Your Personal Finance Pro http://yourpfpro.com Personal Finance for Young Professionals Sat, 13 Oct 2018 00:14:03 +0000 en-US hourly 1 31591919 3 Responsible Ways to Use Your Tax Refund http://yourpfpro.com/3-responsible-ways-to-use-your-tax-refund/ http://yourpfpro.com/3-responsible-ways-to-use-your-tax-refund/#comments Wed, 15 Apr 2015 13:30:18 +0000 http://yourPFpro.com/?p=6064 Happy Tax Day! Have you finished your taxes today? If you have (or even if you haven’t), make sure you take advantage of all those tax day freebies out there! At least you can get something free today which, depending on how tax season went this year, could be a nice way to end the […]

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Happy Tax Day! Have you finished your taxes today? If you have (or even if you haven’t), make sure you take advantage of all those tax day freebies out there! At least you can get something free today which, depending on how tax season went this year, could be a nice way to end the tax season this year.

If you are getting a tax refund back this year, have you thought about how you’re going to use it? Before you get carried away with dreams of going on an exotic vacation, consider the following when deciding how to use your tax refund.

Establish Or Add to Your Emergency Fund

If you haven’t started an emergency fund yet, stop what you’re doing and immediately put your refund into this fund! Emergencies, like a car repair or job loss, can strike without warning. By having an emergency fund, you’ll be able to take care of the emergency and have one less thing (money) to worry about. After all, if you’re dealing with an expensive car repair, the last thing you want to worry about is how much this is going to set you back.

Already have an emergency fund set up? First, high five! Second, do you have enough to see you through a big emergency, like an expensive medical bill not covered by insurance? Many personal finance writers recommend you have 3 to 6 months of net pay saved up in case of a big emergency, like losing your job and being unemployed for a few months.

As much as you may prefer to use your tax refund on something more glamorous than adding to your emergency fund, just keep in mind you likely didn’t count on or expect a tax refund. Consider it a bonus and, if your emergency fund could use a boost, give yourself peace of mind by saving your refund for a future emergency.

Increase Your Retirement Savings

Another way to use your tax refund responsibly is increasing the amount you’re saving for retirement. Use your tax refund to max out your 401(k) or, if one isn’t offered by your employer, increase your Roth IRA or Traditional IRA contributions. Using your tax refund to max out your 401(k) is a great way to easily save for your retirement, reduce your taxable income and take advantage of your organization’s perks.

If your organization doesn’t offer a 401(k) option, you can use your tax refund to open or increase your contributions to a Traditional Individual Retirement Account (IRA) or Roth IRA. You can contribute up to $5,500 in 2015, and depending on the amount of your refund, you may be able to make a significant impact to your retirement account this year. Also, a Traditional IRA will reduce your taxable income immediately, conferring tax benefits next year.

It’s never too early to plan for retirement, and investing your tax refund into retirement accounts is an excellent way to get ahead on saving in 2015. If you have met your emergency fund goals, using your tax refund for retirement savings is a great way to take care of your future self.

Tackling Debts

Between saving for your emergency fund and paying down your debts, I’m more in favor of saving up for emergencies. That’s partially because I had two emergencies happen to me last year, which decimated my emergency fund. However, it could have been worse if I didn’t have enough in savings. With an emergency fund, you can at least use it to pay some of your debt if you lose your job versus adding more to your credit cards just to pay the bills.

That said, depending on your debt burden, you may want to use your tax refund to address debt repayment. If you have credit card debt, it’s imperative you pay this off as quickly as possible. If you have multiple lines of credit card debt, you can choose to pay off the one with the highest interest rate or the one with the smallest debt.

After credit card debt, take a look at other debt you may have accumulated, including your auto loan or student loan debt. Recommending how to pay down these debts is more based on your situation than one particular “rule”. If you are close to paying off your car and want to erase that debt forever, consider paying off your auto loan now. Not only will you have paid off that debt, but you’ll free up money that you were paying monthly to put toward other debts to wipe them out faster.

Splurge on Your Vacation

After giving you three ways to spend your tax refund responsibly, I couldn’t end this post without making a mention of splurging. I don’t mean spending your tax refund on a first class flight to the Bahamas for an all-inclusive resort stay for you and 4 of your closest friends. If your refund was that big, you may be doing your taxes wrong.

When I say “splurge”, I mean allow yourself to indulge in a little on a vacation. If you’re already planning a summer trip, use your tax refund to help pay for your hotel (or AirBnB), rental car expenses, or a few nice meals out. You can still be frugal by charging your expenses to your rewards credit card to maximize your points, but then use your tax refund to pay off that bill before your trip.

Vacations with family or friends create memories you’ll remember for a lifetime, and life is too short not to indulge every once in a while. If spending your entire tax refund on your vacation seems wasteful, go ahead and put some of your refund toward your emergency fund and your vacation, or pay down some debt and pay for a camping trip with your family. Being responsible with your tax refund can be a balancing act, but allow yourself to have a little fun every once in a while!

How do you plan on using your tax refund this year? If you owed money, join the club! I owed this year too, but my fiance received a refund. He’ll be paying for (part) of our vacation this year.

