Where should I park my money?

One of the more popular questions I’m often asked is – “Where should I put extra money to get the best returns? ”

While things like stocks and mutual funds can provide seemingly high average returns, the problem is that – as average returns increase, the risk also increase.  To minimize any losses, we have to ‘lock up’ our money over longer periods of time.

To answer that question properly, we have to first identify our time horizon as to when the funds are needed again, and then, allocate those funds properly.

Here are some suggestions for where to put money into, based on the time horizon you may have in mind – starting from the shortest (i.e. we’ll need to access the money soon) to the longest (i.e. targeting towards retirement).


Less than 3 years
Recommend: Savings & Chk accts
Risk: Negligible, as accounts are FDIC Insured
Average return: Up to 3% (GuaranteedSee how here: “Credit Unions: Your Best Bet for High Interest, FDIC Insured Accounts”)

3-5+ years
Recommended: Bonds / P2P lending / Notes
Risk: Low-to-Medium. Investment can lose value from time-to-time over short periods, but will generally rise over time
Average return: 7% (Losses & defaults included)

8-10+ years
Recommended: Index / Mutual Funds
Risk: Medium.  Investment can lose value for several years in a row, but over the long span, value will rise over time
Average annual returns: 8-10%


Looking for even higher returns for your dollars?  Consider purchasing Real Estate or running a business!

Unlike the other investments above, these options absolutely require additional work to achieve higher returns. Returns received can almost be correlated to the effort / labor inputted, plus also requires a significant amount of education. These are definitely not a ‘set and forget’ type of investment like the options above – and they generally require extended, long term time commitments.

10-30+ years

Recommended: Real Estate
Risk: High, but variable depending on skill level
Average annual return: 5%, increasing to 20+%*

Recommended: Starting a Business / Purchasing a Franchise
Risk: Very High – Variable, from 100% loss to infinite gain
Average annual return: 100% loss to infinite gain*


Have a better idea?  Or, another alternative that should be added to the list?  Comment below!

Credit Unions : Your best bet for High Interest, FDIC Insured Accounts

Every so often, I get asked:

“Where should I put my money?  Which investments should I pick to get the best returns?”

Before jumping into this topic – which has a hundred different answers, all dependent on your risk tolerance, time line, and other aspects unique to each person – let’s determine where we can best put our cash.


Savings / Checking Account

Your local bank where you have a savings and/or checking account may be the obvious starting point, but anyone with a decent chunk of change would be encouraged to keep looking – as far better rates can be had.

At the time of this writing (Q1’2015), interest rates for a regular savings account are honestly pretty abysmal, with an average return of 0.10 to 0.50% at best.  It’s better than zero.. but it’s still not much.  Let’s review all of our options, and see what we find.


Certificate of Deposit

The next option that comes to mind (or, recommended by an officer when you visit your local branch) is a Certificate of Deposit, or CD.  In short, you give a bank a sum of money, for a period of time of your choosing, in exchange for a higher-than-normal rate.  This sum of money can be as little as $500, but some banks may have much higher minimums, of even $25,000 & up.

The best rate with smallest minimum deposit, according to Bankrate.com (at the time of writing) – that can be found is:

iGoBank.com
1 Year CD
APY 1.30% / Rate 1.29%
Min. Dep. $1000

My e-BAnC by BAC Florida Bank
2 Year CD
APY 1.35% / Rate 1.30%
Min. Dep. $500

(For longer time periods of 3-5 years.. consider Peer-to-Peer lending.  See my Prosper.com articles to learn more)

“Wow, only 1.3%?  That’s less than inflation!”

Indeed it is!  I think we can do better.


Credit Union “Insert-promo-term-here” Checking Accounts

Based on my experience, the best and highest yielding accounts can always be found in Credit Unions.

If you’re in Long Island, NY, open up a Bonus Checking account with the Bethpage Federal Credit Union (BFCU), which currently gives APY 1.00% return.  Granted, it’s not a great return – but unlike a CD, you can put new money in and pull out money at any time.  You DO have to have direct deposit & use their Debit Card at least (10) times a month (These 10 swipes can be easily done anytime without setting foot in a store – more on that in another blogpost).

But – what if you’re outside of New York?  Or, are there even better returns available?

