A few months ago I decided to give social lending at Lending Club a try (my Lending Club review). I was intrigued by Lending Club’s business model, and having a little experience on the other side of the loan officer’s table, I thought maybe I could score a decent return.  Here are a few updates from my Lending Club progress report.

For my initial social lending experiment I decided to invest a small amount of money in two loans. Lending Club categorizes borrower profiles based on a variety factors such as credit score, income (which they verify).  I balance this against the borrower’s personal story.  Trying to read credibility in black and white is not always easy, but when you read someone’s story in the context of their other information you can usually get a feel for their authenticity.

To spread my risk out a bit, I balanced investments in Lending Club borrowers between a medium-risk borrower with a low-risk borrower. Both loans are being paid and are in good standing, yielding an approximate net annualized return on investment of roughly 11%.  Not bad for a rookie.

Click for a larger view

Advantages of Investing With Lending Club

• You have the opportunity to earn better returns than traditional market investing
• Lending Club is selective about the types of borrowers they allow to join
• Flexibility to trade notes, or hold them and reinvest (or withdraw) the interest
• Free to join

If you are interested in investing with Lending Club I suggest starting with a small percentage of your overall portfolio until you get your feet wet.  I think you’ll find their platform very straightforward, whether you decided to invest in individual loans, or a collection of loans.  Of course, I haven’t invested enough to exactly live off passive income at this point, but it’s a start, and the potential is there for investing more down the line.

For the last couple years now the idea of going on a summer “staycation,” not a vacation, has been all the rage. Bloggers across the frugal landscape touted the financial benefits of staying put, becoming a tourist in your own town, or spending a week working around the house. I even wrote a couple posts extolling the benefits of a family summer vacation at home. Well, for me “staycation” is a worn out term. This summer, I want to take a real vacation.

A picture I took inside Cades Cove, from our last vacation to Great Smoky Mountains National Park

Our family hasn’t been on vacation in a few years now, and this past year has been an extremely trying one with two major medical crises affecting our family (for those who don’t know, or don’t remember, my mom suffered an aneurysm and stroke, and is still recovering some ten months later). Another close relative has been battling illness. Frankly, we’re a little worn down. I’d like to see different scenery, and smell some fresh air, even if it is just a long weekend.

So, looking ahead to this year’s summer vacation I had the idea to head to the Smoky Mountains for a relaxing few days. Unfortunately, I burned through most of my personal leave at work, so our summer vacation plans will have to work around a long weekend. Still, it will be fun to take a short timeout from the daily grind.

Of course, we’ll have to vacation with cash since we no longer borrow money. This is not a show-stopper, but will require a bit of planning. I’ve created a “vacation” fund at our online savings account and will put away a bit from each paycheck between now and late July to prepare for our trip. Ideally, I’d like to return to the mountains when fall colors are at their peak, which may require a second long weekend in October.

Staycations are great for those trying to get out of debt, or saving for a specific, short-term purpose (i.e. a down payment on a house, etc.). However, if your debt snowball or savings plan will take more than a couple years, I recommend finding a way to take a short, cheap summer vacation with cash. We all need a little break every now and then, and admitting to it makes us no less dedicated to our financial turnaround.

There’s something about children that tugs at our heartstrings and makes us want to keep them safe and protect them from heartbreaks of any kind. That’s why we feel upset and sad when we see their big eyes fill with tears and their tiny faces scrunched with anger when we refuse them something they want.

How often have you shopped with your little one and found the experience nightmarish because your child wants everything he/she sets eyes on?

My niece does this, and it gets pretty embarrassing when she throws herself down on the floor and bawls her heart out when her mom refuses to buy her something. But no matter how hard the tears flow, no matter how long the tantrum continues, it’s not good to give in to the whims of your young one. Besides the fact that you cannot afford to buy them all that they ask, it sets a bad precedent if they learn that they can manipulate you with just a few tears and tantrums. If you face similar problems with your child, here’s how you could try to convince your child to behave better:

• Mean it when you say NO: If you give in when your child begins to act up, the same routine is going to repeat itself every time you go shopping. Your kid is going to get used to the fact that a few tears are enough to make you relent and buy whatever he/she wants.

• Don’t try to make it up to them by buying something else: Besides being a financially foolish move, it does not give you the advantage you need when you go shopping. Children are perceptive, and that’s why they will soon realize that they can get something out of a shopping trip by crying hard enough.