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5 Unconventional Investing Moves for Your 20s http://yourpfpro.com/5-unconventional-investing-moves-for-your-20s/ http://yourpfpro.com/5-unconventional-investing-moves-for-your-20s/#comments Mon, 02 Mar 2015 14:30:46 +0000 http://yourPFpro.com/?p=5969 A few weeks ago, we covered Money Moves to Make in Your 30s, but in covering the 30s, we missed a crucial period for many readers of Your Personal Finance Pro: everyone in their twenties! Many personal finance websites have already covered the standard things you “should” do in your twenties, like cut down on […]

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A few weeks ago, we covered Money Moves to Make in Your 30s, but in covering the 30s, we missed a crucial period for many readers of Your Personal Finance Pro: everyone in their twenties! Many personal finance websites have already covered the standard things you “should” do in your twenties, like cut down on your latte habit and invest that $5 a day into an emergency fund.

5 Unconventional Investing Moves for Your 20sHowever, there are several unconventional ways to make the most out of your 20s. By incorporating these moves into your 20s, you’ll set yourself up for greater success in your 30s – and beyond!

Invest Your Greatest Asset: Time

While some say your 20s are your time to “live it up” and enjoy life (i.e. spend money) as much as you can, take the unconventional approach and save your time – and money. By not going out and spending money on happy hours or fancy furniture, you’ll save money and use your greatest asset to build a large nest egg. Even if you’re only able to invest 5-10% of your money into your retirement account, you will have 50+ years to watch it grow. Unfortunately, many of your peers may not realize the power of compounding interest until their thirties or forties.

Leverage the Power of Your Twenties

Your twenties and early-to-mid thirties are the best time to leverage your youth, energy, and passion into your career. This means not settling for a job that you can only just tolerate. Invest in yourself by tackling new work whenever you see an opportunity. Whether you have to ask for it, or you’re given opportunities to tackle projects on your own, accept everything worthwhile that comes your way.

Investing in your success early will pay off in dividends down the road. The beginning years of your career are crucial to your future success, as this is the period in your life where earnings can increase significantly. Early wage growth spells success down the line, as you’re more likely to continue getting raises, promotions, or other lucrative job offers. Don’t settle for a mediocre job because it’s easy – challenge yourself!

Invest in Your Confidence

Your twenties are a time to take chances and, potentially, fail. While you’re young and have more free time, invest in your skills and start a side hustle. Even if your job completely fulfills you in terms of challenges and new skills, there is always something else you could do to improve your prospects. Invest in learning a new skill, whether it’s improving your writing, coding skills, or even something unconventional like wilderness survival skills.

Charge it – Responsibly

Baby boomers often disparage millennials for their poor credit scores. Whether or not you were taught how to manage money, now is the time to prove your parents or their friends wrong. If you somehow have escaped your early twenties with absolutely no debt (auto loans, student loans, credit card, etc.), it’s time to take on some debt responsibly.

Think of building credit as a long term investment in yourself. It’s clear that you can use credit cards to your advantage – just check out the posts on how to successfully manages dozens of cards. However, you don’t have to even your cards that much to become financially responsible. By charging small amounts to your credit card and paying off the balance in full every month, you’re well on your way to achieving a stellar credit score.

This investment will pay off down the road when you’re applying for an auto or home loan. Also, don’t forget, some companies screen potential hires credit scores, so having a good score is a long term investment for your financial future.

Invest in Your Brand

Even if you never plan on starting your own business or side hustle, you’ll still want to invest in your brand. Investing in your brand means monitoring and shaping up your online presence. Time to take down those Facebook photos of you partying in college, or making obscene gestures (not that any of us has ever done that…). If you’ve neglected checking your privacy settings on Facebook, or reading through your old tweets to make sure you haven’t said anything you would regret, now is that time.

Like it or not, everything we say online is viewable to everyone, including current or potential employers. Go through your old posts throughout the web, and reconsider anything controversial you may have posted. If it’s not something you’d want blasted on the front page of a newspaper (or BuzzFeed article), take it down. Better to be safe than sorry!

Counterbalance a negative (or empty) personal brand by sharing good stuff about your career and accomplishments. Send out tweets touting an accolade you received at work, or share interesting Facebook posts about your industry. Make yourself a reputable source who is focused on their career and improvement. A positive personal brand will go a long way toward making a positive first impression on any potential employer.

If you’re looking for more traditional investing information, a great resource is Fisher Investment Guides. These guides will help you understand your net worth, how to invest in IRAs and 401(k)s, and more. Whether you’re in your twenties or beyond, Fisher Investment Guides are a useful resource to help you understand complex investment questions.

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I Finally Filled Up My Lending Club Roth IRA http://yourpfpro.com/finally-filled-lending-club-roth-ira/ http://yourpfpro.com/finally-filled-lending-club-roth-ira/#comments Wed, 16 Oct 2013 12:45:59 +0000 http://yourPFpro.com/?p=3134 It seems like years ago that I wrote my two part series on opening a Lending Club Roth IRA and how to invest it.  It was actually only 5 months ago, but it marked my first major investment into peer to peer lending.  I was convinced to make a larger investment because my experimental account […]

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I Finally Filled Up My Lending Club Roth IRAIt seems like years ago that I wrote my two part series on opening a Lending Club Roth IRA and how to invest it.  It was actually only 5 months ago, but it marked my first major investment into peer to peer lending.  I was convinced to make a larger investment because my experimental account of $500 was still above 10% returns after two years.  That gave me the confidence to put $5,000 into my LC Roth IRA for 2013 with another $5k on the way next year(in 2014).

