My Money Design http://www.mymoneydesign.com Designing Financial Freedom Mon, 27 Jul 2015 10:24:44 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.3 What If You Stopped Saving Money for Retirement? http://www.mymoneydesign.com/personal-finance-2/retirement/stopped-saving-money-for-retirement/ http://www.mymoneydesign.com/personal-finance-2/retirement/stopped-saving-money-for-retirement/#respond Mon, 27 Jul 2015 06:00:38 +0000 http://www.mymoneydesign.com/?p=8500 Here’s a fun little game to try on yourself and see how your finances are coming along. (… Depending on the answer, it might also make you feel really good about your savings efforts so far!) Suppose you were suddenly let go from your job.  You find a new place to work, but it doesn’t […]

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saving money for retirementHere’s a fun little game to try on yourself and see how your finances are coming along.

(… Depending on the answer, it might also make you feel really good about your savings efforts so far!)

Suppose you were suddenly let go from your job.  You find a new place to work, but it doesn’t pay as well.

So in order to maintain your standard of living you decide you’re going to cut corners and completely STOP saving money for retirement.

The big question:

Would you still be able to comfortably retire when you want to?

 

My Answer …

(… Kind of a funny question to ask on a personal finance blog, right? …)

I tried this little experiment on our current retirement savings, and you want to know what I found out?

We’d be okay!!

It’s true.  As many of you know my wife and I have a plan to retire in about 10 years from now.  So when I added up our savings, calculated what they would potentially be in 10 years from now (using 10% returns with a 3% inflation adjustment), here’s what I came up with:

  • Using a safe withdrawal rate of 4% = $4,446 per month
  • Using an ever safer withdrawal rate of 3% = $3,334 per month

Combine either of those figures with the $2,051 we expect my wife’s pension to be, and we’ve successfully exceeded our anticipated cost of living need of $5,000 per month.

Awesome!!

 

How Is This Possible?

I know what some of you are thinking – how can I STOP saving for retirement altogether and still meet our goals?  Something doesn’t add up …

Fortunately it’s all thanks to the marvelous power of compounding returns.  Because my wife and I have done a pretty good job of saving so much money, we’re now at a point where the earnings from our savings actually contributes more to our nest egg than what we’re saving each year.

Just see this image below:

Compounding Returns 30 Years

This is an example of compounding returns in progress.  Notice how around year 15 the red part starts to outgrow the blue part?  That’s because after a while your money starts to “make more money” than you do!

The “red part” is where we are at in our phase of accumulation.  Adding money to it every year will be nice and all, but the real magnitude of growth will come from the money that is already in there.

This is just another nod as to why it’s important to start saving early and save big (like I stress hardcore in my first ebook)!

 

The First Signs of Financial Freedom!

So why care about how much my retirement savings are going to be under these fictitious conditions?  After all, it’s not like I’m really going to suddenly STOP saving money into our retirement nest egg.

Plus I’m still 10 years away from retirement …

So where does that get me?

The reason I did this little exercise is because in our quest for financial freedom I think there are little milestones that we need to recognize and appreciate.  And this is one of them!

Not that long ago I did a similar exercise in this post here and was further away than I thought.  Now, almost a year later, it turns out we’re getting closer!

In terms of being where we want to be financially, this is the equivalent of just starting to see the sun peaking out from behind the trees in anticipation of a grand sunrise!

Though I would still need to let my money compound for at least 10 more years to make this happen, what this tells me is that the assets we have built up right now are significant enough that they could mature into a fortune that would take care of us for life.

Call it what you will – I see that as a HUGE accomplishment!

It’s a big deal to me because it gives me a positive sense of confidence and security that I would otherwise be lacking.

Suppose I really did lose my job.  Suppose I did take another job that only paid half of what I make now.  If I really honestly and truly had to stop all future contributions to my retirement funds, it’s very pleasing to know that at this point the game it changes nothing in terms of money!

In other words: There’s no knocking us off the road we’re on!

 

What If You Stopped Saving Money for Retirement?

Now you try!

Retirement Calculation Excel ExampleYou can easily do this same test yourself in under 5 minutes using Microsoft Excel.  Here’s how to set it up:

  • Enter the current value of all your savings accounts into a cell.
  • In the next cell type in 7%. We’ll use 7% because that represents an average annualized return rate of 10% minus the average rate of inflation 3%.
  • Next type in the number of years until you plan to retire.
  • Calculate the future value of your assets. In Excel the formula is =-FV(cell with return rate, cell with number of years, 0, cell with current value of your savings account)
  • Finally multiply the future value of your assets by 0.04 and divide it by 12 to get your estimated monthly retirement income (assuming a 4% withdrawal rate). If you really want to play it safe with your withdrawal rate to lower the potential that you could run out of money, use 0.03 to represent a 3% withdrawal rate.

Do you like what you see?

The important lesson to take away from here is just how powerful compounding returns are, and why we need to save/invest as soon as possible rather than waiting to do so in the future.

Because of how much money we have saved up so far, that’s why we could theoretically STOP all our retirement savings and continue to be okay.  The compounded returns from just the assets we have so far we would potentially be enough to carry forward and amass into a fortune that we could use to live on.

That’s not an accident!  That’s by design.  About 5 years ago my wife and I made a conscious choice that we wanted to retire sooner than later.  To do so we decided to up our retirement savings from a meager 10% of our income all the way up to the point where we are maxing out all of our retirement accounts.

It wasn’t easy.  Sacrifices had to be made.  But after careful planning we got there.  And now I’m proud to prove to myself that the mass we’ve built up so far could potentially grow into the fortune we need to secure our financial freedom.

Readers – How did you do at this test? Could you stop saving today and still be on track?  How do you challenge yourself at saving money for retirement?

 

Image courtesy of Neil Fowler | Flickr

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Cancer Update – The Battle is Won! http://www.mymoneydesign.com/lifestyle/philosophy-motivation/cancer-update-the-battle-is-won/ http://www.mymoneydesign.com/lifestyle/philosophy-motivation/cancer-update-the-battle-is-won/#comments Sat, 25 Jul 2015 09:00:41 +0000 http://www.mymoneydesign.com/?p=8694 I have some very exciting news to share … As of my last PET scan, my cancerous tumor is gone! Finally!  My cancer is in remission! Last Thursday was also my last treatment of chemotherapy.  Even though I’m thankful the infusions got rid of my cancer, I am SO glad for that whole process to […]

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Cancer You LostI have some very exciting news to share …

As of my last PET scan, my cancerous tumor is gone!