• Forget the incident once you leave the shop: Don’t harp about it or go on about the way your child behaved in the mall or shop. This will only make them more rebellious and determined to do it again.

• Talk to your youngster: If he/she is at an age where they can understand money, tell your child that you cannot afford to buy them all that they want because of your financial situation. If he/she is just a toddler, use the line that the product they want is not good enough, and that you’ll buy something better.

• Remember that kids forget easily: Your child will most likely forget the incident once you get out of the shop and stop for an ice cream or snack or see a clown on your way home. That’s the best part about children – they don’t hold grudges.

Learning to say NO to your child, for their own good, is a great way to instill the value of money in them at a very early age. Once they know that they cannot buy indiscriminately, they will learn the art of saving and spending money more wisely.

This post was contributed by Kimberly Peterson, who writes about the accounting degree online. She welcomes your feedback at KimPeterson2006 at gmail.com.

This Friday night, May 29 at 9:00pm ET, ABC will air a special titled Unbroke: What You Need to Know about Money.  The hour-long program will feature a number of celebrities including The Jonas Brothers, Will Smith, Samuel L. Jackson, and even the talking E*Trade Babies.

It will be interesting to hear the mainstream, pop culture take on how to solve personal finance issues.  TheStreet.com will be providing some commentary about the show via Twitter, and has invited a few personal finance bloggers to joing in.  If you happen to be watching with the laptop handy, you can follow our conversation on Twitter by following the hashtag #unbroketv.

The Fab Five

Building a Compost Bin. I’ve largely skipped the gardening season this year, and unless I work up a late summer/early fall garden this year may be a total wash.  Still, manufacturing some sort of compost bin is on my to-do list, and this is an excellent resource on the subject.   (@ Gather Little by Little)

I Survived – But Just Barely.  This post from Ron was an instant classic!  He runs down a diverse list of things he’s “survived” over the years, despite dire predictions from the media.  (@ The Wisdom Journal)

Finding Your Passion.  Over the last twelve years or so I’ve held a variety of jobs that seemed to fit my passion, only to later discover that wasn’t it and burn out.  The lesson I have learned over time is that no “job” is my passion; my passion is to build something on my own.  Too bad I’m too broke to be an entrepreneur!  (@ Million Dollar Journey)

50 Bad Money Habits That Will Leave You Eating Alpo for Dinner.  Often times it is the examples of what not to do that make the strongest impression.  That’s the case with this incredible resource of things not to do to experience financial success.  (@ My Super-Charged Life)

Some Thoughts on Angel Food Ministries.  I’m including this one because, like many of you, I have long been interested in Angel Food Ministries. Trent provides an objective look at the service, and shares a few of the highlights, and low-lights, of their organization.  (@ The Simple Dollar)

The Best of the Rest

• Pathetic Propane Proportions
• How to Host a Simple Game Night
  
• How to Have a Happy Childhood
• 55 Best Ways to Save Money
• How to Choose Happiness With Words
  
• Keep the House or Save for Retirement?
• Some Bank Bonus Offers
• Credit Scores for College Graduates
• My Employer Stopped Matching My 401k – Should I Still Contribute?
  

Site of the Week

KidsBowlFree.com.  Hat tip to Frugal Dad reader Jasie who introduced us to this site earlier in the week. According to the site you can receive up to two free games of bowling each day during the summer for your kids, and you have the opportunity to pay a one-time fee for a “family pass” which allows up to four family members (including adults) to bowl a couple games each day as well.

Unfortunately, our local bowling center was not listed as a participant, but if your local lanes are participating this could be a frugal way to get the kids out of the house for a few hours during the summer.

Two dentist visits ago I had a cavity. It wasn’t my first cavity, and it probably won’t be my last. This one didn’t come as a big surprise because it was around the time when I was eating on the run, eating late at night, and not going through my usual brushing/flossing routine. The extra appointment for a filling (and the extra costs) reinforced my commitment to taking better care of myself going forward.

Why all this talk about oral hygiene? Because it sort of reminded me of my own financial turnaround. When we go through a particularly troubling time, and wounds are fresh, it’s easy to remember how things felt before we turned them around. Just like I brushed and flossed like crazy in those weeks immediately following my cavity, most of us can easily make sacrifices when we first go through a financial turnaround.

But over time your dedication to new habits gets tested. You get sick. There is an emergency. You simply lose interest. And slowly your resolve to do better fades. Old, bad habits reemerge. The intensity you had immediately following the negative experience flames out.  So how does one keep up that intensity? Here’s a few ideas.

