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.

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.

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.

Finally, a REAL emergency fund: Series I savings bonds

I'm incredibly, overly excited about being the proud owner of my very first I Bond. I Bonds are probably my favorite financial instrument. I'm going to use them as the vast majority of my emergency fund, and now I'm going to tell you all about it.

I haven't had a proper emergency fund in years. When I started aggressively paying down my student loan debt in December 2011, I threw all the cash I had at my loans. Before that I don't recall having an explicit emergency fund, just a few thousand dollars in savings, and probably less than that once we bought our house. I've felt bad about it, and I've written about other things that sort of act like an emergency fund without being one, like debt paydown and lines of credit.

But a line of credit isn't a real emergency fund. Neither is a credit card, or relying on a wealthy relative. And everyone needs an emergency fund.

I have a savings account with $1200.66 in it. I want its balance to stay right at $2000. (I'll describe how I calculated this number later on.) Every month I'm transferring $200 into it automatically. But that savings account isn't my real emergency fund. It's just my temporary one.

My real emergency fund is all of my I Bonds. Currently that's just one: a $200 bond that I bought at the end of April. Interest accrues on the first of every month, and I Bonds bought in a month count as being bought on the first of the month — so by buying at the month's end and redeeming at the month's beginning, you're basically getting a month of free interest.

I have an automatic I Bond purchase plan for $200 a month. The bond showed up in my Treasury Direct account on the same day the ACH transfer happened, which is pretty awesome since with every transaction I'm familiar with there's a lag of a few days. The interest rate on that one is 1.76%, which is entirely the inflation component. It sure beats 0.75% on my savings account.

I Bonds can't be redeemed until a year after their purchase date, and if you redeem them before 5 years you lose the last three months of interest. Those are basically the only downsides. Oh, and you can only buy $10k per year (per individual). But that's it, everything else is a positive.

Since any I Bond that I purchase now needs to "cook" for a year until I can redeem it, I can't just dump my temporary emergency fund into I Bonds all at once. That explains why I'm buying a small amount of I Bonds every month. This way I'll build up a pipeline of emergency fund money in I Bonds that will become available over time, so instead of having my savings eaten up by inflation I'll have my purchasing power maintained even across long time horizons.

Eventually I'd like to be buying more than $200/mo of I Bonds. Averaging $833.33/mo will put me at the $10k/yr limit. That's a good goal to shoot for but I doubt I'll have enough assets any time soon to feel comfortable committing that much to pure emergency fund savings. Maybe I'll keep my automatic purchases the same and invest one-off amounts to build my I Bond emergency fund faster.

Okay, wait a second: how did I decide that $2000 is enough for an emergency fund?

Good question! The question of "how much money should I have in my emergency fund?" comes up all the time, especially kicking around personal finance circles on the internet. Most recently I saw this topic broached over at Yay, Goodies. I haven't weighed in on it yet, and that ends today.

The traditional advice about emergency funds is one of: 3-6 months of income, 3-6 months of expenses, 6-12 months of income, or 6-12 months of expenses; I honestly forget which is most common, assuming I ever knew. I think that any one of these is good advice... that is, if you have little knowledge of or little interest in personal finance. As a Level One Mustachian or higher, you can do better than this advice.

The optimal size of your emergency fund depends entirely on your circumstances, and you should decide it for yourself. The most important question is: what will it take for you to sleep easily at night? If you need $50k in a savings account to feel comfortable, and you decide that the money you're leaving on the table is worth your peace of mind; then more power to you, you're doing awesome, and don't listen to anyone who tries to tell you otherwise.

I think it's perfectly reasonable to get by with much less of an emergency fund than conventional wisdom suggests. I'm going to briefly describe the methodology I used to decide on my $2000 emergency fund figure. I'll flesh it out in a future post, since this post is long enough already.

First I made a list of catastrophically awful things that could happen. For me this was: unexpected job loss (for both me and my girlfriend), car accident that would total either one of our vehicles, medical emergency (either acute or chronic), destruction of our primary residence, and a medical emergency involving our pets (two dogs and a cat).

For each of these, I came up with a narrative of the worst (or most expensive) thing that could happen. Job loss is an easy example: if you lose your job, you lose your income. If my car were totaled (maybe if a tree falls on it), I'd have an outstanding car loan, and I'd need an alternate form of transportation.

Then, flesh out the scenario with how you would adapt. If I lost my job, we would cut our expenses as much as possible. Since we have a budget, I can see that trimming $300-400 per month would be easy and automatic (mostly ongoing home improvements and furnishings). Further cuts would probably be possible. Since my girlfriend also works, we would be burning through savings at probably $200-400 per month.

Make a table of these outcomes. I chose to have two columns which I labeled "risky" and "very safe", and came up with dollar figures for each scenario. "Risky" means "what is the minimum possible I would need to barely scrape by?". "Very safe" means "how much would I need to be totally shielded from essentially all risk?".