Finally!  My cancer is in remission!

Last Thursday was also my last treatment of chemotherapy.  Even though I’m thankful the infusions got rid of my cancer, I am SO glad for that whole process to finally be over!

From here on out it’s going to be CT scans every 6 months for the next 5 years.  As you can bet, I’ll have my fingers and toes crossed every single time that I get nothing but good news.

 

Cancer Really is a Silent Killer:

Throughout this whole experience cancer has been a very mysterious thing.

It sneaks in on you when you least expect it and then does nothing but completely consumes your life once you discover it.

But then, with treatment, it slips away just as silently as it first appeared.  Hopefully for good!

 

This Chemo-Thing Really Works:

I will confess that there were many times when I sat down for chemo and thought to myself “is this really working?”

It’s hard not to think about that sort of thing when you have no hair, your skin is pale, your fingers are always numb, and your eyes look sunken on account of no longer having any eyebrows or eyelashes.

Of all the other medical problems I’ve had in my life, never has there been one where the cure (or treatment) seems to be worse than the actual disease itself.

However, I know that’s just a matter of perspective.  Just because you can’t “feel” the cancer inside of you killing your body doesn’t mean it isn’t happening.

Plus I’m sure if I hadn’t discovered my tumor when I did, I’d have much bigger problems right now then I have had for the past six months.

 

Looking at Things Very Differently:

The concept of time (and how it’s always slipping away from us) has always been at the forefront of my mind.  It’s the very core of what drives me so hard to achieve financial freedom – so I can have the ability to choose to do whatever I want with my time without any financial repercussions.

But as you can guess, this whole experience with cancer added a new layer of perspective on that mantra.

When you’re lying in a chair at chemotherapy or recovering in your bed at home for the next 2-3 days, there are only a few things you think about.  For me, it was my wife and kids, and what time meant for all of us.

I don’t know if I’ve ever revealed this on this blog before, but we live about 30 miles away from the city where my works and my kids go to school.  The reason why is because when it was just my wife and I, our house was a great “half-way point” between her job and my job.  She would drive her way and I would drive mine.  And it worked!

… for a time.

Now our kids are older – a lot older.  They do more with school, sports, friends, and other things in the community.  And every time they do it means driving 30 minutes into town.

So my wife and I made a very important decision: We’re moving!

In fact, we already bought a new house that is less than 5 minutes away from my wife’s work and both children’s schools.

And for me – I’ll more than likely have to find a new job; something a little closer and easier on the commute.  Though I’m not quite sure yet what that will be, I’m very optimistic that there will be something different for me to try.

All in all I think this whole thing is ultimately going to be a huge win for our family.  No more driving for my wife.  No more commute for her and the kids.   Heck – the kids could walk to school now if they really wanted (though I’m not sure if my parent over-protection instinct would ever allow them to do that).

Readers – Thanks to all of you for being so supportive during this whole ordeal.  It has been incredibly encouraging and positive to hear all of your heartwarming and kind words with each update.

 

Featured image courtesy of MemeGenerator.net

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Learn How to Save MORE, Earn MORE with My New Second eBook http://www.mymoneydesign.com/passive-income-2/ebook/save-more-earn-more-ebook/ http://www.mymoneydesign.com/passive-income-2/ebook/save-more-earn-more-ebook/#comments Mon, 20 Jul 2015 09:00:45 +0000 http://www.mymoneydesign.com/?p=8673 Hi Everyone!  I’d like you to know that for a very limited time (July 20-24) you can download my second eBook “Save MORE, Earn MORE” from Amazon COMPLETELY FOR FREE!  Go to this link here to grab your copy. … So what is “Save MORE, Earn MORE” all about? It answers the question: Outside my […]

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Save More Earn MoreHi Everyone!  I’d like you to know that for a very limited time (July 20-24) you can download my second eBook “Save MORE, Earn MORE” from Amazon COMPLETELY FOR FREE!  Go to this link here to grab your copy.

… So what is “Save MORE, Earn MORE” all about?

It answers the question: Outside my job, how do I actually go about getting enough money for the things I want in life?

Everyone knows financial freedom sounds great!  And we all know we’re supposed to save/invest our money if we want our nest eggs to grow into the life-preservers we want them to become.

… but how do we get there?  How do we do a better job of saving and managing our money?  And how do we actually make more of it (beyond our regular paychecks) so I can have more to save?

You don’t have to tell me how hard it is.  My wife and I started out in exactly this same situation.

I remember when we were got together we struggled to save even $100 per month for the things we knew we’d want some day like a house, college for our kids, and retirement.

A lot of other people are in the same boat.  According to the Trading Economics, the most recent personal savings rate in the U.S. is 5.1%.  That means for a family making the U.S. median income of $51,939 they are only saving $2,649 per year.

Despite the best of intentions, those figures unfortunately just won’t ever add up high enough to financial freedom let alone any other big goals we have.

When I realized this fact, I decided I needed to do something about it – and in a BIG way!  I read books, went online, and did a ton of research on how a regular guy like myself can do a better job at becoming wealthy.

Fast forward to now.  This year we’re on track to max out our 401(k), 403(b), and both our IRA’s!  And we’ll be able to do it without even breaking a sweat.

Do you want to know something?

You can do it too!

That’s the whole basis of “Save MORE, Earn MORE”.  Out of all that research I did, this book is 21 of my favorite and most practical tips for putting more money back in your pocket.

That’s money that you can apply towards your dreams of financial freedom or whatever else you have your heart set on!

Here’s what you’ll find in my new eBook.

 

“Save MORE, Earn MORE” is Advice You Can Actually Use:

Every week on this blog we talk about new and cool ideas that are going to put more money back in your pocket.

If I had to sum them up, I’d say those ideas fall into one of two major categories:

  1. Spending less
  2. Making more

That’s exactly the kind of things you’ll find in “Save MORE, Earn MORE”.  It’s my personal collection of the best of those tips.

Most importantly – they’re all things you can start doing right away – no matter where you live or how much income you earn right now.

For example: Do you know about the “split your raise” technique? 

This is where you take your annual raise and devote half of it to your retirement savings.  It’s one of the first things I ever tried when I started increasing my 401k contributions, and its worked like a charm as I’ve built up my savings level all the way up to the IRS max.

Or how about maximizing out your credit card rewards? 