Even though I happily opened my Lending Club Roth IRA, I still think $10,000 is a lot of money to invest in an unproven and relatively new investment.  We know that the return is there, but it’s tough to tell just how risky the investment is since there isn’t much historical data on peer to peer loans.  But I think a lot of that uncertainty is what drives the returns up so high: people are afraid of the unknown.  

It’s up to investors like me to go in and capitalize on a favorable risk-return rate.

Why’d it Take So Long to Fill Up My Portfolio?

Lending Club’s popularity has been growing exponentially over the past couple of years.  It’s very hard to find notes that match my filters without logging in at the specific times when they release notes(6 am, 10 am, 2pm, 6pm PST).  I set a simple daily reminder at 10:02 am to log on to Lending Club and check for new notes though.  On most days, I find in-between 1-3 notes that match my criteria so I go ahead and invest.

This is one of my only complaints with Lending Club right now.  There’s no way to automate the investment process so it can be a little time consuming for individual investors.  If I wanted to invest more than $10k I’d probably have to widen my filters to encompass more notes(possibly lowering my return though).

Using my once a day strategy though, I filled up my portfolio in about 5 months.  Going forward, I will probably only need to logon 1-2 times a week to re-invest my dividends if I decide not to cash them out.  I didn’t want filling up my LC portfolio to consume my life but I could have set reminders four times a day and filled up my portfolio in a month or two if I wanted to.

Planning For the Future

Even though I’m young and very open to risk, I don’t see Lending Club as that risky of an investment.  Like I said, I don’t think the market has caught up yet in terms of its risk so that’s why I don’t mind putting in $10,000.

Investing in a Roth IRA is the perfect vehicle for Lending Club notes in my mind too.  Once I have enough money in my Lending Club IRA, I can start withdrawing the monthly returns as tax free dividends.

Since you’re allowed to withdraw your contributions from a Roth IRA at any time tax free, I would be able to use my returns as a source of tax free income.  Here’s what I mean.

Let’s say I contribute $5k in 2013 and $5k in 2014.  Assuming my portfolio is completely full by 2015 and I’m earning a 10% return, I can withdraw my $1,000 in interest each year for 10 years completely tax free.

It’s kind of like investing in a high paying CD(albeit with way more risk) but not having to pay taxes on any of the returns.  Since I have already made $20k in Roth IRA contributions from 2009-2012, that would give me another 20 years of tax free returns.

I keep on telling anyone and everyone who will listen what a great investment Lending Club is.  There’s definitely risk but it’s nice to have a second or third source of income that isn’t related to stocks, bonds, or the real estate market.

Readers, what do you think about opening a LC IRA?  Do you think it’s worth the daily hassle to fill up a portfolio or am I right on the money with what I’m doing?

-Harry @ PF Pro

Ready to invest in Lending Club? Click the banner below(aff link).

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3 Expenses That Will Go Up As You Get Older http://yourpfpro.com/guest-post-3-expenses-that-will-go-up-as-you-get-older/ http://yourpfpro.com/guest-post-3-expenses-that-will-go-up-as-you-get-older/#comments Wed, 05 Jun 2013 20:56:28 +0000 http://yourPFpro.com/?p=2149 This is a guest post by Chris at StumbleForward.  Head over to his blog and check out his other articles after you’re done with this one! We all understand that the cost of living is going up on an annual basis.  But as we get older, there are going to be some huge cost increases […]

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3_Expenses_Go_Up_as_you_get_OlderThis is a guest post by Chris at StumbleForward.  Head over to his blog and check out his other articles after you’re done with this one!

We all understand that the cost of living is going up on an annual basis.  But as we get older, there are going to be some huge cost increases that you may not have realized you had to deal with making those golden years not so golden anymore.

So in this article I’m going to cover 3 expenses that may be increasing and help you plan for those increased expenses now before it’s too late. 

Taxes

One of the first increases you may see is a rise in is taxes.  Once you’ve retired you won’t be able to claim several of the great tax deductions like you once did.  To start, your kids will likely have all grown up and moved on with life so you won’t be claiming any sort of child tax benefit.

Secondly, now that you’re retired you won’t be contributing towards your retirement through a company retirement plan such as a 401k.  Contributions towards these programs helped keep your taxes lower during your working years and what’s worse is when you go to withdraw that money you will owe taxes on every single penny you pull out.

Finally, one of the last ways your taxes will increase is if you are a homeowner, because once you have your home paid off you will no longer be deducting the interest you paid toward your mortgage.  The only upside to this is that you won’t have a mortgage payment anymore.

When it comes down to it, your taxes will increase when you get older assuming your income stays the same.  You may not necessarily jump up in tax brackets but rather you won’t be getting the comfortable deductions you once were.  To avoid these issues now, start contributing toward a retirement plan that is not tax deductible such as a ROTH IRA.  Doing this allows you to pay a portion of your taxes now before you retire and hopefully at a lower rate.

Insurance

The next thing to increase is your insurance, and the big one on this list is health insurance.  Health insurance has been increasing by huge amounts over the last few years.  In fact I’ve personally seen it go up by 50% in the last two years alone.  On top of that in the state of Ohio it is projected to go up by 80% by 2017.

