If not, here’s a quick version.  Let’s say you have a savings account that earns 1% per month.  (Don’t laugh too hard.  My dad had one that paid this rate at one point.)  Let’s say also that you put in $1,000 at the start of 2012, and never add anything more.  According to the Rule of 72, after about 72 months, I’ll have about $2,000.  In another 72 months, I’ll have $4,000.  In another 72, $8,000.  The amount in the account doubles each 72 months it sits there.  This happens because the amount that I’m basing the 1% earnings on increases a little bit each month, until some day, it gets really fun.  Almost like magic.

The amount of magic depends on the amount of the rate

Are you still laughing about when I proposed an account that earns 1% per month?  I wouldn’t blame you.  Some of the higher interest rates for checking accounts now are about 1% per year.  About all we can say about these kinds of rates is that they’re better than nothing.  (If you’re earning nothing on your money, try to earn something on it.)

At rates of 1% per year (or less) the magic still happens, but the magic isn’t exactly making-a-jet-plane-disappear magic.  The doubling would still happen, but it would be almost the end of the century before that happened.  And to boot, your $2,000 might only barely buy a nice suit.  Break out the champagne!

Banks are scared to lend now.  They’re reeling from the shakeout in 2008.  As a result, interest rates on savings accounts and checking accounts goes down as well.  And the fees get tacked on.  It’s just not a magical time to be a saver.

What’s the key to building wealth, then, if it’s not through saving money?

Putting money in the bank is low-risk, but it’s also low-reward.  Now, it’s extremely low-reward.

The key, I think, is to take calculated risks, and work to produce something.  Find a need, and serve customers to fill the need.  If you can deliver on time for the price agreed on, that’s a lot more than many businesses do.

This isn’t “stick money in a bank account and it grows while you watch Twilight” easy, but that’s what the times demand.  There’s barely any reward for doing it this way today.

Maybe the magic will come back into compounding, but until then, make your own magic.

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Today’s lesson talked about racking up lots of credit card debt and expecting others to take care of you. (Oh wait … sorry … that was the pamphlet I saw for FROWN Ministries.) But seriously today’s lesson discussed saving and investing, compound interest … all of that good stuff.

One of the key ideas associated with compound interest is that it’s magic. I guess most people that talk about compound interest assume that the people listening think that math is boring, and that’s probably true. But the key ingredient to make the magic work is time. Decades worth of time, usually.

The lesson not only drove home that regular investment a good thing, but at the time it also seemed to suggest that wanting to do it any way but slowly and methodically was not a good thing. Enter Proverbs 28:20:

A faithful man will be richly blessed, but one eager to get rich will not go unpunished. (Proverbs 28:20, NIV)

This statement concerned me a little because (a) I do often think about different ways to make money that are faster than compounding interest, and (b) I want to enjoy the fruits before they have to be put through a food processor and spoon-fed to me. I’m reading through MJ DeMarco’s The Millionaire Fastlane and he refers to this slow, systematic retirement plan as, well, the “slow lane.” Does the desire to kick things into high gear make me “eager to get rich” as stated in Proverbs 28:20?

It’s a matter of balance and honesty

John Gill, an English theologian in the late-17th, early 18th-century, had this to say about the phrase:

… but he that maketh haste to be rich shall not be innocent; he that is over anxious, and immoderately desirous of being rich, and pursues every method of obtaining his desires, with all his might and main; that labours night and day for it; though he takes no criminal nor unlawful methods, properly so called, nor does he do anything injurious to others, yet he is not innocent; that too much anxiety in him is criminal; nor is he free from covetousness; and if he uses any unjust and unlawful means to acquire wealth, and resolves to be rich, right or wrong … he shall not be innocent, neither before God nor men ….  (reference)

There are many godly rich men mentioned in the Bible: Abraham, Isaac, Jacob, David, Solomon, Barnabus, and Job, to name a few. So, it’s not ungodly to be rich. Nor is it ungodly to become rich at a young age, if the person’s heart is in the right place. Being hell-bent on becoming rich, though, is the problem, and this is the notion that is connected with the word “eager.” It’s not the desire to be smart about making money to bring it in faster that’s bad. It’s both the manner in which it’s done, and also whether more important things are sacrificed in the process.