If we’re pursuing the highest returns – here are the best options:

Inova FCU : Ovation Checking
APY 3.00%, Up to $20,000, Min. Bal of $1500
Requirements:
– (5) signature-based debit card transactions of $50+/ea. per month
– Direct Deposit
– E-Statements

Lake Michigan Credit Union : MAX Checking
APY 3.00%, Up to $15,000
Requirements:
– (10) Debit Card transactions/month
– Direct Deposit
– E-Statements
– Minimum of 4 logins to home banking per month

Do you know another, higher-rate, FDIC-insured option?  Share it with us!

Happy Savings!


Direct Links:

BFCU Bonus Checking:
http://www.bethpagefcu.com/personal/banking/bonus-checking.aspx

LMCU MAX Checking:
https://lmcu.org/banking/checking/checking_max.aspx

INOVA – Ovation Checking:
http://www.inovafcu.org/accounts-services/checking.html

Research: What does a “likely-to-default” borrower’s profile look like on Prosper? (If such a thing exists)

Hi everyone,

As a quickie update to my previous Prosper.com post, I had a quick chance to review / look at my notes that have been charged off, in collections, or in bankruptcy.

Let’s start with the facts:

1. As of today, out of the (162) notes I own, (104) of are older than 16 months, and (5) are in the charge-off/late state.

2. Of these (5) charge-off/late notes:
– (2) are “AA” rated by prosper, at 5.99% and 7.49% yield
– (2) are “A” rated by prosper, at 11.19% and 12.34% yield
– (1) is “B” rated by prosper, at 14.19% yield

More specifics:

Loan #97206 – “A” rated
Business Loan
Credit Score: 720-739
No delinquencies
81% bankcard utilization
Employment length 10y5m, self-employed
Issued 8/2013
last paid 11/2013
1st late in 11/2013 (3 months from issue)
(attempted payments, but failed)
chargeoff in 4/2014

Loan #97548 – “A” rated
Business Loan
CS: 700-719
No delinquencies
33% bankcard utilization
Employment length 2y4m, accountant/CPA
Issued 8/2013
last paid 11/2013
1st late in 12/2013 (4 months from issue)
(never paid again)
charge off in 4/2014

Loan #99676 – “B” rated
Debt Consolidation
CS: 660-679
No delinquencies
78% bankcard utilization
Employment length 29y5m, Clerical
Issued 8/2013
Last paid 9/2014
1st late: 10/2014 (14 months from issue)
(Bankruptcy filed)

Loan #97925 – “AA” rated
Debt Consolidation
CS: 800-819
No delinquencies
25% bankcard utilization
Employment length 2y1m, programmer
Issued 8/2013
Last paid 10/2014
1st late: 11/2014 (15 months from issue)
Late / in collections

Loan #97032 – “AA” rated
Debt Consolidation
CS: 840-859
No delinquencies
25% bankcard utilization
Employment length 5y, attorney
Issued 7/2013
Last paid 11/2014
1st Late 12/2014 (17 months from issue)
Late (31-60d)

3. The group of (104) notes were all purchased on / around July or Aug 2013, so about 19 months have passed since the start.  This means that a 3 year loan’s life is about 1/2 (52%) over, or a 5 year loan is about 1/3 (32% over).

4. All of the my (104) older notes are rated AA, A, or B by Prosper.  I never got into the C & D loans in the my first foray into Prosper.com.

===

So, all the facts being said – is (5) notes in collection out of (104) “older” notes issued (making it about 4.8%) so far a good, ok, or bad result?

From Propser’s website, the expected loss of principal for the various ratings are (at the time of issue):

AA – 1.24-1.99%
A – 3.49-3.99%
B – 4.74%

So, simple arthimetic would indicate that either my sample size of (100) is still too small, or that Prosper’s “estimated loss” numbers can’t truly be trusted as they may be underestimating of the expected loss. (i.e. how were these numbers derived in the first place?  Does it vary over time, or by buyer’s stats & numbers?)

In addition, I found this interesting article, which seems to indicate that 5% is the expected default rate of loans:
http://www.lendingmemo.com/lending-club-prosper-default-rates/

Based on the above, and since I got back “average” results of a 5% delinquency/charge-off rate – some interesting conclusions can be drawn, which warrants further investigation & research:

A. A very high Credit Score doesn’t seem to guarantee repayment.

B. Lendees with low bank card utilization don’t  guarantee repayment either.

C. I did not look at past delinquencies at this stage, and surprisingly, all of these “bad notes” have ZERO past delinquencies on file.