However if you’re on Medicare don’t count yourself safe either.  In a recent article by the New York Times, claims that the Medicare trust fund will run out of money by 2024.  This means the safety net that you once had could be gone now, and before that time even comes you could be seeing a huge decrease in benefits, and higher taxes cover the ever widening gap.

On top of that consider the cost of life insurance.  When you are younger, life insurance is cheap.  But when you hit age 60, rates can go way up and a pre-existing medical condition will make the situation worse. In fact nearly 50% of those living in the US do not have life insurance.

In the end, insurance for the elderly is going up especially as you get older.  Buying life insurance earlier in life when you are healthier and younger could save you a lot.  Secondly, start saving extra for your health insurance needs, by setting up an HSA account or extra savings account to help cover unexpected medical expenses.

Retirement

When it comes to retirement savings, most people don’t start until it’s too late.  In fact, in a recent survey by the Employee Benefit Research Group said that 60% of 55 year olds and older had less than $100,000 saved for retirement.

What’s worse is that the cost of living is also increasing on a year by year basis, which means when you do plan to retire things are going to cost more, a lot more.  Not having this extra cost figured into to your retirement savings may end up draining your savings faster than you anticipated.

Finally, we have to consider social security.  As it stands right now social security may run out by as early as 2023, and just like Medicare, it will likely be facing benefit reductions, and possible tax increases.

The best way to avoid this disaster is to start saving as early as possible.  This will allow you to compound your money for a longer period of time and as a result live a better retirement, not a semi-retirement, or even none at all.

So, what are you doing to protect against these extra cost?

Bio:

This article was written by Chris Holdheide a personal financial blogger with StumbleForward.com, helping people avoid financial mistakes and live a higher quality financial life.

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Part 2: Investing in a No Fee Lending Club Roth IRA http://yourpfpro.com/investing-a-no-fee-lending-club-roth-ira/ http://yourpfpro.com/investing-a-no-fee-lending-club-roth-ira/#comments Thu, 23 May 2013 00:48:56 +0000 http://yourPFpro.com/?p=2199 This is the second part in my series on investing in a Lending Club Roth IRA.  You can read the first article here about Opening a No Fee Lending Club Roth IRA. Finding a Great Sign-Up Bonus Lending Club has always had some pretty solid sign-up bonuses.  When I opened my account three years ago, […]

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Investing_Lending_Club_Roth_IRAThis is the second part in my series on investing in a Lending Club Roth IRA.  You can read the first article here about Opening a No Fee Lending Club Roth IRA.

Finding a Great Sign-Up Bonus

Lending Club has always had some pretty solid sign-up bonuses.  When I opened my account three years ago, their $50 sign-up bonus definitely assuaged my initial apprehension and was part of the reason why I signed up.

Lending Club was offering cash bonuses of $100-$300(thanks to reader Noah for this tip), but they actually slashed these bonuses by 25% this past Monday(5/20)!  Horrible timing for me since I had already written this article, but Lending Club now offers bonuses ranging from $25-$100 depending on how much you invest.

It’s not a ton of money like it used to be, but it’s better than nothing if you’re going to sign up anyways.  There is an abundance of investor money out there right now so it doesn’t look like these bonuses will be going back up any time soon.

Lending Club’s referral program actually requires current members to invite new members through e-mail or social media accounts from the account dashboard.  The referral bonus you can send out depends on how much money you have in your account but I’ve copied the links to the landing page for each bonus and I’ve posted them below:

From my account, I can only invite people with a $25 referral bonus so YMMV on the $50 and $500 links.  I would make sure to take a screenshot in case you don’t end up getting the bonus.

In case you’re wondering, I won’t receive any type of bonus or commission if you sign up using any of the above three links.  I do have affiliate links though where I get paid a small commission if you click on them and then sign up with Lending Club.  But if you plan on investing more than $2,500, you should use one of the above non-affiliate links since my links won’t give you any type of bonus.

Funding a Roth IRA and Investing in High Quality Notes

Since my after-tax account was relatively small, I only needed to invest in new loans once every couple weeks.  For my new Roth IRA, I was a little worried about investing $5,000 all at once since I have such strict filters.  Either way, it was too late, since I didn’t really think about this until I already had the money transferred over.  I probably should have though since what I found was that there are hardly any notes to invest in anymore.  There is a gluttony of investor money and borrowers just can’t seem to keep up with the demand.

I was checking constantly throughout the day and there never seemed to be more than 100 notes available.  Most of which, didn’t even come close to meeting my strict filtering criteria.  I was getting a little worried but then I came across some great advice from Peter at Lend Academy.  Peter told me that Lending Club has started releasing all their new notes at 6 am, 10 am, 12 pm and 2 pm Pacific time each day.

Once I started logging in at those times(sometimes it doesn’t update until 1-2 minutes after) I was often seeing the number of notes jump from 50-75 to 150-200 depending on the day and time.  I finally had the selection I wanted but now I had to decide which notes to invest in.

Using a Tiered System

I did a lot of experimenting searching for notes using various filters and I finally settled on two variations.  The first filter I call my tier 1 filter and I invest in $50 notes with it.  The second filter I call my tier 2 filter(real creative, I know!) and I invest in $25 notes with it.  I plan on owning about $2,500 worth of tier 1 filters and $2,500 worth of tier 2 filters.  That should give me around 150 total notes, I think that’s plenty for diversification purposes.