So the takeaway for me is that wanting to get rich on an accelerated schedule isn’t necessarily “being eager to get rich,” but it can be, and I have to ask continually for wisdom as to whether I’m following the good path or one of the many bad ones.

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Greg McFarlane, co-author of Control Your Cash: Making Money Make Sense and writer on the parent blog, calls a large swath of bloggers to the mat in a ProBlogger guest post about the effort that’s required to put up read-worthy content.

He’s a choosy reader, and presumably a very busy guy who doesn’t appreciate having his time wasted, which is fine.  No qualms about that.  He likes writing that’s to the point, and I suppose I do too.  But picking on career moms who blog about their job and kids borders on disenfranchisement:

There are too many homogenous bloggers living lives similar to yours and expressing like opinions for your blog to be noteworthy. Oh, you’re a mother who’s juggling child-rearing with holding a job? Congratulations. No one in the history of the universe ever had to sit in an office all day and come home to her kids before you did. Tell us more about how exhausted you are every evening, and what hilariously precocious thing your 4-year-old said that put a smile on your face and made it all worthwhile.

I guess he’s not a fan of mommy blogs, is he?  (For the record, I don’t read them much myself either, but that ultimately doesn’t matter.)  But I doubt that mommy bloggers really care about what Mr. McFarlane thinks of their subject matter.  They may even have some words for him that they wouldn’t repeat in front of their children.  It’s also a little odd that in the very next breath he talks about the benefits of “bringing something unique, whatever that might be.”  How can a mom blogging about her job and kids not be unique?  Lastly, it’s a cheap trick to trivialize something with which one has no direct experience.  If he was once a career mom, then, well, he’s got me, and I’ll gladly eat my words.

If you’re blogging about such matters (or other similar common-ground matters) that’s awesome.  Keep it up!  Keep in the habit of writing.  The more you do, the easier it gets, and if you’re actively learning about your writing and your style, the better you’ll get.  Here are several reasons why starting up (and continuing) this kind of blog is a good thing:

• There are still a lot of people who won’t start one at all. Just starting one up puts you in the minority.  The technical barriers to entry are getting lower every day, but psychological barriers aren’t keeping pace.  Getting a blog up and running on any topic at all is a significant accomplishment.
• It’s your own content, not Facebook’s. Starting up a blog indicates (or should) that you have somewhat of an idea how the web works and how you keep control (and profit) from your work.  (You didn’t know that?  Well, it does!)  This isn’t to say that if you only feel comfortable updating Facebook with your kids’ antics that this is a bad thing; not everyone wants to be public about everything in their lives.  But if you realize that Facebook is slicing and dicing your personal information and the content of your status updates, and selling them in ways unimaginable to the highest bidder, then you’re wise in trying to keep some of that revenue for yourself!
• It doesn’t have to be the last topic you blog on. And starting up a personal blog will make the next one — should there be a next one — all that much easier, because you’ll have one under your belt as well as all of the headaches that go along with maintaining a blog.  Plus, there’s little easier than writing about something that you already know intimately.
• Despite naysayers, you may just end up with an audience anyway! Sure, there’s a lot of competition.  Sure, lots of other people are writing about many of the same topics that you are.  But, in doing so, a bit of you comes out in the blog.  You’ll connect with someone, possibly many someones.  What’s uninteresting to one group of people will be interesting to others.
• Most importantly, it’s empowering. A career mom is already empowered; I’m quite sure of that.  Getting yet another avenue of expertise and potential income?  Even better.  It’s straightforward disaster preparedness: if something happens to your spouse, sure, it will hurt financially, but not nearly as much as if starting from ground zero.

Comments?  Poison darts?

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Thanks for everyone’s input. Very interesting. I think I’ll just give it a try….Being in graduate school, my time is only worth about $1 per hour anyway! haha

Now again: I know exactly where Jacob is coming from.  Even with a research stipend, things are tight, and with the long hours a grad student puts in, $1 per hour doesn’t seem all that far off.  We tolerate the $1/hour (or whatever) because we have faith that we’re padding our earning power later.  That turned out to be the case for me, and I hope it does for Jacob.