For years I’ve been able to strategize my purchases to the point where we consistently make over $1,000 in annual cash-back and gift card rewards.  Merry Christmas for us every year!

And then there’s my favorite money-making hobby … Blogging! 

Since I started blogging almost 4 years ago, I’ve added over $50,000 gross to our household income!

You read that right … we’re half way to six-figures!

That’s not a bad return considering it now only takes me a few hours per week to keep my websites going.  And it can easily be done at night on my own time.

That’s not all. 

Over the course of 21 chapters we’ll also talk about:

  • How to really challenge your bills
  • Getting your full 401(k) employer match
  • Avoiding taxes using a flexible savings & health savings account
  • Building up your dividend income – the ultimate passive income
  • Taking advantage of bank sign-up bonuses
  • Selling and flipping items on eBay
  • Freelancing
  • Plus many more …

Every one of these tips are something that you could get started on right away.  You DON’T need to be a financial expert, rich, or have an MBA to put them to use.  You just have to want to give them a try!

Honestly of the ones I personally use, I’m glad to have tried them and to be adding as much as I am to my income.  That just makes our road to financial freedom that much easier to travel.

 

Download Your Copy Today!

No matter where in the world you live, whether it’s a big savings goal you’ve got planned or the long-term financial goals, I’m sure there will be something for everyone in “Save MORE, Earn MORE!”

Like I mentioned, download your free copy from Amazon.  It will only be free for a limited time this week!

And please … do me one other favor.  If you do download my book, please be sure to leave a review on Amazon.  When you do it helps other financial readers (like yourself) to make smart judgments about whether or not this would be the right book for them.

And as always, if you have any questions, you can always email me or post a comment below.

Enjoy!

 

Featured image courtesy of MMD!

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What is the Best Safe Withdrawal Rate for Retirement? http://www.mymoneydesign.com/personal-finance-2/retirement/best-safe-withdrawal-rate/ http://www.mymoneydesign.com/personal-finance-2/retirement/best-safe-withdrawal-rate/#comments Mon, 13 Jul 2015 09:00:15 +0000 http://www.mymoneydesign.com/?p=8406 The 4 percent rule… It’s arguably one of the most highly debated figures in retirement planning. Since its inception in 1994 by Bill Bengen, it seems as though you can find just as many people who love it as those who hate it. Why so much fuss over one tiny, little number? Because of what […]

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BEST SAFE WITHDRAWAL RATE- (1)The 4 percent rule…

It’s arguably one of the most highly debated figures in retirement planning.

Since its inception in 1994 by Bill Bengen, it seems as though you can find just as many people who love it as those who hate it.

Why so much fuss over one tiny, little number?

Because of what it stands for!  Planning your nest egg size using the right safe withdrawal rate figure can mean the difference between playing with fire during retirement or having 100% confidence that you’ll never run out of money.

But if you pick a number that is too conservative, it can also mean the difference between trying to save up for a $2 million dollar nest egg instead of a $1 million dollar one.  Obviously it would be great if we didn’t have to stress ourselves out by saving two or three times more money than we need for retirement.

So what if the critics are right?  What if some other figure than 4% (maybe lower or even higher) could give you that confidence you need without having to drastically over-save your money?

In this post we’re going to take a hard look at a number of safe withdrawal rates and see if there really is some optimal number we can count on when we’re planning for retirement.

 

How Can We Find the Perfect Safe Withdrawal Rate?

To properly explore this subject, let’s first ask ourselves:

What do we want from this little exercise?

Since I plan to retire early (and you can see my whole plan here), I want:

  1. The highest, reasonable level of confidence that we’ll never run out of money.
  2. A rate that will last us longer than 30 years.

That’s good!  But how do we figure that out?

Well … usually when someone wants to see how their investments would have performed, they simply take the annualized average of the stock market over the last 50 or so years and crunch some numbers as if each and every year the stock market returned a fixed rate of return.

Though that makes for a nice back-of-the-envelope style of estimation, it fails to reproduce what actually happens in real life.

In reality, the markets go up and down all the time.  Never do they produce the same perfectly linear return each and every year.

So a better way to prove to yourself how long your money “would have lasted” would be to use real stock market data – as if you had actually retired during specific 30 year time frames.  For example:

  • If I had retired in 1985, I would have X1 amount of dollars left to my name today in 2015.

Now as you can guess, retiring at different years throughout history would have made significant differences on where or not your nest egg savings would have lasted.   For time periods it would have been successful (positive balance) and in other instances you might have ran out of money (negative balance).

So a far more thorough way to approach whether or not your savings would have lasted would be to repeat the same analysis for various periods in history straight down the line:

  • If I had retired from 1984 to 2014, I’d have X2 amount of dollars left.
  • If I had retired from 1983 to 2013, I’d have X3 amount of dollars left.
  • If I had retired from 1982 to 2012, I’d have X4 amount of dollars left.
  • … and so on.

Doing things this way would give you far more confidence that no matter what happened in history; whether it be bad economic conditions, war, natural disaster, or whatever, that your retirement nest egg would have made it and you would have never ran out of money!

Wouldn’t it be great if there was something out there that could take those stock market returns and do all of these simulations for us?

Guess what … there is!

It’s called FIRECalc.

 

The Power of FIRECalc:

FIRECalc is a wonderfully useful free website that can essentially be used to do everything I just said above.

The way it works is you simply go to the homepage and enter in:

  • How much you’d like to take out of your nest egg every year in retirement
  • What size nest egg you plan to save up (start with)
  • How long you’d like to see your savings last.

Then … Presto!  FIRECalc crunches your numbers through every economic condition since 1871 and lets you know how exactly many times your portfolio would have succeed or failed.  They also provide a “success rate” number letting you know the percentage of how many of those conditions had positive results.

Imagine that for one minute …

Finding a safe withdrawal rate with a success rate of 100% means you would have out-lasted every single thing that happened in the world since 1871!

How’s that for confidence?

So for this experiment, I’m going to use FIRECalc as a sort of “safe withdrawal rate calculator” to see just how many scenarios would have actually returned a 100% success rate (or close to it).

 

The Results:

After running dozens of retirement scenarios through FIRECalc, here are the success rate results it returned:

safe withdrawal rate success rate table

I figured the most effective way to share this with you was in the form of a heat map.

My own personal preference for this heat map was:

  • Green = 100% success!
  • Orange = 95 to 99% – Still really good odds of success.
  • Yellow = 90 to 94% – Getting a little risky.
  • Red = 89% and below – Too risky. Forget it!