Tier 1 Filter

Revolving Balance Utilization: 50% or less

Minimum Length of Emplyment: 3 years

Term: 36 month only

Max Loan Amount: $20,000

Delinquincies(in the last 2 years): 0

Exclude loans already invested in: yes

Home Ownership: Mortgage or Own

Interest Rate: C: 15.8%, D: 18.76%, E: 21.49%, F: 23.49%, G: 24.84%

I also add my own filter at the end and I don’t invest in any loans that have a title or description of credit card consolidation, payoff, get out of debt, etc.  This is the majority of loans on Lending Club but I have never like investing in these types of loans.

Tier 2 Filter

Revolving Balance Utilization: 50% or less

Minimum Length of Emplyment: 2 years

Term: 36 month only

Max Loan Amount: $30,000

Delinquincies(in the last 2 years): 0

Exclude loans already invested in: yes

Home Ownership: Mortgage or Own

Interest Rate: B: 12.2%, C: 15.8%, D: 18.76%, E: 21.49%, F: 23.49%, G: 24.84%

I also add my own filter at the end and I don’t invest in any loans that have a title or description of credit card consolidation, payoff, get out of debt, etc.  This is the majority of loans on Lending Club but I have never like investing in these types of loans.

Reasoning Behind My Filters

I think my tier 1 filter is pretty self-explanatory.  I’m looking for homeowners who don’t want too much money and have a decent credit history.  I didn’t really do any in-depth analysis to come up with these filters, I just played around with them over the past few years and relied on past data.  The only changes I made from tier 1 to tier 2 is to increase the loan amount, add B grade borrowers and lower the minimum length of employment.  I did this in part because I needed more loans to invest in so we’ll see how these play out.

The one thing to note is that I no longer invest in 60 month notes.  I don’t think the slight increase in interest rate is worth the additional two years of risk that a borrower could default on the loan.  You can use a site like LendStats to test your filters and see how they have performed in the past but don’t get too caught up in it as past performance is not always a good predictor of future performance.

Off to a Good Start

In just two weeks, I’ve already accumulated 27 notes that meet my filtering criteria and the split is exactly 50% for now.  I have $450 invested(9 notes) in Tier 1 notes and I have $450(18 notes) invested in Tier 2 notes.  I set a recurring Outlook reminder at 10 am and 2 pm to check the platform for new notes and it takes about a minute to quickly log on, check for notes and invest.  I usually find 1-2 tier 1 notes a day and 2-3 tier 2 notes a day.

So that’s the strategy I’ll be using from now on.  I’m probably going to slowly start phasing out my after-tax account since otherwise I’d be investing in a lot of the same notes in my Roth IRA.  Like I said in part 1, I’m going to invest a total of $10,000 and see how it goes.  If things go well after a year or two, I’ll probably open up another Roth IRA in my fiancee’s name(with a sign up bonus of course) and do some more investing there.  Ultimately, I would like to use these accounts as part of my passive income strategy but for now I can be patient.

Readers, what do you think of my investment strategy?  Do you use similar filters or do you just pick whichever loans look good to you?

-Harry @ PF Pro

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Part 1: Opening a No Fee Lending Club Roth IRA http://yourpfpro.com/opening-a-no-fee-lending-club-roth-ira/ http://yourpfpro.com/opening-a-no-fee-lending-club-roth-ira/#comments Mon, 20 May 2013 01:26:21 +0000 http://yourPFpro.com/?p=2182 I’ve been investing with Lending Club for three years now and my returns are still over 10%.  I’ve developed a specific set of filters that I feel give me a distinct advantage over the average LC investor yet it’s nothing ground breaking.  The average investor is doing pretty well according to Lending Club, but I […]

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Lending_Club_No_fee_roth_iraI’ve been investing with Lending Club for three years now and my returns are still over 10%.  I’ve developed a specific set of filters that I feel give me a distinct advantage over the average LC investor yet it’s nothing ground breaking.  The average investor is doing pretty well according to Lending Club, but I want to do better.  My filters have produced just one default out of 50 loans(37 still issued and current) in my after-tax account and although my initial investment was only $500 3 years ago, I’ve been continuously re-investing interest payments and my account value is now over $700.  That is a pretty amazing return considering the low interest rate environment we’re in.

I wouldn’t dare compare Lending Club to fixed investments like CD’s or even bonds in terms of risk but I’d say there is a very favorable risk-reward trade-off when it comes to peer to peer lending.  Since it’s such a relatively young business, the market has not caught up to it yet and individual investors like you and I can take advantage of that fact.  I’d say the risk is somewhere in-between stocks and bonds but the returns are more closely aligned with stocks.

Most people invest in stocks because they want the high returns that bonds/fixed investments don’t offer.  But with higher returns, there is almost always higher risk.  Stocks are no exception as anyone investing in the past 10 years has seen just how volatile the market can be.  Even though Lending Club has some obvious risks, I don’t see nearly the same volatility that stocks have even though they both produce similar returns.  The lack of volatility coupled with higher returns is what makes Lending Club such a great investment.

Why Roth IRA?

I’m not going to get into a whole Roth IRA debate here but the benefits are pretty obvious in my opinion.  You don’t know how much money you’ll make in the future and you don’t know what the tax rates will be like.  If you diversify your investments between stocks, bonds and real estate then you should diversify your retirement accounts from a tax perspective.  Pay taxes on some of your money now and pay taxes on some of it later.

