Monthly Archives: August 2010

I Want To Become a Minimalist, But I Could Never Give Up My…

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Have you ever wondered what it would be like to live a minimalist lifestyle? It’s a movement I’ve been an admirer of for some time, but unwilling to put into practice in my own life until now.

Recently, I began watching a new survival show on Discovery Channel called “Dual Survival.” One of the featured survivalists, Cody Lundin, is also a minimalist, and goes about surviving extreme situations barefoot, and without other forms of survival gear.

My feet are too tender to go around barefoot, so I think I’ll keep my shoes for now. However, I do admire this guy, and others like him. They may have adopted minimalism for environmental reasons, economic reasons, or maybe some combination. Either way, their level of commitment reminds me just how addicted to stuff I still am, and has inspired me to rethink that addiction.

“But I Could Never Give Up My…”

How did you finish that sentence above? Daily cup of Starbucks? CD collection? Season football tickets? All of us probably have one thing we aren’t willing to give up. And maybe that’s the first thing that should go.

On the other hand, life is to be enjoyed. I’m reminded of words of wisdom from my grandfather who often reminded me to, “Stop and smell the roses. Life is to be enjoyed.” Well, there are plenty of “roses” available to smell that don’t cost much, so I am trying to adopt his philosophy with a frugal approach.

How Many Things Do You Own? How Many of Those Things Own You?

As I’ve tried to learn more about the minimalist approach, I’ve discovered a number of new blogs on minimalism. I’ll be sharing a few of my favorites in upcoming editions of the weekly roundup.

Several of the authors behind these blogs have advocated taking an inventory of just how much stuff you own. And they mean that quite literally. If you have 20 DVDs, 30 CDs, an Xbox with 5 games, a house, a car, a bicycle, 10 pairs of shoes, and a 5-piece art collection, you have 74 things. At least I think that’s the idea.

Not sure how far to break down the count – do I count the dishwasher and refrigerator inside my house? Do I count the things inside my refrigerator and the dishes currently in the dishwasher? Probably. You get the idea.

The point is, even if we don’t think we own a lot of stuff, we do. And how many of those things are things we continue to accumulate without receiving much value from them after the initial shine wears off?

I am not much of a collector, and I have few hobbies, so I naturally don’t collect a lot of things. But I haven’t always been that way, and my inventory of stuff is still representative of former life as a spendthrift.

Letting Go of Stuff is Hard

Over the next few weeks, as the weather beings to cool, I plan to begin making a weekly effort to get rid of some number of “things.” My plan is a sort of incremental minimalism in steps. Maybe I’ll get rid of 10 things a week, or completely empty one desk drawer, or garage shelf.

One week I’ll pull ten shirts I no longer wear and donate them to a shelter. Next week I’ll round up 10 games (video games, old board games, etc) I no longer play and drop them off at the children’s hospital. The next week maybe I’ll contribute to a neighbor’s yard sale by adding 10 DVDs to their collection for sale.

I’m still not settled on what is a reasonable number to get rid of each week, or if I’ll even track it by week or specific number. But I am convinced this is something I want to do. Having too much stuff is costly. It costs money to store it. It takes too much time to find the few things that are really important. And of course if you have really expensive things, you might even have to pay to insure it, or operate it, or clean it, or whatever. That’s the point where things begin to own you, and I want to begin moving away from that point.

Traveling Light

Oddly enough, some people are comforted being surrounded by stuff. I am the complete opposite. For me, stuff is a distraction. There is a certain freedom that comes with owning less stuff. You feel less pinned down. You have less payments. You have more options. You more fully appreciate the few things you do have, and find yourself wanting less.

Over the next several weeks I’ll periodically update you on the things I’ve given away – maybe even share pictures of my collections on our Facebook page. I hope it will inspire a few of you to look around and free yourself of an addiction to things.

Look around the room you are in right now. Could you find 10 things to get rid of and barely even miss them? I see at least 10 in my already frugal home office (OK, I cheated a bit because my office doubles as our closet – and there are plenty of things to get rid of in here!). Off to grab a box and get on with round one.

Read This Before You Spend The Big Bucks

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This is a guest post from MD of Studenomics– a personal finance blog that makes money talk fun for 20-somethings.