The Winner?

So looking at this table, what would I declare the most optimal safe withdrawal rate to be?

3.5%

That’s the equivalent to an inflation adjusted withdrawal of $35,000 every year for a starting nest egg balance of $1 million.

Why Did I Pick That Rate?

Statistics!

Notice how in that column every single success rate was above 95%.  Even for retirement periods lasting as long as 60 years!

I don’t know if I’m going to be retired for 60 years.  But that sure would be nice to know that my money is going to last that long if I need it to!

Now if I really wanted to be conservative, then I could have instead opted for a 3.0% or 3.25% withdrawal rate.  After all – those two rates had almost unanimous 100% success rates for every given time period.

But understand what that means.  Using our example above, a 3.0 percent withdrawal rate would only give you $30,000 for your $1 million dollar nest egg.  That’s $417 less per month you get to enjoy in retirement.

On the flip-side, too conservative of a withdrawal rate could also mean saving up a whole lot more for retirement; perhaps unnecessarily.  Let’s say you wanted that $35,000/year retirement income.  That would mean having a nest egg of:

  • 3.5% withdrawal rate = $1,000,000 nest egg
  • 3.0% withdrawal rate = $1,166,666 nest egg.  That’s $166,666 more dollars you need to save!  Ouch!

So is the risk of a 3.5% rate worth the return?

For me, I think so.

What About the 4 Percent Rule?

To give credit to the number that started it all, notice that the results from FIRECalc do in fact validate the 4 percent rule.

At 4%, you have a 94.8% chance your money will last you for 30 years.  To my surprise it also revealed that you would have 92.7% chance that your money will last you 35 years.  That’s not too bad.

If all you plan on needing your nest egg is for 30-35 years, then these are pretty reasonable success rates for you to base your retirement planning needs upon.

It’s when you get into 40 years and beyond that you see how a 4 percent withdrawal rate starts to unravel.  Notice how at those years the results start to get very unfavorable.

The same could be said about a 4.25% withdrawal rate.  If you only need your money to last 30 years or less, then you could get away with using this rate.  Plus it would give you more money to enjoy at retirement!

But anything higher than 30 years and your chances of success again quickly tank.

Forget about using a 4.5% rate or more.  You’re simply just playing Russian Roulette with your retirement savings at that point.

 

FIRECalc Technical Notes:

A few details I wanted to point out about FIRECalc and the calculations it produced here:

  • The success rate is based only on the three numbers you enter into the program (as we talked about above). It’s ignoring any Social Security, pensions, dividend income, etc.
  • It’s assumed that the money you withdraw for your retirement expenses is inflation adjusted at 3%. In other words if you start with $40,000 your first year, you’ll take out $41,200 your second year, $42,436 your second year, and so.  I’m glad the creator of FIRECalc did this because that’s right in line with how the original 4 percent rule publication of 1994 approached this.
  • All the market phases are based on years going back as far as 1871.
  • It’s assumed your portfolio is 75% stock (index) and 25% bond funds. Obviously if your asset allocation was different, then this would affect the results.
  • It automatically subtracts an annual fee of 0.18% to cover the funds.

One of the cool things about FIRECalc is that you can alter any of these “default” settings to make the simulations as close to your personal financial situation as you’d like it to be.

I highly encourage you to check it out and give it a try for yourself!

Readers – What are your safe portfolio withdrawal rates?  Do you agree that 3.5% is a better compromise between confidence and return?  After looking at this data, what number do you feel comfortable with for your own retirement planning needs?

 

Featured image courtesy of Chris_J / Flickr.

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Niche Website Income Report 31 – $1,046 for June 2015 http://www.mymoneydesign.com/passive-income-2/blogging-passive-income-2/niche-website-income-report-31/ http://www.mymoneydesign.com/passive-income-2/blogging-passive-income-2/niche-website-income-report-31/#comments Mon, 06 Jul 2015 09:00:07 +0000 http://www.mymoneydesign.com/?p=8646 Hello and welcome to my monthly niche website income report and business update. At the start of every month, I like use this opportunity to share with you, the reader, what’s been going on with my niche site business.  The idea behind these websites is to create multiple streams of passive income that I can […]

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niche siteHello and welcome to my monthly niche website income report and business update.

At the start of every month, I like use this opportunity to share with you, the reader, what’s been going on with my niche site business.  The idea behind these websites is to create multiple streams of passive income that I can use to help advance my efforts to achieve financial freedom as quickly as possible!

June marks a special milestone for my niche site business because it signifies that the year is halfway over.  Unfortunately this business has met some pretty big challenges over the past 12 months.  So if I want to show year over year increases in profits, I’m going to have to work both hard and smart to reach my growth goals.  We’ll talk more about this in each one of the sections below.

For now, here are our stats for June.

 

Niche Website Income Report – June 2015:

Here is my income and expense report for the month:

Niche Website Income Report June 2015

Income Breakdown:

Here’s a closer look at my income sources for the month:

  • Amazon = $85
  • Clickbank = $538
  • Google Adsense = $324
  • Web Hosting = $0
  • Personal Capital = $100
  • Private Advertising = $0

We’ll talk about this month’s expenses below.

 

Slowing Down Developments with NS4:

I know for several months now I’ve really been talking a lot about my Amazon –based music niche site #4 (NS4), and investing a lot of time and energy into it.

Unfortunately all that is about to take a break for a little while.

The traffic and keyword rankings still appear to be doing fairly well.  As you can see on SEMRush, we’re currently ranking for around 281 keywords (i.e. keywords that are in the top 1-20 Google position).

NS4 June Keyword Rank

However, despite that accomplishment, that’s not been enough to drive major conversions on Amazon.  My Amazon Associates accounts gets a lot of clicks every day, but the conversion rate is still less than 3%.

This is where traffic and conversions becomes a pure numbers game.   The more quality traffic you get, the more conversions you can expect.

That is one major weakness of NS4.  The keywords I’m targeting are not exactly “high volume”.  They are mostly low competition keywords with search volumes between 100 and 1,000 monthly searches.  Though it’s great to rank for these keywords and attract some customers, these organic searches are not necessarily going to bring in the droves of traffic we’ll need to truly get those revenue numbers up where we want them.

What Can We Do About This?

For now, I plan to put the brakes on NS4 and instead focus on NS2 (more on that below).