===

Some interesting follow up questions come to mind when revisiting this in the future, as the C & D notes grow older and the original (104) notes get closer to their maturity:

1. Since my second round / reinvestments and the additions of C and D rated loans didn’t start until April 2014, what will be the % default by August 2015 (another 16 months after the start of those notes’ purchase)?

2. Adding in the variables of “no previous deliquencies” did not seem to have any affect on AA, A, and B rated notes from the expected result. Will this trend be the same for C & D notes, to at least minimize the expected higher levels of default?

3. Do most defaults occur early in the life of the loan (as shown by the 1st lates being in 3-4 months from issue on the “A” rated notes”?  Or, do they occur in the middle, or end, or is it just random?

===

It’s fairly obvious to anyone that the key to success on Prosper is to find, identify, and skip the loans that will default – but what characteristics should be looked at, besides the obvious numbers like FICO score?  Clearly, the 5% expected loss really weighs down on on the final result. (That is to say, if the loss was actually 0%, the expected return would be around the 7.5% we’ve been getting + 5% = making total return around 12+% – handily beating stock market / mutual fund returns).

Obviously, 0% loss won’t happen – all we can do is reduce / mitigate it!

Let’s revisit this in the summer time, and we’ll see what happens then!

How to live like a Millionaire

I’m a big fan of “The Millionaire Next Door,” and recently came across an article on Business Insider that, summarily, re-caps the entire book into 19 distinct points.  Time is money, so here’s the short without having to read through the whole book:

  1. He always spends less than he earns. In fact his mantra is, over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.
     
  2. He knows that patience is a virtue. The odds are you won’t become a millionaire overnight. If you’re like him, your wealth will be accumulated gradually by diligently saving your money over multiple decades.
     
  3. When you go to his modest three-bed two-bath house, you’re going to be drinking Folgers instead of Starbucks. And if you need a lift, well, you’re going to get a ride in his ten-year-old economy sedan. And if you think that makes him cheap, ask him if he cares. (He doesn’t.)
     
  4. He pays off his credit cards in full every month. He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.
     
  5. He realized early on that money does not buy happiness. If you’re looking for nirvana, you need to focus on attaining financial freedom.
     
  6. He never forgets that financial freedom is a state of mind that comes from being debt free. Best of all, it can be attained regardless of your income level.
     
  7. He knows that getting a second job not only increases the size of your bank account quicker but it also keeps you busy – and being busy makes it difficult to spend what you already have.
     
  8. He understands that money is like a toddler; it is incapable of managing itself. After all, you can’t expect your money to grow and mature as it should without some form of credible money management.
     
  9. He’s a big believer in paying yourself first. Paying yourself first is an essential tenet of personal finance and a great way to build your savings and instill financial discipline.
     
  10. Although it’s possible to get rich if you spend your life making a living doing something you don’t enjoy, he wonders why you do. Life is too short.
     
  11. He knows that failing to plan is the same as planning to fail. He also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck. It’s not enough to simply declare that you want to be financially free.
     
  12. When it came time to set his savings goals, he wasn’t afraid to think big. Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.
     
  13. Over time, he found out that hard work can often help make up for a lot of financial mistakes – and you will make financial mistakes.
     
  14. He realizes that stuff happens, that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner and can be triggered from multiple sources: the death of the family’s key bread winner, divorce, or disability that leads to a loss of work.
     
  15. He understands that time is an ally of the young. He was fortunate enough to begin saving in his twenties so he could take maximum advantage of the power of compounding interest on his nest egg.
     
  16. He knows that you can’t spend what you don’t see. You should use automatic paycheck deductions to build up your retirement and other savings accounts. As your salary increases you can painlessly increase the size of those deductions.
     
  17. Even though he has a job that he loves, he doesn’t have to work anymore because everything he owns is paid for – and has been for years.
     
  18. He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four.
     
  19. After six months of asking, he finally quit waiting for you to return his pruning shears. He broke down and bought himself a new pair last month. There’s no hard feelings though; he can afford it.
     

Regardless, I still STRONGLY recommend doing a read of the book.  It’ll definitely break some incorrect perceptions of REAL millionaires and their TRUE, versus PERCEIVED, behaviors.