Just don’t let it go to your head

It’s when that $1/hour mentality bleeds over into the rest of life, and affects monetary and time decisions for a long time, that it becomes a problem.  It manifests itself in a couple of ways: deliberately taking low-paying jobs or spending an inordinate amount of time to save a few bucks.  If Your Money or Your Life drives any point home, it’s that we only have a finite number of hours in our life to do our work.  This isn’t to say that money is everything, because it isn’t. But we should be wise in how we work so that we’re not spending our life working for less than minimum wage.

What are you saying?  Is a buck an hour too much?!

Amazon’s Mechanical Turk impresses me by how little someone can earn by staying so busy.  Sign up and you too can earn two cents for locating contact information on a web page and pasting the appropriate information in a form.  This would probably take me a couple of minutes.  Multiply that by 30 and I’d earn a whopping $0.60 for an hour’s work.  Some jobs pay better, but the best-paying job on that site was only worth about $20 — and that was to fill out a credit score form!  The others worth more than $10 were transcription jobs:  audio to text.  Some of the audio for these jobs was over an hour long.

Now, there are a couple of tricks to making low-paying jobs worth doing:

• Do the jobs, but for a higher price. My pastor is a meticulous painter.  He does exceptional work.  Whereas a hungry painter would charge $1,200 to $1,500, my pastor wouldn’t take less than $2,000 for the same job.  Why?  He knows he’s good, and he knows what will be worth his time.  He’s busy enough with his “day job” that he doesn’t have to compete with other painters, but he’ll make time for the right price (an extra $500 to $800).
• Do the job, but make sure there’s a back-end — meaning back-end income.  You can do a “get paid to read e-mail program” but make sure you also tell people about it in such a way that you can get extra for it.  The direct income from actually reading the e-mails might be nothing, but indirect referral income could end up being ongoing, passive income.  I haven’t talked about MyPoints for quite a while, but I still get sign-up bounties from the articles I’ve written on it.

There can be such a thing as too frugal

Spending five hours to save five dollars is, in essence, working for $1 an hour.  If you’re able to make $50 per hour, it costs you $250 to spend those five hours to save a measly $5.

Jeff Yeager does this, but he embraces it and turns it into a lucrative living in other ways.  His cheapskatedness doesn’t really count here.  What does count here is the following:

• Sometimes it is more cost-effective to pay someone instead of trying to do it yourself. This involves knowing your limitations and knowing when you need to cut bait instead of fish.  I’ve gotten into this situation more than once myself.
• Sometimes other things are just more important than saving a few bucks. Sacrificing time with family, sacrificing morals, sacrificing peace of mind, sacrificing sleep — the list could go on and on.
• Sometimes it’s necessary to spend money to make money. This is one area I haven’t exercised myself enough yet, but trying to do everything can limit side business growth, and overall income potential.  Instead of looking for ways to save $5, look for ways to make $100, even if it costs $75 to do that.

Financial stability and comfort doesn’t come at $1 per hour. Please don’t settle for it!

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If you’re stashing your cash in a traditional savings account earning next to nothing, you’re wasting it. Make sure you’re getting the best return on your money. Search for the highest yields on CDs and money-market savings accounts. And consider using a free online checking account that pays interest, such as ones offered by Everbank and ING Direct.

Now, there isn’t a thing wrong with these banks.  I’ve used ING Direct for years, and I’ve had nothing but good experiences with them. I’ve heard many good reviews of Everbank as well.  I guess over the past few years we’ve had our expectations of “high-interest savings account” lowered a bit.  Both ING Direct and Everbank are quoting rates around 1% APY.

One percent per year. And this is supposed to be an alternative to wallowing in a low-interest account?!  By most measures, this is wallowing in a low-interest account!

Certainly it’s better than earning nothing, but truth be told, it’s not a whole lot better than nothing.

It makes me wonder if the whole idea of passive retirement income is out of reach for most people. How much would someone have to have saved up to have a retirement income of $50,000 per year in investments earning 1%?  Fifty thousand dollars is one percent of $5 million.  And this income is before taxes and the devaluing due to inflation!  Even if the return rose to 5% — say, with some very well-chosen dividend stocks — then this still requires $1 million invested.