BUT when I do turn my focus back on NS4, I’d like to do the following:

  1. Target more “aggressive” high-volume keywords for new articles and content.
  2. Purchase a HOTH Blitz package to help increase the overall authority of the site.
  3. Something I haven’t tried before with a niche site – leverage better social media promotion. In particular: Doing more with Facebook to help promote the site.  I have been talking with a potential social media manager and I have some ideas about how we could gain more targeted traffic from this source.

Of course each of these things would be outsourced at some expense.  So part of “waiting” on the site will be to let the site passively build up profits.  We can then invest those profits back into these three potential growth areas.

 

NS1 HOTH Update & New Steps:

A quick update on the HOTH Platinum package we implemented last month:

At least one of the pages (the one with the highest search volume) does appear to have moved up in ranking from virtual Google obscurity to somewhere around 60, and then leveled back off to position 90.  As you can probably guess, this has not resulted in any new traffic or revenue.

NS1 June 2015 Hoth Keyword Google Ranks

The other two pages the HOTH package linked to appear to show no movement at all.

So what does this mean for our HOTH Platinum package experiment?

Unfortunately it means it’s a failure.

BUT before anyone points the finger at the HOTH, I’d like to first take responsibility for a few things.  The failure was probably mostly due to the way I went about it.

Perhaps it was my fault for choosing 3 webpages that were way “too deep” in the Google-rank-abyss to try to get them to increase to a decent position among the search engines.

Recall I mentioned that I intentionally choose these three low ranking pages as a safety mechanism because I was unsure of how the HOTH package would affect my results.  For example, what if I had chosen three decent ranking pages and used the HOTH package to get them to rank better, but the effects were negative?  Then I’d be really unhappy with the results.

At least from this experiment I learned that the HOTH can be helpful in raising ranks by some degree of relativity.

Next Moves:

Like NS4, I do not plan to do anything new with NS1 right away because I want to work more on NS2.  But when I do, I plan to do the following …

My next big move with NS1 is to update the internal link infrastructure of the site to see if I can improve the SEO of the site.

What does that mean?  It means I will be going back through my old posts and seeing if I can improve the internal linking within the content; perhaps linking to newer posts that would not have been there back when the article was first published.

If you do this strategically within each category of your site, this is called link-siloing.  And it’s a good thing for SEO because it builds authority among articles that are a wonderful fit for one another.

Since I do not plan to add any new content to the site any time soon, this will be a great time to see if my link siloing efforts really do improve the SEO of the site.  I’ll know this by checking SEMrush a month or two after the event and seeing if my overall keyword ranking improved.

Let’s just hope there aren’t any significant Google algorithm updates between now and then!

 

BIG Plans for NS2!

Well it’s been a long time coming, but I’m long overdue for this one!

One of the next big moves I’d like to make with my niche website portfolio is to start building up NS2 again!

Over the last almost 12 months I’ve done hardly anything new with the site in terms of added content or linking, and it shows.  NS2 has slipped in both keyword rankings and traffic, and probably will continue to decline unless I step up to the plate and do something about it.

Yet, despite these reductions, NS2 continues to dominate my income report month after month.  If I’m truly being disciplined about my business efforts and sticking to the 80/20 rule, then this is where I should be focusing my attention to get the best possible return.

From a business perspective, it should only make sense that you focus your energy on your prize race-horse and give it everything it needs to flourish.  If these improvements we make do help translate into more traffic for the site, this will surely produce more conversations and possibly bring this site up to a level where it makes four-digits per month on its own.

Wouldn’t that be great!

My Plans for NS2:

You probably noticed I had almost $100 in expenses in June for NS2.  Aside from annual domain registration fees, those expenses are from things I’ve already started to try.

  1. Improved layout. I’ve decided to freshen-up the overall appearance of the site by giving it a brand new look with a new theme.

The new layout I purchased is another Genesis StudioPress theme that is crisp and clean with a very simple design.  I ditched our old logo and went for something more subtle in the header.

The new theme also has two well placed menu bars which I believe will help me better organize the categories menus for the readers to find more articles to read.

  1. Better strategic content. This area is going to be huge!

I been reading recently another niche website blog called Rank XL where the author, Chris Lee, is making +$16,000 per month from his niche website!

How does he do that?  For starters he gets over +850,000 visitors per month to his niche site, and he does that by being very creative with the way he targets certain keywords for his articles.

I’ve decided to give this a try for myself by adding some new articles (that I had outsourced) to NS2 that are using his suggested approach.  If it works out for me, I’ll be sure to explain this method in much further detail in next month’s income report.

  1. Linking from the main page.  Along with #2, part of my strategy for new content will be to write articles that better develop some of the content I have on the main page of the site.

To better explain this, I should first tell you that the structure of NS2 is one extremely large landing page with tons of great content, and then a separate blog section with several smaller articles.  This is different from a typical “blog” setup where the landing page is usually just “the blog section” with links to the most recent 10 blog articles (kind of like the website you’re reading right now).

My goal here is to create a unique article for each of the topics we cover on the landing page so that the readers can dive deeper into each topic (if they wish) and take in even more digestible and valuable material  instead of clicking off the main page when they are done.

Because the main page has the most domain and page authority, linking from this page to these new internal articles will help strengthen the SEO of these new articles and give them a great boost.  I’ll also be sure to link from within a few older articles as well.

  1. Restructure the internal links (link siloing). Similar to what we just talked about in NS1, at some point I will also plan to restructure the internal linking of the site to silo the content among specific categories.

First I plan to update the categories before I do this.

  1. HOTH Blitz. If the site continues to make money, I may also use the HOTH Blitz package to send some much needed link-juice to the main page.  This will help boost the authority of the site and strengthen those links I plan on building out from the main page.

Phew!  That’s a lot of work to do!  But I do believe the potential is there, and so I’d like to take the next month or two to really invest some time into this site and see if we can increase its revenue.  Hopefully we’ll have some very positive news to report in the next upcoming months!

Readers – How were your income reports for June?  Have you been trying any new website development techniques? 

 

Featured image courtesy of Evan Hamilton | Flickr

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How to Retire By 55 (or Sooner) on a Salary of $50,000 or Less http://www.mymoneydesign.com/personal-finance-2/retirement/how-can-i-retire-at-55/ http://www.mymoneydesign.com/personal-finance-2/retirement/how-can-i-retire-at-55/#comments Mon, 29 Jun 2015 06:00:39 +0000 http://www.mymoneydesign.com/?p=8359 If you’ve got dreams of retiring early by age 55 or sooner, then you’ll be very delighted to know that this goal is well within your reach! Believe it or not, our ability to reach financial independence is something that is always possible to achieve. Though the path to get there may not always be […]

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How to Retire by Age 55If you’ve got dreams of retiring early by age 55 or sooner, then you’ll be very delighted to know that this goal is well within your reach!