1. Write down your goals (be specific). It isn’t enough to say, “I will avoid getting a cavity at my next dentist visit.” Be more specific. I will brush and floss my teeth after each meal and before bedtime. Similarly, setting a goal of “Saving some money for vacation” is not sufficient. I will save $1,000 in the next twelve months for vacation is much more tangible.

2. Find an accountability partner. Some people argue against telling others when starting out a new challenge. I’ve never understood why. Share your goal with a trusted friend, or your spouse, so they can help remind you of your goals when you start to slip a little.  If your best friend knows you are trying to pay off $5,000 in credit card debt they are less likely to invite you shopping, but might opt for a dinner and a DVD at their place.

3. Keep your goals close. When you feel yourself starting to slip, whether it is on a new nutrition plan, or an improved financial plan, make it easy to refer back to your original goals. Consider typing them in a small font, cutting out the list and laminating it for your wallet or purse. I did something similar by putting a wallet-size picture of my kids in front of my debit card. It was a visual reminder of why I was making this turnaround, and I saw it every time I wanted to spend money.

4. Remember progress, not perfection.  Many people miss their goal for a variety of reasons.  Perhaps the goal was unrealistic, or something unforeseen came up and caused you miss your target. Instead of being discouraged and giving up, celebrate the progress you did make!  If your goal was to pay off $5,000 of credit card debt, and you only paid off $4,000, that still leaves you with $4,000 less debt.  Don’t feel sorry for yourself and run out to charge your cards right back up to $5,000 again.

5. Surround yourself with people with a similar goal.  This is the reason I started Frugal Dad. It was my hope that it would attract people like me with shared dreams of financial freedom. I draw a lot of inspiration from readers who share their stories in the comments, and in private via email. It’s nice to have those daily reminders to keep us on track.

After being in debt for some time you find yourself struggling to remember what it feels like to not owe anyone. Unless you have been deep in debt, it is hard to describe the feeling to others. At times it feels like a tractor is parked on your chest, and other times it feels like two tractors are parked on your chest.

The best way I can sum it up is to say that being in debt sucks. Sorry, I know that’s a bit crude, but when it comes to debt all rules of verbal civility must be tossed. Without further apologies, here’s my list of reasons why being in debt sucks.

1. Debt limits your opportunities. How would you like to pick up and move across the country, or maybe just closer to relatives, or to the beach, or to the mountains?  Perhaps you would like to make a career change, go back to school, or take that international assignment for a couple years. Forget about it. You are in debt.

2. Debt forces you to put up with more crap. Debt forces us to put up with bad jobs, poor living conditions, broken down cars, and cubicle creeps with headsets, also know as debt collectors.

3. Debt is the first thing you think about each morning. Seriously, you know you are in trouble  when you hit the alarm clock at 5:30 in the morning and think, “Hey, that’s the same amount as my car payment – $530. And I have no idea how I’m going to pay it this month!”

4. Debt is the last thing you think about each night. Money problems is a leading cause of insomnia. Instead of drifting off to sleep counting sheep you lie there counting the months until you will be debt free.  You obsess over it.  You worry over it. And the reality that you can do little to get rid of it right away leaves a feeling of helplessness that is truly depressing.

5. Debt eats away at future earnings. For every dollar you pay in interest on debt it is a dollar that could have been spent on something else, and a dollar taken away from your earnings.  It’s like a little debt monster snatching $100 from each paycheck and depositing it in their bank, laughing all the way!

6. Debt makes you desperate. There is a reason people applying for positions with financial authority are scrutinized more carefully. Of those who commit financial crimes, it is not unusual to find out they were deep in debt. It has a way of challenging your morals for the promise of freedom.

7. Debt affects your entire family. Kids may not fully understand the financial ramifications of debt, but they recognize Mom and Dad sure fight about that “d” word a lot.  They don’t know what debt is, but from listening to you they think they’ll always be in it, and being in it must be bad.

8. Debt is a lousy employer. When you are in debt, and over half of your income is going towards repaying that debt, you might as well consider yourself working for the debt. And debt is a lousy employer!

9. Debt plays by its own set of rules. Don’t believe me? Try carrying a large balance on a credit card. One month your statement reflects an APR of 6%, the next 29%. What did you do to deserve it? You just appeared risky to their scoring model.

10. Debt makes even the sweetest life events taste sour. Getting married, buying a house, and having a baby should all represent some of the highlights of your life. But if you are deep in debt, these event only provide temporary relief. Until the bills arrive, that is.