We all hate to be told that we can’t do something. Whenever I’ve discussed ways to save money in your everyday life, my readers would get turned off.

When I would discuss strategies on how to cut back without giving up, my readers responded favorably.

Today, I wanted to try something different with the younger readers of Frugal Dad. I wanted to tell you to go ahead and spend the big bucks...BUT. Yes there’s a catch. Actually there’s a few catches (isn’t there always?):

You need to make big money before you spend big money.

You need to ensure that you’re at a stage in life where you’re earning a decent chunk of change if you want to buy that new Infiniti G35. Many college graduates are guilty of extreme lifestyle inflation. If your big spending results in you saving less than you would like to, it’s still somewhat justifiable. If your big spending is paid for by credit card, then you’re headed towards a financial disaster. Even worse is when low-income earners want to spend the big bucks before they’ve even reached the stage where their income justifies it.

The other day I heard yet again another story of a friend that just graduated college, started making a little bit of money, and is already living an extravagant lifestyle. Instead of saving up a buffer in his savings account, he decided to spend 15 grand for two people to go to Australia. I’m all for long term travel and working abroad, but, I’m opposed to spending the big bucks before you’ve saved any bucks or have earned any money to justify your spending.

Where are you cutting back?

If you want to allocate a lot of your income towards one spending area, it’s advisable that you cut back in other areas. I love to go out with friends. Instead of forcing myself to stay in or making my life miserable, I find ways to cut back on other areas. I try to prepare as much of my own food as possible. I try not to indulge in the newest fashion trends. I truly believe that uniforms don’t win games. So I would rather not jump on the newest trends just so that I can have more money for going out with friends.

The key point here is that if you want to spend big money on a specific area, you need to try to cut back somewhere else. If you don’t then you’ll never have any money leftover. Even worse, you might end up in massive amounts of debt. The last thing you want to happen early on in your working career is to rack up debt. The debt will just prevent you from moving on with your life (moving out, getting married, etc.).

You must plan your spending

I’m not here to judge anyone. I’ve spent more money on trips the last few years than celebrities do on plastic surgery (well not really). The reason that I get away with spending the big bucks here is because I plan ahead FAR in advance. I recommend that you find the best online banking account for your situation. This way you can plan all of your expenditures and know where your money is going.

Instead of always stressing about your money and trying to figure out where your hard earned money is being spent, plan ahead. I try to keep a few sub-accounts in my online bank account with ING Direct. This way I can roughly plan my spending for the short term and the long term.

Admit your weak areas.

We all have areas where our spending is horrible. There’s no point to lie about it. Just admit to it and try to slowly work on it over time. The quick fix almost never works (just like dieting) and you end up worse off in the end. If you acknowledge that you spend too much money on eating out, you can begin to improve your spending in this area. There’s no point to deny or to seek a quick fix. Both options will hurt your financial future. If you get realistic and serious about your money management skills, then you’ll eventually notice a big difference in your bank account and your quality of life.

There you go guys. A personal finance article giving you permission to spend the big bucks. What do you think? Where do you spend the big bucks? How do you plan your spending?

Weekly Roundup: Student Loan Debt Edition

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I believe student loan debt is a cancer attacking the financial futures of young people. While I do believe in the value of a college eduction, I wonder if taking on such exorbitant debt before earning an income is a smart thing.

I had a small student loan when I first entered college, and then racked up credit card debt when I returned to school several years later to finish. I joke that it took me 10 years to finish my degree and nearly as long to pay for it!

If you are already in college, and accumulating debt, consider other ways to pay for the remainder of school. If you are still a few years from college, or the parent of someone a few years from college, I hope the following graph will serve as a wake-up call of sorts. College is not getting any cheaper, and fewer of us are able to pay for it without going deep into debt.

Budget Planner from Mint.com

Frugal Roundup

How Living a Frugal Lifestyle Has Changed My Thought Process. I’ve noticed that my thought process has changed just like in the article. Things that we used to frequently spend money on are not even close to making the cut today. (@Being Frugal)

So You Want My Job: Magician. This isn’t really personal finance related but I still thought it was interesting. I think all of us wanted to be a magician at some point in our childhood. (@The Art of Manliness)

How To Replace Six Vital Documents. If you’ve ever lost an important document, you know how stressful it can make you life. Use this list to relieve some of that tension. (@Get Rich Slowly)

How Personal Finance Changes As You Begin to See Success. Trent shares some more insight into how things change once you begin to alter your financial life for the good. (@The Simple Dollar)

Best of the Rest

The Key to Effective Budgeting – Master The Yes/No Factor

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The following guest post is by Craig Ford.  Craig blogs at Money Help for Christians where he teaches people how to budget.

