I was paying for a $39.99 600 minute plan per month.  Except after all the taxes and fees, the real total came out closer to $55 per month.  My statistical usage was between 300-450 minutes.  I had promotional rate, and the next plan down was 300 minutes for $39.99.  There was no benefit in downsizing my plan; it would not save me money, and cost the same with fewer minutes.

I switched to a pay-as-you go plan with T-mobile.  With my statistical usage, I pay $105 after taxes for 1150 minutes (1000 minutes plus 15% bonus minutes when paying $100) every 3 months.  With my monthly plan, I was paying approximately $165 every 3 months with a lot of unused minutes.

I used exactly what I needed.

Did you drop your monthly plan for a prepaid? How did it work for you? If you have a monthly plan, would you consider prepaid? Why or why not?

 

Money is often cited as the leading cause of divorce in the western world.  When I found this article Money isn’t the culprit in most divorces, it made me think, is this true?

Money does not wreck relationships.  Lack of communication and compromise does.  Money just happens to be the catalyst in which poor communication and compromise occurs.

When dating evolves to a point where you are considering ‘the next level’ whether moving in together or marriage, it’s time to come clean about your debts and priorities.  Who pays for the dinner and movies is inadequate information about financial compatibility.

At the same time, until you both are ready to have a serious relationship, the state of your finances is nobody’s business but your own.  Confessing about your bankruptcy in the first couple of months of dating may put forth uncomfortable questions about whether you are with a person to be bailed out. Do what you feel comfortable with.

Show your strength and independence.  If you need to reveal an embarrassing and unpleasant topic, admit your mistake, and say you are taking charge of it.  Keep your finances separate until you have agreed to combine finances in marriage.  Do not accept money gifts or loans from your partner.  Thank them, but let them know your debts before you come into marriage is your problem.  Have them settled before you commit so it does not become a source of contention or liability on your future.  Your partner will love and respect you for it.  If they become angry or insistent about it – be wary.  They may be trying to control you through money.

If your partner is the one with money troubles, do not give them money gifts or loans.  Do not think you can try to solve their money problems.  If things don’t work out, you are going to feel like a fool.  If they have a serious debt problem, let them know you have concerns about it and it may jeopardize any long term plans you may have together.  Be wary if they try to make you feel guilty about not helping them.  You should feel empathy, but not obligated.

If they have acknowledged personal responsibility, then your emotional support will be appreciated. Congratulate them on their achievements!

You can talk to them about it, and give them passive advice, but know that ultimately, you cannot change the other person.  You can only change yourself.  If they do not want to change, lash out at you, and refuse to have an honest discussion about it, weigh your options carefully.  30-40-50 years of union with someone is a long time.  5 years with someone who wrecks your credit can impact your life in direct (bankruptcy) or indirect (losing compound interest savings) ways for at least as long.   If you have children, you will never be entirely separated from your partner, even if you split.  Memories of a painful separation lasts a lifetime.

If your partner comes to you with a criticism, thank them, as uncomfortable as it is.  Reward them for being open and honest.  Before becoming defensive, take a moment and be self reflective.  Does my partner have a point?  Do I have a spending problem?  It also swings the other way, too.  Am I cheapskate?  Am I an ungenerous penny pincher?  Agree with the person that you can see how they would feel that way.  You may also bring up any concerns you have.  Open discussion means there is your side too.

If they say these things to you lashing out in anger, walk away and talk later.  Just as you reward someone for honest communication, refuse to reward bad behavior.  Perhaps they have a point, but they owe you a calm and reasonable discussion about it.

Learn how to negotiate and compromise.  If your partner says you spend too much money on shoes, say, ‘I see your point.  I need new shoes for work, where a neat clean image is important.  If I buy a new pair of shoes, I will donate or sell an old pair that I have’.  Then follow through with it.  If you don’t, you will lose respect.  Lose enough respect, and it’s over.  Money didn’t cause that – you did.

If you are buying things compulsively and you don’t really need them, then you don’t have a strong negotiation point.  Concede.

Take a long, deep look in the mirror.  Let’s say you get married or move in together.  Your partner had lots of money in savings, good credit and no debts before they met you.  You have creditors calling you and couldn’t get a credit card even during a period of lax credit checks.  Suddenly, both of you are having trouble making ends meet.  Your rent check bounces.  Who is most likely to have influenced this situation?

Closing Thoughts

Talking about your past is uncomfortable.  There’s always something embarrassing we wish we could never reveal.  However, when you are talking about a committed relationship, you need to put everything on the table, especially the uncomfortable topics.  Despite the openness and honesty, there is a chance your partner will choose to not accept it.  It is painful, but it is their right.  You cannot try to choose for another person by keeping secrets.  You can only choose what’s right for you.  Sometimes, you might be the one who decides to walk away.

What’s your take?  Why do most divorcing couples list ‘money’ as the reason?  Do they mean something else?  Why are people willing to disclose their credit for a car loan, but are terrified of sharing it with someone they want a relationship with?

It’s no surprise the banking industry supports the opt-out proposal while consumer groups want the rule that requires customers to opt-in. The American Bankers Association says not only is automatic enrollment better for people; it’s what people want. “Customers have demonstrated this is their overwhelming preference” says the ABA’s Feddis.

If that were true, then why aren’t we given a choice for opt-in or opt-out?  If this is about consumer preference, then let the consumer decide.  I agree with the bottom line – when making an electronic transaction, the bank already knows if you have enough to process or decline.

Then there was this whopper:

Many banks automatically process daily debits from largest to smallest. The banks say this is another customer service. Because the bigger amount is more likely to be a mortgage, rent or other important payment, they think customers would want those to go through and have smaller debits bounce.