Believe it or not, our ability to reach financial independence is something that is always possible to achieve.

Though the path to get there may not always be clear, there are always certain actions we can take that will cut through the brush and reveal a clearing at the end of the forest.

The biggest question and sometimes most challenging obstacle: How?

You might think that the dream of financial freedom is something that is only reserved for the rich or those who make over $100,000 per year.  But I can tell you that a lot of the same tricks work even if you make much less than that.

In this post I’m going to create a roadmap for early retirement for someone who wants to know: How can I retire at age 55 or sooner?  AND thanks to a challenge from my friend from Angry Retail Banker, we’re going to do it assuming your household makes $50,000 or less per year.

An income of $50,000 or so per year is not that uncommon in America.  In fact according to a 2014 report from CNN, the median household income of America was only $53,891.

To start, let’s consider what an income of $50,000 actually looks like.

 

Defining Your Standard of Living:

Because this post will be one out of a million different ways you could create a solid early retirement plan, we’ll have to lay down a few ground rules and assumptions.

My first assumption is that you’ll want to continue to enjoy whatever quality of life you’re currently enjoying right now.  That means that by age 55 or whenever we’re able to retire, you’ll be making approximately the same net take-home pay.  No more and certainly no less.

To do this, the first thing we’ll need to understand is how much money are we really living off of?

In other words, if you make$50,000 per year, are you really living off of $50,000?  Of course not!  It’s less because you have to subtract away taxes and 401k contributions.

Let’s get an idea of exactly how much:

  • Start with a gross income of $50,000 per year.
  • Subtract your 401k contribution. 401k’s are the most common form of tax-sheltered savings currently in America.  So in this example we’ll assume you have one.  The average recommended savings rate is 10%.  That means we’ll stashing $5,000 per year.
  • Subtract Federal taxes. Your annual Federal taxes are calculated by taking your gross income, subtracting away your 401k contribution, a standard deduction, and two personal exemptions (in this example we’ll assume you’re married and filing jointly).  After all that, we’re left with a taxable income of $24,700.  Using our tax bracket system, that calculates out to $2,798 in Federal taxes for the year.
  • Subtract away Social Security / FICA taxes. At 6.2%, that’s $3,100.
  • Subtract away Medicare taxes. At 1.45%, that’s $725.
  • (We’re going to ignore State taxes because there are too many variations to consider. For simplicity I’ll just have to assume this is one of your expenses you’ll cover with your net pay.)

Putting all of that together, that works out to a current net take-home pay of $38,378 per year (or $3,198 per month).

 

What is Our Target Retirement Income?

Kids Dream of MoneyThe first thing you have to understand about the future is that inflation makes everything more expensive.  Obviously you already know this because things you buy today probably cost you more than they did a few years ago.

Fortunately for you in this example we’re going to be doing our calculations with inflation adjusted returns, so no worries!  That means we’ll assume that $38,378 today has the same purchasing power it will whether we’re looking at 20, 30, or even 40 years from now.

So is our target retirement income $38,378?  Nope.  Remember that you’ll to pay taxes on your 401k income when you retire.  So we’re going to need more than $38,378 per year to live on.

We can figure this out very simply using the Federal taxes line we just calculated above:

$38,378 + $2,798 = $41,175

Notice something?   You can ignore Social Security / FICA and Medicare taxes in the future!  That’s because these are taxes you pay on your employment income, not on your savings.

 

What is Our Target Nest Egg Size?

Using the ole-stand-by safe withdrawal rate of 4 percent, our nest egg is going to need to have:

$41,175 / 0.04 = $1,029,375

 

How Many Years Will We Have to Save?

Now the big question: How long is it theoretically going to take to get there?

In order to figure that out, we’ll need to consider 2 main factors:

  1. The estimated return rate on our investments.
  2. Our annual savings.

Return rate.  We can make this one really simple and assume you’re investing in a common stock index fund.  According to NYU, such a fund would have an average annualized return rate of 9.84%.

Now remember that we said we’re going to adjust our example for inflation.  Inflation is roughly 3% per year.

So to figure out the true rate of return on our investments every year, we subtract:

9.84 – 3.0 = 6.84%

Annual savings.  Above we already started off by saying we’re going to save 10% in our 401k every year.  We could assume that our salary is going to go up every year, but I’ve got some bad news.  “Most” raises are only 3% or so; just enough to keep up with the rate of inflation.  So since our example is inflation adjusted, 3% – 3% = 0% increase in purchasing power every year.  In other words, we’ll keep that $50,000 income the same throughout this example.

Now the good news is that in addition to your savings there’s one more thing we haven’t considered that really helps us out each year: Our 401k employer match!

401k employer matching plans are as far and wide as you can imagine.  So for simplicity we’ll use the average reported figure of 3% of your salary:

$50,000 x 0.03 = $1,500

Combining our 401k employer match with our own savings, that’s:

$1,500 + $5,000 = $6,500

How many years?  Combining a savings of $6,500 with a return rate of 6.84%/year, how long will it take us to accumulate our target nest egg of $1,029,375?

The answer: 37.3 years

 

WAIT!

Stoic Abe Five Dollar BillThat’s no good!  If you had started working at age 25, that means you won’t have enough money to retire until you’re age 62.3.  MMD: You didn’t accomplish your goal!

I did this on purpose to show you how the “conventional” way of saving for retirement is rigged.  After going through this example, is it any wonder that the “average” savings rate in a 401k is 10% and the “average” age of retirement in America is 62?

Did you see how that math played out perfectly?

Unfortunately, if you REALLY want to achieve an early retirement, you’re going to have to do a little bit better.  You’re going to have to make some sacrifices to get what you want.

But fortunately it’s not going to be as bad you think.  Here’s a few variations that I think you’ll enjoy.

 

Changing Our Savings Rate:

Using exactly the same parameters as we did in the above example, let’s see how we can get our “number of years of saving” down from 37.3 to 30 or lower.  That would put us at age 25 + 30 = 55.

To this, we only need to change one variable: Our 401k savings rate.

By going from a 10% to an 18% savings rate, this drops our “net income” down to $34,978.  In other words, if all you ever knew was an income of $34,978, you’d learn to make your life work at this amount.