Once you have the table, you need to decide how to aggregate those values. You can total them up, or pick the biggest value in the "very safe" column, or really whatever aggregation scheme you want. I chose to add together the highest two values, on the theory that losing my job and having a tree fall on my car in the same month is as close to a worst-case scenario as I want to imagine. That gave me values of $2200 in the "risky" column and $5400 in the "very safe" column. From there I basically eye-balled it and decided that $2000 and a $5000 personal line of credit is a big enough safety margin for me.

That's the basics I used to decide on the size of my emergency fund. I'll write it up more completely the next chance I get. As for the emergency fund itself, in two years time I should have my entire emergency fund in readily-accessible I Bonds. Until then I'm stuck with my savings account.

Check out what a wuss I am

I've spent the past month with my mind on business and investments, and not more important things like frugality and biking. This month was Anti-Automobile April so I've also had my mind on how much I've been driving. I've commuted to work by car every week day. I haven't biked at all. I've walked to the grocery store three times.

Where there's a week day, 6.6 of the car miles are commuting. I drove 202.8 miles this month, of which 146.2 were from my commute. I walked 4.6 miles, not counting walking the dogs. I biked zero miles.

Day	Car	Walk	Comments
1	6.6	1.4	walk to grocery
2	6.6	0
3	6.6	0
4	6.6	0
5	6.6	0
6	0	0
7	0	0
8	6.6	0
9	12.8	1.4	errands, walk to grocery
10	11.6	0	library
11	24.6	0	dinner out
12	6.6	0	0
13	14	0	friends house to hang out
14	0	0	0
15	6.6	0	0
16	6.6	0	0
17	6.6	0	0
18	6.6	0	0
19	6.6	0	car pooled with our friends for dinner out
20	0	0	0
21	0	0	0
22	6.6	0	0
23	12.8	0	0
24	6.6	0.4	saved a trip by staying late at work and walking to a local meet-up
25	6.6	0	0
26	6.6	0	0
27	8.2	1.4	friends house to hang out; walk to grocery
28	0	0
29	6.6	0
30	6.6	0
	202.8	4.6	Total

If you've ridden your bike even once this month, you did better than me. I want to draw attention to this for two reasons.

First, showing up is terribly important. To be dramatic: "History is made by those who show up." Showing up is also most of the work (especially for me), and I'd say it's more important than finishing. As soon as I get on my bike, getting to and from work is a breeze. It's fun and I enjoy it. It's deciding to get on my bike as soon as I get out of bed, and then following through, that's the difficult part.

Second, relative status is at least as important as absolute status. I am tied for last place in the category of "distance biked" over the past month, no matter who you compare me with. If you even made one trip to the grocery store on your bike this month, and your friends don't even own a bike, then guess what: you beat their socks off. You are awesome and you should be proud. To reach the top 5%, you must simply kick the ass of the other 95%.  I wish I could find a statistic for average distance biked by an American over any period of time, but I bet it's not too high.

I obviously must change my habits. There are two things blocking me from a frictionless decision-making process of waking up in the morning to getting on my bike and starting off to work. First, I need to get my bike ready, which entails pumping the tires and making sure the handlebar is the right height. Second, I need to track down my bike clothes, work clothes, and a towel and soap (for showering at work); then lay them out before I go to bed at night. That way I can roll out of bed and be ready without thinking.

How did everyone else do on Anti-Automobile April?

Anti-Automobile April

Happy Anti-Automobile April everyone. Mr. Money Mustache didn't punch me in the face for my lack of bike riding, but he may as well have.

The goal of this Anti-Automobile April is merely "to make yourself AWARE of when you are using your car, and when you are not." I'm going to be as public about it as is feasible, since public shaming is a great thing.

Here's my chart so far:

Day	Car	Walk	Comments
1	6.6	1.4	commute, walk to grocery
2	6.6	0	commute
3	6.6	0	commute
4	6.6	0	commute
5	6.6	0	commute
6	0	0
7	0	0
8	6.6	0	commute
9	12.8	1.4	commute + errands, walk to grocery
10	11.6	0	commute + library

The first thing to notice is the lack of a "Bike" column. I don't need one yet because I haven't biked this month yet, or even this year. Yes, this is a problem. Yes, I plan on addressing this problem in April.

My place of business is 6.6 miles from my house. Caveats for the above list include: I take the dogs for walks but I'm not counting that because it's not really a place I'm going or errand I'm running; and I'm only counting traveling in my car and not my girlfriend's car, just because.

That's 64 miles of driving in only ten days. This could be a lot worse if I worked farther away from where I live. It still feels like a lot of driving.

Here's looking forward to kickstarting my biking habit and adding another column to my list.

Investing in energy-efficient lighting

tl;dr I just saved a bunch of money by replacing some light bulbs with energy-efficient alternatives. Once you're debt free, your most profitable investments may be in energy efficiency upgrades.