Five million dollars is a lot of money, and with average retirement savings not even cracking six figures it’s not an amount of money that most people have at their disposal.  So for most people, there has to be more.  There probably has to be some kind of active income earning going on.  Things like building up a side business in an area that can be done part-time (or even full-time) in the normal retirement years.

This transition is far easier if the business is already chugging away when the traditional retirement age comes.  But this requires planning and consistent effort well before that time occurs.

Are you on top of this?  Are you laughing in the face of low-interest passive investments and taking the bull by the horns?  I hope so.

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And it’s going to stay that way.

This isn’t Prosper’s fault.  It’s mine.  I’ll explain.

I started investing in Prosper.com notes in June of 2006, as an experiment.  This was the year it launched.  After the books are cleared almost 5 years later, I’ve taken worse hits on my money than Prosper, but I’ve also done much, much better.  Here is a summary of my foray into peer-to-peer lending:

• Invested in 53 notes totaling $2,923.56
• Payments from the borrowers on these loans totaled $2,705.28, for a total net loss of 7.5%
• Of the 50 loans, 30 of them (57%) were to borrowers with the highest credit rating (AA)
• Of the 53 loans, 47 of them (89%) were to borrowers with one of the two top credit ratings (A or AA)
• Of the 47 loans to borrowers with ratings of A or AA, 15 of them (almost one-third) were charged off to some degree (meaning I lost money on those loans)

It did take me a little bit by surprise that I lost money on what should be a fairly safe portfolio: nearly nine out of ten of the loans I invested in were to buyers that appeared very creditworthy (A or AA).  The default rate I saw for these loans was several times the estimated default rate for these borrowers (I don’t recall exactly the percentages, but I’m pretty sure both A and AA default rates were estimated to be under 10%).  Of course, there are absolutely no guarantees: default is the risk for the greater reward, which was an above-market interest rate.  But it’s hard to deny that the notes I chose to invest in missed the mark pretty badly.

There could be all kinds of reasons why things went south for me:  the recession in 2008 and the years that followed; lower-than-average judgement on my part (though I did take the time to read all of the listings); lack of real default data at the time I was investing.  No matter.  It was my risk to take, and I took it.

It could be a better environment for lenders now.  Prosper.com has added a secondary market for loans, and has changed the way that lenders invest in borrowers — the rates are now fixed rather than determined by auction.  So maybe I jumped in too early.

If you’re looking to borrow money, it’s a great site for borrowing money.  It’s a fairly clean way to consolidate debt at (possibly) a lower percentage than you might be paying now, and pay that debt off over three years.

There are lots of lenders ready to lend, and if they’ve been with it from the beginning, they’ll love looking over what you need and making a decision based on their own criteria.

I just don’t think I’m cut out to do that anymore, so I’ll get out of the way.

(This post may contain affiliate links.  Read my policy on endorsements here. Also, a big thanks to My Personal Finance Journey for including this post in the Carnival of Personal Finance.)

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I went straight to graduate school after college and was a “poor student” for quite a while: another six years after graduating from college.  I quadrupled my salary when I left to get my first real job.  All of that money!  It was pretty hypnotizing.  I really can’t imagine what I would have done with the money had I come into it in my early twenties.

But some are earning the same starting salary out of college now that I did out of grad school ten years ago.  Inflation has taken its toll, but not a whole lot.  $63k/year is quite a chunk of change.  It’s likely far beyond what that person had earned prior.  So why not enjoy the wealth a little bit?  Certainly a $500/month car payment when it’s within budget isn’t out of line?  It is for a BMW 328i, and it is even used!

“Younger self, this is your older self, and I have something to tell you”

Finances change throughout a person’s life.  The level of responsibility (usually) goes up:  marriage, children, house, college, weddings, and so forth.  It’s easy to see the parts that have passed, but it’s not so easy to comprehend the financial challenges that lie ahead.  What appears to be a wide-open budget that can easily accommodate a $500/month car payment in addition to a hefty gas bill — the 2008 BMW 328i gets only 21 MPG combined, and filling up the tank is getting ouchier every day — won’t be so wide-open after a family and all of its trappings are in the mix.

