Sunday, June 23, 2013

Lending Club update

I think this is my first official Lending Club update. Here's where I stand:

Don't be alarmed by the -57% net annualized return (NAR). When I started with Lending Club I purchased 8 defaulted notes on the secondary market for pennies on the dollar. I think I spent around $22 in all. Since then, all have been charged off. That's what I get for being trigger happy at new opportunities. I bought around $300 worth of debt at 90-95% discounts, when in reality the discount needed to be 98%+. This is a good lesson, which I take as: don't invest in things you don't (fully) understand. I should mention that at the beginning I was looking at over -90% NAR, and that has crept up over the past few months as interest has rolled in.

I've made $31.84 so far in interest. I don't have many notes — only 64 so far — but that's enough that every day or two I have another few dollars in my account.

My investment strategy is as follows:

I transfer cash into my account when I decide it's time to invest. This is usually in amounts of $100 to $500. I'm taking things slow while I'm liquidity-constrained in the early days of building my stash. Most recently, $300 cleared on June 20th, and I've been working to get it fully invested. (That explains the $167.59 in available cash and $175 in in-funding notes.)

When I have cash to invest, I need to choose which notes to fund. Since I don't have much cash I can afford to be relatively picky. The filters I use are: 36-month term, and home ownership of "Mortgage" or "Own". I use home ownership as a proxy for lifestyle stability though I admit this is a bit of a stretch.

I only fund notes from people who have answered a few questions, and I have to like the answers. Not many people ask questions, and notes get funded quickly nowadays, so I have two strategies.

My first strategy is to look at notes that will be funded soon. I sort by "% Funded" (so soon-to-be-fully-funded notes are at the top) and look at each loan until I find answered questions. If I get lucky and find someone who has answered some questions, I see if their answers sound thoughtful and I fund the loan.

My second strategy is to ask my own questions. For this I sort by "% Funded" again, but in the other direction (so the loans at the top are far away from being fully funded). Then I go through each and ask a bunch of questions — they're in a list with a radio selector, and you have to submit each separately. My personal favorite is "Please explain the reason why you carry a large revolving credit balance." I often use the questions asking for a detailed breakdown of monthly expenses, credit card payments per month, and what loans they will pay off.

I usually have the patience to go through one or two pages of notes at a time (the default is 15 loans per page). After firing off questions, it's time to play the waiting game. Lending Club emails me when questions are answered. Then I read through the answers and decide if I want to fund the loan.

I have had one loan that became late. Since then the borrower has paid the loan so that it's current. I'm very happy with this turn of events. Also of note, my very first payment on a note was for more than the minimum — good for that guy!

I've really enjoyed reading about what people want to do with their loans. Many of them are for refinancing credit card and other high-interest debt. Sometimes they have names like "paying off credit cards" or even "Final Credit Card!!", which makes me feel good.

I've been very happy with Lending Club so far. I especially like that, now that I've been doing it for more than a month and I have a few dozen notes, I can see compounding happen on a daily basis. This is how wealth is built: one day at a time.

Sunday, June 16, 2013

Goal: six figures invested

I've been kind of antsy since I paid off my student loans in February. During the 14 months of my aggressive debt payoff, I knew exactly where all of my money should be going. This hasn't been true over the past 4 months. I've still been saving pretty aggressively, investing in Lending Club, and otherwise trying to keep out of trouble. But without a firm goal in mind it's easier to spend money freely.

I make the best decisions when the right two choices are juxtaposed against each other. Here's an example: should I buy this game on Steam called Prison Architect? It looks fun. At $29.99 I can definitely afford it. Without a long-term financial goal (or a budget), I'd frame the choice as: do I buy this computer game, or do I not buy it?

Now imagine I have an investing goal. I want to have a combined portfolio of $100k+ as soon as possible. Then my decision gets framed as: do I buy this computer game, or do I want to be $30 closer to my goal? It's not that buying things is bad or the wrong decision. It's that you need to know your priorities before you can make a good decision.