Ever since I paid off my student loans, I can be a bit more relaxed with money. For an upstanding Mustachian that doesn't mean daily or even weekly lattes at Starbucks. It means that, now that I've exhausted my 6.8% guaranteed-return investment opportunity (i.e. student loan debt payoff), I have to search for other attractive investment opportunities.

I want to fill you in on one such "investment" that we made: replacing a bunch of light bulbs and fixtures with energy-efficient compact fluorescent bulbs (CFLs). I did not do a cost-benefit analysis before making the plunge; well, nothing besides thinking "gee, I bet I can save money on electricity with CFLs since that feels like the prevailing wisdom nowadays". I want to do that cost-benefit analysis now to see how good or bad an investment we made, and to give ball-park figures for your own energy efficiency improvements.

We made two changes: first, we replaced six overhead light fixtures in the basement and hallways; second, we replaced the decorative globe incandescent bulbs in both our upstairs bathrooms with CFL equivalents.

Since we moved into our house, I have hated the light fixtures in the basement. They were these brass-colored fixtures whose covers were in various stages of falling apart. Maybe they looked good when they were original, but they certainly didn't look good when we arrived. (I wish I had a picture to show but I'm not sure I took one. I'll post one if I do dig one up.) They took these bulbs, 25-watt globe with candelabra base. Six for the large fixtures, three for the small fixtures. I'm intimately familiar with this type of bulb because of the number of times I've had to replace them. I must have replaced dozens upon dozens of these bulbs in the less-than-two years we've lived in our house. I'm not sure why, but after replacing all the dead bulbs, the first burn out would occur within a week or two. Then in the next month or two we'd lose another one or two (this is per-fixture, by the way). The net effect was 1) most of the time half our bulbs were burnt out, 2) way too much time spent replacing bulbs, and 3) way too much money spent replacing bulbs.

I forget what the last straw was, but in late January I went to Lowe's and bought new fixtures. We decided on a chrome finish and frosted glass (see pictures). For three large fixtures and three small fixtures, the total cost was $224.78. Each came with a single CFL that retails at somewhere between $5 and $7 (I haven't had to replace any in the two months we've had these fixtures installed).

The old fixtures used 27 incandescent candelabra bulbs at once. I'd guess that on average half were burnt out, so let's say there were 14 on when the lights were on. That's 350 watts for the old fixtures. The new bulbs use 27 watts each, but there are only 6 of them, so that's 162 watts. If I had to guess at how much we use those lights, I'd say 4 hours per week night and 10 hours per weekend day, for about 160 hours of lighting per month. That means about 30 kWh saved per month, at a cost of around $3 per month. Even if I'm way over-estimating our lighting usage, half that savings is $1.50 per month which is pretty good.

I'll admit these are very rough estimates. But I think they clearly demonstrate that investing in energy efficiency offers great returns. Investing $250 at a safe withdrawal rate of 3% will give you around 62 cents a month for the rest of your life. Buying and installing new light fixtures in my basement cost less than $250, and is saving us somewhere north of $1.50 per month

It would have been even better if I didn't totally hate my basement light fixtures, and I could have just replaced incandescent bulbs with CFLs. As luck would have it, that's exactly what we did in our upstairs bathrooms.

Between the two upstairs bathrooms there are 18 light bulb fixtures. Here are the CFL replacements: G25 globe with medium base. They say they're 40-watt replacements but all the bulbs we had were 60-watt bulbs so that's an even bigger energy savings. At $20 per 3 bulbs, our initial outlay was $120. Here's the equivalent incandescent bulb at Home Depot, at $6.42 for 4 bulbs, or about $1.60 each (versus $6.67 each for the CFL version). The CFL says it lasts 9.1 years based on 3 hours per day, or around 9970 hours. The incandescent advertises 1500 life hours. So not only are CFL life hours cheaper, but CFLs are also cheaper to operate. How much cheaper? 3 hours per day, 30 days a month, times 18 bulbs at 60 watts each is 97.2 kWh. At ten cents per kWh that's $9.72 per month. For 40-watt incandescents that number is $6.48 per month. For CFLs it's $1.78 per month.

One minor word of warning: the bulbs take about a minute or two to warm up. During the warm-up time the interior CFL coil is visible so you may consider it unsightly. It's not something I mind now that I'm used to it, but it's something to be aware of.

We're saving $7.94 per month with the new bulbs (at 3 hours per day of use). That kind of income would take a stash of over $3k at a 3% SWR. Well worth the $120 outlay for the bulbs. And that's not even counting the lower cost to replace the CFLs.

Here's a chart summarizing the above data:

	40W Incandescent	60W Incandescent	CFL
Cost per bulb	$1.60	$1.60	$6.67
Life-hours	1500	1500	10000
Cost per thousand life-hours	$1.07	$1.07	$0.67
Cost per year (3hr/day, $0.11/kWh)	$4.81	$7.22	$1.32
Lumens	370	660	500

In conclusion, once you're debt free, your most profitable investments may be in energy efficiency upgrades.