And that’s the main reason why it’s so important to save like crazy when you’re young and relatively unencumbered with other financial responsibilities. Take it from a husband and father pushing forty: saving is a lot harder with other mouths to feed and other payments to make.

How did you live as a student?  Was is so horrible?  Probably not.  Now there may be student loans to pay off and housing to pay for as well as some basics, but even after all of that, there’s probably a relative fortune left after the end of the month.  Just because it’s there doesn’t mean that it needs to be spent.

The other reason to sock away money now is that the power of compounding and the power of dividends have more time to work.  Starting earlier with a good investment strategy for your excess cash will give you an enormous financial leverage later.  Likewise, starting later will saddle you with an enormous financial handicap.

A cushy job right out of college is the opportunity of a lifetime.  Take advantage of your youth to set yourself up financially!

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“Do You Pay Your Children an Allowance? Stop! You Are Ruining Them.”

That’s a strong opinion. (He has strong opinions on just about everything. He’s also very rich, so I tend to believe him.)  Without giving away everything in the article, he does reference this TED talk by entrepreneur Cameron Herold.  It’s a longish talk but worth listening to.

Mr. Herold states that he was raised to be an entrepreneur, as were his siblings.  His father was an entrepreneur, and trained Mr. Herold to start and execute various small-scale, yet successful businesses.  In doing so, he learned negotiation, spotting opportunity, salesmanship, thinking on his feet, managing employees, and many other skills that successful entrepreneurs have.

Time for the deep end:  No allowance

His argument (and Dr. North’s) are that allowances teach the opposite of entrepreneurship.  It teaches kids to expect a paycheck.  A set amount each week (whether for chores or not) or even a set amount “plus” for doing extra work, mimics the behavior of a salaried employee, not an entrepreneur.  Far better, he says, to have kids look for things around the house to do and negotiate.  This acts as a stepping stone for hustling outside the house, whether it’s a lemonade stand, or selling at a craft show, or something even bigger.  An allowance, they say, robs them of this opportunity.

They have company.  Robert Kiyosaki, author of Rich Dad, Poor Dad, makes the distinction between salaried employee and businessperson loud and clear.  At one point in the story, he had been working for 10 cents an hour (in the 1950s, but this was still a pittance) and then was working for nothing.  This gave him the mental RAM to find other opportunities.  Dr. North makes the point that adults who are salaried (like myself, for the most part) are at a disadvantage trying to teach entrepreneurship to their children, because I’m more like Poor Dad than Rich Dad.

Taking away the fixed payout works for commissioned salespeople as well.  Carl Sewell, car salesman and author of Customers For Life, weans his salespeople off of a salary over the course of three months.  By the beginning of the fourth month, they’re completely on commission, and the best ones do very, very well — probably better than they would have if they had a salary to fall back on.

So, it’s time to throw my daughter in the deep end?

Mr. Herold also makes the point of looking for entrepreneurial traits.  Becoming an entrepreneur requires training, but certain people are predisposed to becoming entrepreneurs.  From my own experience, it’s hard to say how much of an effect my upbringing fashioned my becoming an employee, and how much of that outcome was based on my internal wiring.

If I knew nothing except entrepreneurship growing up, it’s more likely that I’d be completely an entrepreneur now, and I’d have a much different view on training my daughter in the financial ways of the world than I do now.  As it is, I’m leading her more toward “getting a job” rather than “becoming an entrepreneur” by my actions: I have a job myself, and I’m giving her an allowance.  At the very least, though, if she wants to be able to do some of what she wants as a teenager, she’ll need to be earning her own money to a large extent.  Whether that’s working part-time somewhere, or whether it’s starting up a business, that remains to be demonstrated.  It’s as much of a mistake to hoist entrepreneurship on someone who would be a great employee than it is to discourage a budding entrepreneur by not opening the right doors for them.

I don’t think she “gets entrepreneurship” just yet, but I hope she does.  She’ll be better for it in the long run.  For now, talking to her about money and letting her spend, save, and give away some of it herself is needed.

(Thanks to Fiscal Fizzle for including this post in the Carnival of Personal Finance!)