I decided to contribute $5,000 to my Lending Club Roth IRA for 2013 and I will contribute $5,000 more in 2014.  This represents about 5% of my overall retirement portfolio and even though I’m a huge Lending Club fan, I don’t think it would be prudent for this number to ever go above 15%(for now).

Re-invest the Interest?

Here’s where things get fun since Lending Club pays out monthly cash payments of interest and principal.  Investors can either re-invest that money in new loans or withdraw it to their bank account.  Personally, I plan on re-investing the dividends to start, but eventually I think it could be a great source of passive income.  And the best part would be the fact that the income would be tax-free.  Here’s how:

From 2008-2012, I contributed $5,000 a year to my Roth IRA for a contributions total of $25,000.  Obviously the market has done well over that period so my Roth IRA has gone up.  But I don’t ever plan on touching this money(principal and gains) until I retire.

Since I’ve already contributed $5,000 in 2013 to my Lending Club IRA, I’ll contribute another $5,000 in 2014 for a total of $10,000.   Let’s assume that my $10,000 balance is fully invested at the start of 2015 and I earn a 10% return for the year.

At the end of 2015, I would withdraw $1,000 from my Lending Club Roth IRA.  Up to this future point in my future life, I’ve contributed a total of $35,000 to all of my combined Roth IRA’s.  Since I’m allowed to withdraw contributions at any time tax free, all I’m doing is withdrawing a contribution, my first $1,000.  I can do this for the next 35 years!

So technically, even though I’m taking out the money I made from Lending Club, the government sees it as me taking out the first $1,000 I ever contributed to a Roth IRA.  This is what’s known in the finance world as ‘the fungibility of money.’

Even if I never contributed the first $25,000 to my Vanguard Roth IRA, I would still be able to use this strategy for 10 years and take out $1,000 a year.  After that though, I would have to pay taxes on any withdrawals or leave the money in the account and take it out tax free when I retire(still not a bad deal).

The Fees Associated with a Lending Club IRA

This all sounds too good to be true right?  Kind of, although there are fees associated with a Lending Club IRA, they can be negated by depositing 5k within the first year and 10k by your 2 year anniversary.  Lending Club is actually pretty good about disclosing their fees and the only fee they charge is the servicing charge on each loan.  You will clearly see this fee when you go to place an order and it calculates your expected return(rate – default percentage – fee).

Lending Club doesn’t actually offer retirement accounts so you’ll have to open one through their custodian SDIRA Services as an administrator.  Now these guys know how to charge some fees.  Just take a look at their fee sheet!  There are all sorts of fees for wire transfers and things of that nature but fortunately there is no charge for ACH transfer, so getting your money in and out should be free(I haven’t tried this yet).  And as long as you meet the 5k/10k requirements, Lending Club will cover all the other applicable fees.

The only thing that worried me was the $150 account termination fee, so if you ever decide to close your account you might be hit with this fee.  With certain companies, you can try to transfer out all your money instead of closing the account.  They might require that you leave a certain amount of money in the account, but if that amount is less than the account closure fee it might save you some money to transfer instead of close the account.

Editor’s Note:  This article turned into kind of a monster at over 2,000+ words so I decided to break it up into two parts.  The second part of this article will cover how I invest in Lending Club: what filters I use and why.  I’ll also talk about the best sign-up bonuses currently going on at Lending Club so check back on Thursday.

You can read part 2 here: Investing in a No Fee Lending Club Roth IRA

Readers, what do you think about my new Lending Club strategy?  Do you like the idea of opening an IRA or rolling over your 401(k) to Lending Club?

-Harry @ PF Pro

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My Tax Efficient Investing Plan http://yourpfpro.com/my-tax-efficient-investing-plan/ http://yourpfpro.com/my-tax-efficient-investing-plan/#comments Thu, 02 Aug 2012 05:34:48 +0000 http://yourPFpro.com/?p=941 If the Mayans are wrong and Dec 21, 2012 doesn’t bring the end of the world, taxmageddon is still headed our way in 2013.  Income taxes are slated to go up for every single tax-paying American unless congress and Obama act.  Regardless of whether you’re for or against the proposed tax increase, it’s causing a lot of […]

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taxmageddonIf the Mayans are wrong and Dec 21, 2012 doesn’t bring the end of the world, taxmageddon is still headed our way in 2013.  Income taxes are slated to go up for every single tax-paying American unless congress and Obama act.  Regardless of whether you’re for or against the proposed tax increase, it’s causing a lot of uncertainty among investors.  This tax increase would return the capital gains tax to ordinary income rates, greatly affecting investors and their retirement accounts.

The budget deficit is growing every year, so it seems pretty reasonable that there is only one direction taxes can go, and that’s up.  With that in mind, it’s important to know how your money is taxed going into retirement accounts and how it might be taxed coming out.  Capital gains taxes can have a significant impact(just ask Mitt Romney) over a long horizon.  There are different theories as to the most efficient fund placement but I like to keep it simple.

My Tax Efficient Investing Plan

1.  401k – Contribute up to the maximum employer match

2.  Traditional IRA/More 401k – It’s easy to contribute more to your 401k but if your plan is laced with fees, consider opening a traditional IRA.