Budgeting: Is it More About Yes or More About No?

Your perspective of budgeting is dependent on how you answer the question listed above.  There are some people who think budgeting is all about no.  No spending.  No entertainment.  No fun.  While any good must have its fair share of occasions where it says no, a good budget is not about saying no.  Instead, an effective budget is about appropriately using no to help you achieve a yes you would really like to accomplish in life.

A good budget must utilize the word no.

Consider the following illustration.  A man goes down to the river to enjoy an afternoon fishing.  A friend comes by and asks if he can use the river to wash his face.  Of course, the man is benevolent, so he allows the man to come and dip his head into the cool river.  A few moments later, another friend is passing his way and makes the same request.  All throughout the day the man provides strangers, friends, and relatives an opportunity to rinse in the river.  He is able to do so because the river provides an unlimited (to a certain extent) amount of water.

But a budget is not like the river because you are dealing with a limited resource.  Budgeting is more like a man with a pie.

A man goes to town to buy a pie.  As he looks at the pie, his mouth begins to water.  Then, as he prepares to take a bite, a friend passes his way and asks for a piece of the pie.  He quickly agrees and cuts the man a piece of pie.  Before long, there comes another and another until only one piece is left.  The man had told his family he would bring them pie, but there is no longer enough.  The problem is that by saying ‘yes’ to his friends, he indirectly said ‘no’ to his family.

Budgeting | The Yes and No Factor

Since money is a limited resource (in the sense that a dollar can only be used once before you must earn another one), each dollar represents the number of yeses we have available to use.  A man who makes $3,500 can say yes to 3,500 things that cost $1.  Beyond that number, he must say no.

The problem with North American culture is that credit cards and loans have made people believe that they have an unlimited number of yeses.  If they run out of money, they just go borrow more.

What if I say ‘yes’ too often?

If you say yes more than you can should, then you can improve your finances by taking away your ability to say yes when you cannot afford it.  As an example:

  • While some people properly manage credit cards, others would be better off if they stopped using a credit card.  A credit card simply allows you to say yes to a purchase when you should have said no.
  • Other people say yes too often when they go grocery shopping.  Limiting the number of trips you make to the grocery store would be a good way to remove your opportunity to say yes.

Each of us have occasions we say yes when we know we should say no.  A structured budget will help curb reckless spending.

I believe a written budget is a very important component of a financial plan. I’ve experienced it. I believe it’s important because with a budget you can predict and forecast when you want to say yes and when you must say no.  I want to say yes when it comes to family needs, so I budget.  I want to say yes when it comes to taking a family vacation, so I budget.  I want to have money to contribute to the church, so I budget.  I want to help pay for my kids’ college, so I budget.

A budget tells you when you should say yes and when you should say no.  Budgeting is not about saying ‘no,’ but about choosing when to say ‘yes’.

What do you think?  Is budgeting more about saying yes, or more about saying no?

Investing With Lending Club: Six Secrets to Higher Yields

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I have been investing money at Lending Club for over a year now, so it seemed like a good time to review my progress. While I started small, I have been adding a small amount to my modest portfolio each month. I’ve been lucky to this point; none of my loans have charged off. Here is an overview of my strategy for identifying profitable, relatively safe loans to invest in.

First, a little background for those unfamiliar with Lending Club, directly from their website:

Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. We replace the high cost and complexity of bank lending with a faster, smarter way to borrow and invest.

Couldn’t have said it better myself. Basically, this is how the process works. Borrowers apply for loans to consolidate debt, start businesses, make home improvements, etc. Their loan requests are made available to investors (people who have signed up as an “investor” and are looking to loan money to borrowers).

If enough investors agree to cover a portion of the loan up to the requested amount, and borrowers agree to terms with Lending Club, the loan is approved and borrowers begin making payments. Each month, a portion of your original investment is repaid, including a bit of interest (minus a small service fee).