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Our mortgage is good, and the balance is going down like gangbusters with the 15-year.  With the lump sum we threw at it during the refinance, and the small amount extra we’re paying toward principal each month, we’ll pay it off completely by 2019 if we do nothing different.

Right now, the rent income, minus property management fees, taxes, insurance, etc., makes the cash flow for the property slightly negative, but considering that now over two-thirds of the mortgage payments are going toward principal — that is, equity in the property — I’m not stressing that much.  (Actually, truth be told, the fact that I have great tenants is the reason that I’m not stressing that much!)

This home went from a consumer good to a big investment asset

If you’ve heard something to the effect that “your home is your biggest investment” then (a) you’re not alone, (b) I have too, and (c) it’s BS.  If you’re living in said home, it’s a consumer good. It’s a roof over your head with four walls, wires and plumbing, glass, and some decorations. It’s hopefully a durable consumer good, but it’s nothing but expenses.  It doesn’t pay dividends.  It doesn’t spin off a shed when the garage decides to make an IPO.  Put another way, if it’s not producing income and serving only as a place to hang your hat, it’s not really an investment asset.

But move out, and bring in a rent-paying tenant, then all of a sudden, golly gosh, that same exact house becomes an investment!  The expenses are still there (and some new ones show up) but there’s income to offset them.  Whether the house is a good investment or a bad investment depends partly on whether the property makes or loses money each month.  Put another way:  Does the property have positive cash flow?

The house became an investment property the day I actively tried to rent the property.  We had already moved out into another home, and had decided to make a try at “the real estate rental thing” with our old house.  The lender for our new mortgage gladly let us keep the old one, so off we went.  We’ve kept the course with both mortgages — the mortgage on our new primary residence, and the old one as it was — for almost a year now.

Has a bad debt become a good debt?

“Good debt” and “bad debt” are commonly used to differentiate income-enhancing use with consumption-driven use.  In many ways, mortgage debt on a primary residence is “bad debt” and is best reduced on an accelerated scale in much the same way that credit card debt should be paid down.  If it’s afforable, a 15-year mortgage is preferable to a 30-year mortgage because the total interest paid is far less with the 15-year mortgage.  That was in fact why we decided to refinance the mortgage on our old house (which we were living in at the time).  We wanted to pay it off faster.

But that pay-it-off-faster mentality is working against the cash flow of the property now that it’s a rental!  Earlier in the post I mentioned that the cash flow was slightly negative for this property.  Again, we’re not stressed out too much about this, but now we’re considering going back the other direction: refinance this mortgage to a 30-year mortgage.  After the costs of refinancing, this could add $300-$400 per month positive cash flow to the rental!  We’d be paying more in interest to the bank, but maintaining the positive cash flow carries as much, or more, weight than paying off the mortgage on the property.  Why?  Because this would let the property be an income-producing asset now rather than in 2019 when the mortgage on the property is paid off.  It would allow the property income itself to build up a cushion for expenses, repairs, etc., rather than us building up and maintaining that cushion out of other areas in our budget.  It would make the property a little more self-sufficient than it was.

Refinance or not, either way would work out.  It just seems like going for the longer-term fixed-rate mortgage and the positive cash flow is the more businesslike way to go.

(Thanks to Fabulously Broke for including this post in the Carnival of Personal Finance!)

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I have thirty-two domains in my Namecheap account.  Some are for my wife’s projects but many are for mine.  I got them probably for the same reason that J. Money got his: I had some idea for a website and used the domain as a first step to committing to the idea, or a mental placeholder, or both.

I haven’t carried out all of those ideas, or even most of them.  The problem is that carrying the domains isn’t free; it costs about $10/year for each one.  Each unimplemented idea costs me $10/year, and cuts into the income for the sites that are producing.

This year, I’ll get these domains to earn their keep, or they’re going away. It gives me a twinge of guilt to renew them each year while they’re in the same state that they were when I registered them.  Someday Real Soon Now has to be This Year.

Getting a domain to pay for itself shouldn’t be that difficult.  Since my web hosting is a fixed cost, and I can still add plenty of domains to the mix, getting the domains in the black means income of only about $1 per month.

I’ll take as many websites with positive cash flow as I can but I need to get them that way first.

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