3.  Roth IRA – Allows you to lock in tax rates now

4. Alternative Investments – Real estate prices are at an all time low

5.  Taxable accounts – I’m not a huge fan of taxable accounts for retirement investing and I’ll explain why

1.  401k Up to the Employer’s Match

I’m lucky because my company fully matches up to 6% of my 401k contributions, with an additional 2% vested after 3 years.  So as long as I stay with the company 3 years, I receive a 6% match and a 2% bonus as long as I contribute 6% of my salary.  Contributing up to your employer’s match is a no brainer, even if it’s only 2-3%; it’s a guaranteed return.  If my company didn’t match my contributions, I’d probably skip to step 2.

2.  Open a Traditional IRA or Contribute More to Your 401k

If your company doesn’t offer matching, then their investment options are probably pretty lacking too.  I’d go straight to a company like Vanguard and open a traditional IRA.  There you’ll get great service and some awesome ultra-low cost mutual funds.  For those of you that have high fees and limited choices in your 401k, a traditional IRA can be a good choice after you’ve contributed up to the employer’s match.  After you collect that free money, there’s no reason you have to stay with your 401k provider.  Opening an account with Vanguard will also make things easier if you want to rollover your 401k when you leave your employer.  Traditional IRA’s give you a ton of flexibility, you can invest in everything from gold and REIT’s to Lending Club.

If your 401k plan has low fees and a good selection, contribute more!  I’ve increased my 401k every time I got a raise over the past three years, and now I’m max’d out.  If you have an HSA, I’d also consider contributing here because it’s the only triple tax advantaged account.

3.  Open a Roth IRA

I always recommend Roth IRA’s because it allows you to diversify your investments from a tax perspective in addition to reducing volatility.  I think tax rates are going up and a Roth IRA allows you to lock in current tax rates unlike a 401k where you will pay taxes at your ordinary income rate when you withdraw after the age of 65.  If you read this blog for the next 30 years, you should have a wide array of passive income by then and your income will be much higher than it is now 😉

Unfortunately though, with a Roth IRA you have to contribute your after tax dollars so you don’t get the AGI reduction like with a 401k or a traditional IRA.  There are income restrictions for a Roth IRA too but if your AGI is less than $110,000 you can still contribute.  Alternatively, for those over the AGI limit, they can explore a backdoor Roth IRA.

4.  Alternative Investments

Now that I’ve max’d out my 401k, Roth IRA and HSA, I am saving all my after tax money for my next real estate purchase.  Real estate prices are still low and the interest rates are at an all time low.  Real estate is the only investment where you can put up 20-30% of the investment, but still receive 100% of the returns. Not only will you receive 100% of the returns, but you don’t even have to pay taxes on the capital gains from selling your property up to $250,000.

5.  Taxable Accounts

You should only consider contributing to a taxable account once you’ve exhausted all other options.  And trust me there are many!  Before you invest in taxable accounts, you can open a 529, buy tax free savings bonds, and more.  But I think real estate is the best after tax option since it can help you create steady passive income.  But if you’re insistent on after-tax investing make sure to invest in tax efficient stocks like ETF’s or low cost mutual funds.

Summary

A good retirement plan involves diversifying your investments in addition to diversifying the way they’ll be taxed.  Although I think taxes will be higher in the future, they could easily be lower and that’s why I have a wide array of very different investments in my portfolio.  Some of my investments pay tax now, some pay later, and some pay never.

Although every situation is unique, I recommend contributing up to the employer match, starting a Roth IRA, using your raises to increase 401k contribution, then starting tolook at alternative investments like real estate.  Although there are a lot of different opinions on this subject, this is the plan I’ve used and what I always recommend.  It’s worked great so far, and I’m happy to say I’m on track to retiring early while creating steady sources of passive income.

Readers, do you do some, all or none of this?  Are there any types of investments I’ve missed that are a sure thing?

-Harry @ PF Pro

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What To Do When Your Company Offers a Roth 401k http://yourpfpro.com/what-is-a-roth-401k/ http://yourpfpro.com/what-is-a-roth-401k/#comments Fri, 02 Mar 2012 04:57:07 +0000 http://yourPFpro.com/?p=284 It seems like every few years the government introduces a new retirement plan.  Even though it’s getting hard to keep track of all the different types, at a minimum, a savvy investor should have a basic understanding of each option and whom it can benefit most. The Roth 401k was authorized by the IRS in […]

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It seems like every few years the government introduces a new retirement plan.  Even though it’s getting hard to keep track of all the different types, at a minimum, a savvy investor should have a basic understanding of each option and whom it can benefit most.

The Roth 401k was authorized by the IRS in 2006 and many employers now offer it in conjunction with a 401k plan.  Like the name sounds, this type of retirement savings plan combines some of the most desirable aspects of a Roth IRA and a 401k.  Although this may sound advantageous, I’ll explain why a Roth 401k doesn’t make sense for most people.

401k and Roth IRA Explained

Most people are familiar with how a 401k works.  You contribute pre-tax dollars to your account, which reduces your AGI(Adjusted Gross Income), thus reducing your tax burden.  When you take money out in retirement, you pay taxes on the entire amount (contributions + earnings).  A 401k basically defers taxes to when you retire and you’re(usually) in a lower tax bracket.  On the other hand, with a Roth IRA, you fund your account with post-tax dollars, essentially prepaying your taxes now so that you will be able to take tax free withdrawals on your contributions and earnings in retirement.  This option is usually best for people who plan on having a higher income in the future.  The Roth IRA has a $5,000 yearly limit while the 401k has a $17,000 yearly limit.