That changes our target nest egg goal to $929,375.  And by doing that it now only takes us 29.5 years to save up that much.

Success!!

But why stop there?

If you can make your life work for less than $34,978, let’s keep playing out the numbers:

  • A savings rate of 25% would drop your number of years down to 24.7.
  • A savings rate of 34% would drop your number of years down to 19.8.
  • A savings rate of 45% would drop your number of years down to 14.9. (Note to accomplish this you’d have to max out an IRA as well as a 401k because you’d have already exceeded the IRS $18,000 per year limit.)

Now I completely understand that a savings rate of 45% is a VERY extreme example and certainly not for everyone.  I’m running through these numbers simply to illustrate to you the path.  There IS a way to get there.  It’s what you choose to do to make it happen that’s your own choice.

 

Other Ways We Could Have Gotten There:

Like I said in the beginning, there’s a million different ways we could have crafted this example.  Increasing your 401k savings rate doesn’t have to be the only thing we change.

For example, let’s go back to the numbers it took us to accomplish our retirement in 30 years or less.  Suppose you had a rental property that was contributing a steady net income of $500 every month.  If you could depend on this income during your early retirement, that would offset the amount of money you’d need in your nest egg and allow you to only need a savings rate of 15% instead of 18%.

OR we could have kept our savings rate of 18% and dropped our number of years down from 29.5 to 27.2.  It works both ways.

Other things we could have done:

  • Creating MORE passive income streams (similar to our rental income example). Here’s a list of other ideas we’ve gone through on my blog before.
  • Paid off our house. Having no more mortgage would certainly lessen how much income we actually need each month.
  • Decreased other living expenses.
  • Held a part-time job.
  • Retire to another country.
  • And many more…

The takeaway in all of this: The answer to “Can I Retire at 55” is possible.  Financial freedom is possible.  But getting there isn’t something that’s just going to happen.  There are no shortcuts to early retirement planning.  Though it can take a little thought, planning, and execution, it’s totally possible to devise a strategy that can and will work.

Readers – Do you believe it’s possible to retire early under an income of $50,000 or so?  What do you think of this model?  How would you help someone at this income level to retire by age 55 or sooner?

 

Images courtesy of Chi King | Flickr, Brendan Riley | Flickr, and Earl | Flickr

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Countering The Arguments Against P2P Lending http://www.mymoneydesign.com/personal-finance-2/stocks/arguments-against-p2p-lending/ http://www.mymoneydesign.com/personal-finance-2/stocks/arguments-against-p2p-lending/#comments Mon, 22 Jun 2015 06:00:07 +0000 http://www.mymoneydesign.com/?p=8620 MMD: Today we have a mega guest post from fellow personal finance blogger ARB.  Take it away! Hello, readers of My Money Design! I am ARB, the Angry Retail Banker! Over on my blog, I offer what I call “An Insider’s Take On Retail Banking”, which means that between bouts of raging out and threatening […]

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p2p lendingMMD: Today we have a mega guest post from fellow personal finance blogger ARB.  Take it away!

Hello, readers of My Money Design! I am ARB, the Angry Retail Banker!

Over on my blog, I offer what I call “An Insider’s Take On Retail Banking”, which means that between bouts of raging out and threatening my entire customer base with physical harm, I talk about both life as a branch banker and ways for you to maximize your banking relationship.

I am here today to talk about absolutely none of that stuff.

Before you all hit the back button on your browser and type “funny cat videos” into a Google search, know that I’d like to discuss an awesome form of passive income that I think doesn’t get covered a whole lot.

I’m talking about Peer-to-Peer (or P2P) lending and I will be addressing some of the common arguments against it.

 

What Is P2P Lending?

I actually first heard of P2P lending right here on My Money Design and have been smitten with the concept ever since.

While I’m sure the veterans of the passive income community already know what P2P lending is, let me take a moment to explain the basics to the uninitiated.

P2P lending is a form of loaning money that bypasses the banks and other financial institutions almost entirely.

Instead, borrowers looking for loans are matched with individual investors looking to lend out their own money with interest. Essentially, individuals act as banks and make a profit in the same way that the banks typically do.

The two major P2P platforms in the United States are Prosper and Lending Club, the latter of which saw Google as a major investor before becoming a publicly traded company.

Both borrowers and investors (or lenders, I should say) would sign up for an account with either or both platforms.

Borrowers would then submit their loan applications while lenders would transfer funds to their accounts. Once the borrower is approved for the loan, it becomes visible on the site to the lenders.

Lenders go through the list of available loans and decide which loans they want to fund and how much of each loan they want to fund (as little as $25 per loan).

Once a loan is fully funded and distributed, the borrower repays the loan via monthly payments that cover both principal and interest. Those payments are distributed to the investors who funded the loan.

Pretty much it’s regular people lending money to other regular people. You can imagine it as yourself taking on the role of the bank, or as being a bond investor where the bonds represent real people rather than governments, municipalities, or businesses.

Either way, expect that at least one out of every three people you try to explain P2P lending to will look at you and un-ironically ask you if you are a loan shark.

It's a stupid question. Prosper doesn't let you do this when someone defaults. [Photo courtesy of Treachery In Outer Space by Cary Rockwell, 1945. public-domain.zorger.com]

It’s a stupid question. Prosper doesn’t let you do this when someone defaults. [Photo courtesy of Treachery In Outer Space by Cary Rockwell, 1945. public-domain.zorger.com]

Why Should I Be Interested In P2P Lending?

Is my word not good enough for you?

Alright, how about the fact that most experts believe you can earn a 5-12% return on your investment in P2P lending. Now understand that this is not a hard number or a guarantee; your results will depend on the loans you choose, your loan filters, your risk tolerance (you want the riskiest loans or the safest?), and the state of the general economy.

I’m not telling you what you will or won’t make. But it seems to be the average for many institutional investors and industry experts and it seems to be the average whenever I do loan back-testing (more on back-testing later).

Now, there will be a downward trend in the ROI (Return On Investment) of every portfolio. A new portfolio hasn’t had a chance to experience defaults yet. But even taking this into account, looking at all of Lending Club’s loans issued since 2009, we still see a ROI of 8.68%.

Not bad, huh?

Compare that to your savings account getting you 0.01%.

And P2P lending is gaining grounds amongst some personal finance bloggers who are letting the results speak for themselves. Mr. Money Mustache, for example, has seen returns so far of about 12.22% as of this writing. I credit the mustache for his success.