I've wanted a new financial goal for a while. I shied away from a specific number at first because anything less than enough money to be financially independent is going to be arbitrary. But now, months after I paid off my student loans, arbitrariness seems a small price to pay for a specific financial goal. I've read that the first $100,000 is hardest, and that seems to ring true, so that will be my goal. Also I got a little envious of Dividend Mantra when he crossed the $100k mark in March.

I haven't decided on a timeline yet, and I haven't nailed down the details (actually that's what this blog post is for). Let's lay it out.

Goal: To have $100,000 or more in income-producing assets

"Income-producing assets" means my car and my house don't count. I'm not going to count money in savings or checking accounts either, nor cash in my brokerage account, nor my HSA. I am going to count my I-bonds, my taxable brokerage account, my 401k, and Lending Club.

Here are the totals so far:

  • 401k - $22,760.80
  • Lending Club - $1,564.30
  • Schwab - $1,492.01
  • I-bonds - $400.00
  • Total - $26,217.11
Not too bad. Most of my stash is my 401k, built with three years of the minimum contributions I needed to get the full employer match.

Of note, I turned off my automatic $500/mo contribution to Lending Club. I'm going to be transferring money manually from now on. The cash takes almost a week to transfer, and I felt uneasy about having so much money automatically go into limbo each month. I still have $200/mo automatically buying I-bonds; the bonds show up in my account the same day that the ACH transfer happens, so that's pretty cool.

I'm kind of low on cash. Last month I lent $5000 to a family member who was having an issue with cash flow. She just got her commission check, so I'll probably have my money back by next weekend. When that comes in I'm going to spend most of it paying down my 0% credit cards. I want to buff up my credit score one last time, so we can get a Home Equity Line of Credit (HELOC) as a joint emergency fund / means of financing large home improvement purchases. Beyond that, I can't wait to buy some more notes on Lending Club.

Thursday, June 6, 2013

An excuse to bike

I finally biked to work this year. And it was great.

My first time was last Tuesday, the day after Memorial Day. My strategy was "don't think about it, just do it" which was effective. I'm prone to over-thinking, which is my most common cause of under-acting. I would normally worry about finding the bike pump, inflating the tires, laying out my bike clothes and my work clothes, cleaning out my messenger bag, and getting ready that morning. That anxiety is what kept me from biking through March and April. But the week before Memorial Day was my vacation, and I returned refreshed and with a clear head.

I had forgotten how easy it is. Last year I built the biking habit so that when I started again this year it felt like second nature. I'm making a conscious effort to wake up earlier and take my time while biking — what's the rush? after all — and that has reduced my stress level. Slow down and smell the roses, you know? When the weather is nice (or even too hot) it's a significantly more enjoyable experience than driving.

I biked twice the week of Memorial Day, and three times so far this week. My game plan going forward is basically "fair-weather biking": I'll plan on biking if it's not forecasted to rain or thunderstorm. No reason to overdose on badassity too soon; no reason to give myself an excuse to interrupt my biking habit.

I want to take some time to talk about excuses. I've made up a lot of excuses not to bike over the past year: it's raining, I can't find the bike pump, the seat is too low even on its highest setting, it's too cold, it's too hot, I'm tired, I'm late for work, I want to be early for work... I'm sure I could keep going. These reasons are incidental.

An excuse is just an incidental reason. Armed with this fact, I played a mind game on myself on the first day I biked to work. I found an excuse to bike (actually a few of them):
  • I have to bike because my car is overdue for maintenance
  • I don't want to drive because I had to park the next street over because they're paving the road in front of my house, and I don't feel like walking
  • I have to bike because I have to get back in shape
All of these are true. None of them are the underlying reason why I biked to work. I biked because I decided I was going to and then I followed through. Armed with these excuses, it was easier to keep myself from backing down. This is precisely the opposite process of our brains using excuses to keep us from doing the things we know we should be doing.

Excuses have a bad connotation, but they're just incidental reasons. I'm going to try finding excuses to do more things I've been putting off. For example, I have to make a vet appointment for my cat because otherwise she'll stop loving me. And I had to write this blog post because otherwise my adoring readers would forget all about me and I'd die alone and abandoned. See, excuses don't even have to be feasible. They just have to spur you to action.