Roth 401k

A Roth 401k is said to combine the best aspects of both plans.  You contribute post-tax dollars, as you would to a Roth IRA, but the yearly limit is $17,000 just like a 401k.  Your total 401k contributions and Roth 401k contributions cannot be greater than this amount.  Similarly to a Roth IRA, the Roth 401k offers the advantage of tax free distribution in retirement but without the income restriction of a Roth IRA.

The problem with the Roth 401k lies in the fact that it is most beneficial to those of us with lower incomes who usually can’t afford to contribute as much post-tax dollars.  It allows you to prepay your taxes at a low rate and withdraw later in retirement.  However, most people in lower tax brackets may find it challenging to contribute significant post-tax dollars to a Roth IRA and Roth 401k.

A Roth IRA allows for greater flexibility compared to a Roth 401k.  You should always contribute to the former before the latter.  In fact, Roth IRA contributions can be withdrawn at any time tax free.  However, when you take a nonqualified distribution from a Roth 401k, you must report income earnings in proportion to the account’s earnings.  Here’s an example:

Roth 401k Balance: $100,000
Contributions: $80,000
Earnings: $20,000

If you take a distribution of $10,000, you will have to pay ordinary income taxes on 20% of that.  If this was a Roth IRA, you could take out up to $80,000 tax and penalty free for any reason.

So who does it help?

A Roth 401k can be most beneficial to low-income earners that plan on making more later in life.  If you are able to contribute to a Roth 401k in addition to your Roth IRA, you will essentially be prepaying your taxes now to avoid a higher tax rate later in life.  PhD and medical students would be the perfect example of someone whom this might benefit.

I recommend a 2:1 contribution ratio of 401k:Roth IRA contributions.  For every $2,000 I put into my 401k, I’ll put $1,000 into my Roth IRA(up to the $5,000 limit).  It’s too hard to try and predict what tax rates will be like in the future, but if I had to guess, I would say they’re going up!

Do you contribute to a Roth 401k or Roth IRA?  Where do you think tax rates are headed?

-PF Pro

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Why Everyone Should Have a Roth IRA http://yourpfpro.com/why-everyone-should-have-a-roth-ira/ http://yourpfpro.com/why-everyone-should-have-a-roth-ira/#comments Mon, 06 Feb 2012 03:17:11 +0000 http://yourPFpro.com/?p=107 While a 401k is probably the most popular and well-known type of retirement account, there are a few others you may have heard about.  In this article, you will learn what a Roth IRA is, and how it’s tax-favored status can be leveraged by investors at any income level.  A Roth IRA is the only […]

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While a 401k is probably the most popular and well-known type of retirement account, there are a few others you may have heard about.  In this article, you will learn what a Roth IRA is, and how it’s tax-favored status can be leveraged by investors at any income level.  A Roth IRA is the only investment vehicle that allows you to withdraw gains and dividends completely tax-free.  For that reason alone, it is one of the most valuable diversification tools in a strong retirement account.

The Basics: 401k vs. Roth IRA
401k

  • A 401k plan allows you to make pre-tax(deductible) contributions that will reduce your Adjusted Gross Income(AGI).
  • The yearly employee contribution limit on a 401k is $17,000.

Many companies will percentage match(up to 4 or 8% for example) on contributions the employee makes to their 401k.  At a minimum, you should contribute up to the company percentage match.  However, I like to use the rule of 5 for 401k contributions.  You take the first 2(or 3 if you’re in six figures) numbers of your salary and divide by 5.  Example:

If you make 50,000:  take 50/5 = 10% 401k Contribution

Roth IRA

  • Contributions to a Roth IRA are not tax deductible but they may be withdrawn at any time for any reason.
  • Any gains above principal can also be withdrawn tax free after the age of 59 1/2.
  • You can contribute up to $5,000 per year as long as your AGI is less than $122,000.

There are a couple other restrictions and rules, but generally these will not apply.  More detailed information about Roth IRA’s can be found here.

Why I love the Roth IRA

The key to a successful investment portfolio is diversity.  Diversity can be easily achieved by holding mixed asset classes; but it is also important to diversify from a tax perspective.  Deferring taxes on 401k contributions means you will still have to pay taxes at ordinary income rates when you start withdrawing in retirement.  If too much of your retirement nest egg is in your 401k, you could be paying taxes at the highest income tax rate on all 401k withdrawals.  This assumes that you have other sources of income: Social Security, rental income, etc.  When you retire in 20-30 years, who knows what the tax rate will be; but at one point in 1945, the highest federal tax rate was 94%!  Although it’s very doubtful rates will return to this peak the Roth IRA allows us to diversify for a future scenario with much higher tax rates.

Who should use it

Anyone under the $122,000 income limit is free to contribute to a Roth IRA as long as they have earned income.  There is even a legal way for those over the income limit to contribute known as a backdoor Roth IRA(send me an article request if interested in this option).

When to use it

You can still contribute to your 2011 Roth IRA up until April 17th(Federal tax filing deadline).  Roth IRA contributions can always be made for the previous year up until the federal tax filing deadline.  And remember, the maximum is $5,000; so any amount up to that will go a long way towards securing your finances.

Do you think a Roth IRA makes sense?  Do you expect your income to go up in the future?  What about tax rates, are they on the upward trend?

-PF Pro

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