If you find yourself deep in debt, you’ve probably experienced some or all of these feelings.  I hope you are working to get out of debt. If you are not in debt, or have never been in debt, consider this ten reasons to never go into debt. Trust me; it sucks.

If you are over 70 ½ you might consider converting your Traditional IRA to a ROTH IRA right now. If so, you’ve got plenty of good reasons to think about it.

First, the market has done a number on your IRA account value. Since you must pay ordinary income tax on any amount you convert, low values mean lower taxes.  A good thing.

As an added bonus, Congress passed a law in December of 2008 lifting the requirement to take distributions from your IRA (for 2009 only). So if you don’t take your RMD (required minimum distribution) you will have lower taxable income.  That means it’s easier to qualify for the conversion (your AGI must be less than $100,000 to convert). It also means the tax on the conversion might be lower.

So the stars are all aligned…but does that mean you should convert your Traditional IRA to a ROTH?

The answer to this question really depends on your unique situation.  It also depends on your ultimate goal. If your main goal is to accumulate wealth, this might indeed be the time to convert. I ran some numbers and concluded that (for the right person) it makes sense to convert.

Here is what I assumed:

1. You have $100,000 in an IRA and $35,000 in cash.

2. You are in the 35% tax bracket.

3. If you convert, you will use the cash to pay the tax due.

4. You can earn 5% on your money in the IRA.

5. You also earn 5% on the cash but since it’s in a taxable account, your net earnings are reduced to 3.25%. (I know you can’t earn 5% on cash right now.  I’m using 5% so we can compare apples to apples and also because this illustration is for 20 years plus. You never know where interests rates are going to be a year from now….do you?)

6. You are currently 70 ½ and you if you decide to keep the Traditional IRA as is, you will take out just the RMD amount and deposit that into your savings account.

Let’s consider the Roth Conversion first. It’s simple.  We use the $35,000 to pay the 35% tax on the conversion so it’s gone.  The Roth continues to grow at 5%.  At the end of 20 years, the value of this account is a cool $265k.  NICE.

Now consider the alternative.  Let’s say we don’t convert our Traditional IRA.  Look at the chart below.

Column B shows “IRA VALUE” growing at 5%. It’s reduced by the amount you withdraw to satisfy the RMD (column D).

Column C shows the RMD factor.  This is simply the number the government makes you use to determine the amount of your RMD.  For example, in year 1, the factor is 27.4.  You divide the balance – in this case $105,000 by 27.4 and arrive at an RMD of $3832.  This is the amount you must take out in the first year – unless it’s 2009 of course.

The cash is shown in column E.  You deposit your RMD (net of tax) into that account and this, plus the prior total grows by 3.25%.

After 20 years, the total is $266,191.  So you should definitely NOT convert….right?

Not so fast……

Remember that you’ve paid the tax on the ROTH conversion and you haven’t on the Traditional IRA. If you were to take all the money out of the Traditional IRA, you have to pay that tax.

Again, if you want to approach this question from the standpoint of capital accumulation, you have to look at how much money you’d have if you took all the money out of the Traditional IRA and paid your tax.

Now, truth be told, you don’t really know when you’ll pay that tax.  You could die & your grandchildren could inherit your traditional IRA and they could defer most of the tax for a very long time.

The only way to decide what to do is by making certain assumptions.

As you can see from the graph below, if you don’t need the money and don’t think you’ll ever need the money, the Roth is a good choice.  Again, this is only if you approach the question from a wealth accumulation point of view.  If you are looking at income, it’s a whole other ball game.

You can see, even if you don’t consider the latent tax liability, you’ll have more wealth in year 23 if you convert to the ROTH.

Bottom line?  This calculation assumes that you have money outside of your Traditional IRA and can use that to pay the tax on your conversion. If you find yourself in that situation and your main objective is to grow your wealth – rather than create retirement income – the conversion could be for you.

But I think there is a more important take-away. Never listen to anyone who makes a blanket statement about converting your IRA or not.  There are too many variables and assumptions. The right answer depends on what you want to do with your money.  It’s just stupid to think that one solution fits everyone. For example, if you told me that your main goal was to maximize retirement income, my answer might be completely different.

Have you converted your IRA into a Roth?  Are you considering doing so? Have I missed something that you think is critical in making the decision?

This was a guest post by Neal Frankle, CFP. Neal is an author and avid blogger. Subscribe to his blog at www.wealthpilgrim.com.