Since many banks are not bouncing any transactions at all, this argument is completely disingenuous.  They reorder from highest to lowest, then charge a fee on each overdraft.  This might be true if customers could opt out.

When I was banking with Washington Mutual, I linked my checking account to my savings account.  When I made an overdraft, they withdrew the money from my savings, but still charged me a $35 fee.  I did not expect this.  I moved my accounts to a credit union.  There it works like I expect – if there was money in savings to cover the difference, there’s no fee.  I guess I opted out by changing banks.

While I have since reorganized my finances, there have been a couple of occasions when a shared account has gone slightly over due to spending more on groceries/dining out than we expected.  The credit union withdraws any excess from savings, so there isn’t a problem.  They HAVE declined transactions for us as well, in which case we used a different card.  Again, no problem.

Sure, an overdraft on a $3 coffee is irresponsible.  However, my take is a $3 overdraft shouldn’t suddenly put you in debt for $38.  If this kid wandered over to the comic book store after the coffee, he could have been looking at an $80 fee.  Because the bank processed his coffee transaction, he likely didn’t know he didn’t have the money until later.  Yes, he should take better care of his finances.  In order to do that, I’m sure he would choose ‘opt-out’.

I’m certain the number of opt-outs will be very disappointing to the banks.

I have my bank accounts setup with an Account Payable and Account Receivable, which is similar to how an accountant sets up a business account, but personalized for me (since this is personal finance).

Rent, Utilities and Food

I have direct deposit setup through my employer.  A fixed portion of my check gets sent to a “Bills” checking account that I share with my boyfriend.  We pay any mutual bills with that account – rent, utilities, groceries, dining out, etc.

The rest of my check gets sent to my Checking/Debit account, then dispersed through various mechanisms.

Here is a snapshot of my ING account.

(These picture have been formatted to fit your screen and modified to protect the innocent and guilty.)

Account Receivable and Account Payable

I have a main Checking/Debit account and several sub savings accounts.  Account Receivable and Account Payable are like what you would see on a business account.  Account Receivable is the account where I link any sources of income (except my regular paycheck, which we will talk about in a minute.)  This includes payments from Amazon, Ebay, Adsense, PayPal, Lending Club, or anywhere else where I generate extra income.

My regular check is deposited into my Checking/Debit account.  The reason for this is because savings accounts at ING are treated like a money market fund with limits of 6 withdrawals a month.  My regular paycheck disperses among many accounts, so it’s best to deposit there, then send the amounts necessary to various accounts through automated withdrawals.

Accounts Payable is where I link recurring bills.  My car insurance, health insurance, or credit card payments.  The limit of 6 withdrawals a month is great checkpoint here.  If I withdraw more than that, then that’s a clue I have too many bills, and it’s time to streamline.

The snapshot here shows a sample of my bills from Account Payable.  A regular bi-weekly deposit is made.  Since the majority of my bills are regular, fixed value recurring bills, I know exactly how much I need to deposit automatically.  If I have a credit card payment due, I manually deposit the amount I need.  I keep a buffer in the account as well to allow for minor calculation errors. 

When I receive my credit card bill, I immediately go to my card’s bill payment center and schedule a withdrawal a couple of days before my due date.  This allows me a couple of days to change payment amounts if something comes up.  It also helps to ensure the credit card company doesn’t play funny games with my deposit.  I have a couple of days to catch if they didn’t withdraw/credit payment when they were supposed to.  I then also schedule a one time payment from my paycheck account to deposit money to cover the credit card bill.

Retirement Accounts

My 401K contribution is automatically withdrawn before I get my check.  My Health Savings Account (HSA) withdraws automatically from Accounts Payable.

Unfortunately, I can’t schedule an automatic withdrawal to my IRA account.  I currently have it setup with ING, and plan to move it to a Vanguard account once my balance reaches $10,000, which will be next year.

Savings Goals

The remainder of my money gets divvied  up between my various savings goals.  I am keeping most of this at SmartyPig since the interest rate is currently 3.25% and ING is at 1.50%.  (Ouch ouch ouch.)  However, these are my short term goals that must be in liquid cash.  Saving for a new car, 6 months insurance premium, vacation to the Bahamas, new computer equipment etc.

The rest of the money is put into a small “spending cash” account.  If I need to buy new clothes for work, or if I just plain want something, that money is there for me to use.

Every Penny Accounted For

I try to run my personal “books” like an accountant.  Every dollar has to be allocated and put somewhere.  Even if that somewhere is my “wallet account” from an ATM withdrawal.  It is also highly automated.  I review often to make sure everything is running smoothly.  Honestly, it was only “hard work” getting my inflow/outflow setup.  Now it’s pretty effortless, and I just review and maintain to make sure it’s running the way I expect.

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 to learn from your experience.

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.

Read the full Review of Ramit Sethi’s Book: I Will Teach You to be Rich.

Update 3/23/2009: Corrected spreadsheet formula in C row.
Update 3/30/2009: Added link for book review.

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.
Update 3/30/2009: Added link for book review.

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:

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.

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.

1. 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.
2. 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.
3. 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.

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 don’t know how they are checking income levels and net worth.

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 $25 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

Of 1,687.28. Woohoo! I have not yet paid off the credit card because I need to have a savings account for the unexpected. I have a dentist appointment coming up, and I don’t have dental insurance. My best friend is going in for a root canal, and it’s expensive even WITH dental insurance. So I’m very worried. I’m hoping the dentist will just scold me for not seeing a dentist in a long time, and give me a cleaning.

I am also traveling to the UK over the holidays to meet my boyfriend’s parents. The US exchange rate is still pretty icky, so I need a few dollars in the pocket. However, I feel great that I could pay that sucker off any time I am ready now. Hurray!