our goal, however, is to eventually maximize our Roth IRA contributions once my wife goes back to work.  In addition to the tax exempt withdrawals, we like Roth IRAs because of the possibility to withdraw money prior to 59 1/2.  And since there is a very real possibility that I will retire at 55 (or not sooner), it is definitely an added plus to have that option as an extra precautionary measure in case for some reason we need it.
Lesson Learned: Taxes don't generally decrease; in fact, they will likely continue to increase. I'd much rather pay today's tax rates so I won't have to pay tomorrows tax rates!

Dividend Growth Stocks
Although I covered our dividend growth stocks portfolio in Part 2 - Investments, I wanted to bring it up real quickly here because the reality is that it's also part of our retirement plan.  In retirement, we are hoping to use the distribution from our dividend stocks portfolio to provide us with approximately 15-20% of our retirement income.  For this reason, we have made it our main goal to build a solid dividend portfolio with only companies who have solid track records of consistently paying and increasing dividends for decades.  Our current portfolio, although it finally consists of only dividend paying stocks, is still not entirely of Dividend Aristocrats.  Nevertheless, we have both agreed that it is direction we want to be as we move closer to retirement.
Our thinking is that if we could find a way to live solely off my pension and the income from our dividend growth stocks, this would allow us to delay tapping into the my 457k, both of our Roth IRAs, and my wife's social security benefits.  By doing that, we could allow these accounts to continue to grow and hopefully provide future generations a fairly decent inheritance.  And as Dave Ramsey would say, "completely change our family tree."

Lesson learned:  The more income streams you create, the more flexibility and options you have with money.