Eventually, if the loan is fully repaid you will receive back your initial investment plus interest, an investment that generally yields far more than traditional savings accounts pay. How much more? Well, that depends on the types of loans you invest in.

Borrowers are “graded” by Lending Club based on their creditworthiness, considering a variety of factors. In addition to this grading system, loan listings provide you with a credit score range, credit utilization ratio, debt-to-income ratio, and a variety of other metrics to help make an informed decision. Generally, the riskier the loan, the lower the grade and higher the interest rate.

Most listings also include a discussion thread Q&A between potential borrowers and potential investors interested in learning more about their employment status, intentions for the money borrowed, etc.

At the time of this writing, my net annualized return is running 11.04%. Most of my investments have been in grade A or B loans that meet a set of criteria I’ve developed over the last few months in an effort to avoid charge off (yes, you can lose your money) while maximizing returns.

My Six Secrets for Earning More With Lending Club

1. Invest in loans less than $9,900. Lending Club allows borrowers to borrow up to $25,000, but for me, that’s a lot of burden for someone to take on (even if my portion of the loan is only $25). Requests for an even $10,000 seem fishy to me, too, so I like to invest in amounts less than $9,900. Under this threshold, chances are borrowers are requesting a specific amount for a specific purpose., making it more likely that they will repay.

2. Look for borrowers with debt-to-income ratios less than 15%. The lower the debt-to-income ratio, the higher the chances they will have money freed up for making payments on your loan.

3. Funding progress is at least 70%. If seven out of ten investors were willing to invest, and other criteria has been met, chances are I’ll invest, too.

4. Invest only $25 per note. $25 is the minimum amount allowed by Lending Club, and after experimenting with various amounts, I’ve decided to stick with the minimum amount for maximum diversification. I’d rather have four loans at $25 each than one with $100 exposed.

When I spoke to Rob Garcia, Lending Club’s Sr Director of Product Strategy, he stressed the importance of diversification when investing in Lending Club loans: “Diversification can lead to more steady returns while lowering your risk.  For example, 98.4% of Lending Club investors with 100 Notes or more have experienced positive returns.” See Distribution of Investor Returns

5. Look for borrowers with zero delinquencies…ever. I understand people can change, and past troubles are not necessarily indicative of future troubles. However, I’m investing my money here and I am not into giving second chances through investments. If I want to help someone get a second chance, I’m more inclined to give instead of loan.

6. Do not invest more than 10% of your taxable portfolio in social lending. I’ve been lucky so far earning over 11% and not losing any investment money to charge offs. However, it is possible, so I do not recommend loading up on peer-to-peer loans to chase a big return. As with any risky investment (and I consider anything over savings accounts to be fairly risky these days), I would limit my contributions to 10% of my overall, non-retirement portfolio.

Note: I recommend creating a filter while browsing notes for criteria 1-5. The post How to Earn High Returns with Lending Club inspired this strategy.

A Word About the Ethics of Social Lending

I initially tried Lending Club as an experiment, and before deciding to invest more money I thought long and hard about the ethics of lending money to others. I haven’t forgotten what it’s like to be in debt – after all, I only became debt free in the last year.

I worried that, in a way, I was simply enabling people to borrow money, so I limit myself to those borrowing for consolidation purposes, rather than taking on a project that needs financing. I suppose borrowing is borrowing, but I’d like to think those borrowing to consolidate debt are also interested in eventually paying off that same debt – more so than someone looking to borrow $15k to remodel a kitchen, for instance.

I’m also hopeful that borrowers are obtaining a better interest rate from Lending Club than they were paying to banks and credit card companies. When I was in debt I remember credit card issuers jacking up my interest rates for no apparent reason other than “the economy is bad.”

I suppose in this way, I am making borrowers’ paths to debt freedom a little bit easier. And of course, I like the idea of cutting out big banks and lending directly to borrowers.

In the end, I decided I would invest a small amount with Lending Club, but do so rather selectively in borrowers whose story and financial picture made me believe they would successfully pay off their loan.

If you’re interested in Lending Club, either as a potential borrower or investor, I encourage you to give them a try. Simply follow the banner below, or click here to sign up.