But Mr. Money Mustache isn’t the only wildly popular, immensely successful, and amazingly good looking blogger to enter the P2P sphere. I’m, of course, talking about me. I said “amazingly good looking”, right?

For those of you who must know how much I’m making, I started with Prosper a little over a year ago and Lending Club a few months after that. My Prosper account has returned me about 9.93% for all the notes that are over ten months old (thus properly weeding out the defaults from the ROI), while my younger Lending Club account (invested entirely in low grade, high yield loans) as a return of 12.84% after taking defaults into account.

Of my 164 Prosper loans, only 7 are late and 2 have been charged off (with 13 being paid in full already). On the Lending Club side of things, I’ve got 237 loans with 4 of them being late, 1 still in the grace period, and 1 charged off (14 of them have been fully paid). While I expect the default rate to increase as time goes on, that’s definitely not the risky “Vegas gambling” many people see P2P lending as.

Don't ask to see my pay stub. This is what you get.

Don’t ask to see my pay stub. This is what you get.

Now the worst, most dishonest thing I can do is sit here and tell you that you will make a ton of money because I’m doing good so far, but I just want you all to get a feel for what the general returns have been since 2009. I truly doubt a mature portfolio will see consistent 15% annual returns, but I do believe that P2P lending can offer you better returns than even my beloved dividend stocks, though with much greater risk (so I do recommend keeping only a small portion of your greater investment portfolio in P2P loans). I have companies that pay 3% in dividends; I have loans with interest rates over 20%.

 

Taxes On P2P Lending:

For those of you who forgot, MMD wrote a nice little eBook recently called Save Better (which everyone should go and buy already) in which he taught you all the ways you can save money on your taxes. One of the ways to gain a tax advantage was by investing in stocks for the long term. Dividend and capital gains taxes are lower than the ordinary income tax rate that your paycheck is taxed at.

But what about your P2P lending returns? How are they taxed?

Unfortunately, your returns are taxed as normal income, and if you’ve ever found yourself complaining about how much the government takes out of each paycheck (like I do every two weeks), then you are going to find this to be a major downside to this form of investment.

Fortunately, both Prosper and Lending Club allow you to open up an IRA with them, greatly minimizing your tax burden. And like stocks, charged off loans in your taxable account can be written off as losses, according to this post on Lend Academy, a popular P2P lending blog.

 

P2P Lending In Your Area:

Funny thing about P2P lending. Not all states allow it.

I’m not going to go into why certain states have still not allowed P2P lending (why does any politician support or oppose anything? Votes and money), but some states allow you to enter the P2P lending world, and other states do not.

What’s crazier is how complicated these restrictions are. It’s not simply a matter of the whole asset class being allowed or blocked. Rather some states allow you to borrow but not lend, and some states allow you to do business with one company but not the other.

A potential investor may find themselves allowed to borrow from Lending Club and Prosper but not actually lend money out themselves. Another person may find themselves limited to doing business with Lending Club but not Prosper.

As far as investing goes, 28 states allow you to invest in Lending Club while 31 allow you to invest in Prosper. The breakdown for Lending Club is as follows:

Lending Club tried to come to Texas, only to be met by an angry, gun-toting Rick Perry saying something about "not allowin' your types around here". [Photo courtesy of lendingmemo.com]

Lending Club tried to come to Texas, only to be met by an angry, gun-toting Rick Perry saying something about “not allowin’ your types around here”. [Photo courtesy of lendingmemo.com]

And here’s Prosper:

prosper states

If you live in a state that doesn’t allow P2P lending at all, then you’re pretty much out of luck.

But what about you non-’Muricans that don’t live here in ‘Murica?  You might want to check out what P2P lending companies exist in your country.

Europe has a number of different P2P lending companies headquartered in the United Kingdom, France, Spain, and Germany, of which some of the best ones are listed in this Forbes article.

P2P lending has also broken through the Great Firewall of China. There the amount of money that has been issued in loans has increased by 300% since the same point in time in 2014.

The Asian Banker actually takes the time to list all P2P lending services by country. This asset class is not just limited to the Western world; these markets are also in Australia, Hong Kong, India, and South Korea. No word on when North Korea will be getting in on it (probably never).

 

The Arguments Against P2P Lending:

Now that I’ve educated you on a few aspects of P2P lending, I want to really get into the meat-and-potatoes of this article.

You see, every type of investment has its risks, and P2P lending is no exception.

The biggest risk of a P2P loan is that of a loan default. A person might lend money to a borrower only for that borrower to never repay the loan.

But you could say that about any type of investment. Stocks could go up and down, or the company can go bankrupt. Bonds can also default. Not all bonds are as safe as the U.S. Savings Bond. Real estate investment income can erode due to vacancies, maintenance, and deadbeat tenants.

I could literally go down a list of passive income ideas and come up with a reason to avoid every single one.

I’ve heard a lot of arguments over time about why “you shouldn’t be lending money to random strangers over the Internet”. Some arguments against P2P lending were very well crafted and thought out. Others, not so much.

I’m not going to sit here and try to convince everybody that P2P lending is the best investment or form of passive income for you. Nor am I going to analyze whether P2P is a viable threat to the banking industry or compare them to traditional bank products like I did awhile back with prepaid debit cards. That is all outside the scope of this article.

Instead, I will opportunistically and shamelessly promote my blog using someone else’s resources in order to drive … I mean … address some of the arguments that I have heard against P2P lending and offer my counterarguments.

publicdomainpictures.net man shrugging

“What?” [Photo courtesy of publicdomainpictures.net]

Argument #1: “What happens to you if the borrower defaults!? These loans don’t have any collateral!”

Do you know how many times I’ve seen this excuse presented as “The Big Secret The P2P Lending Platforms Don’t Want You To Know” or something like that?  The notion that these loans are backed only by the good faith and credit of the borrowers?

This message is presented in this hushed whisper of a tone, like a crazy living-off-the-grid survivalist who is trying to tell everyone that bank tellers are calling the police on their customers without Obama overhearing and personally ordering a hit squad to cover his tracks.

It’s absolutely true what they say. These loans are backed by absolutely zero in collateral!

There is no home, car, or any other hard assets to recover in case the borrower doesn’t pay back the loan. And if the borrower defaults, you lose the money you lent that person.

But that’s just like a regular credit card or bank loan!

The fact that you don’t lose your home if you default on a bank loan doesn’t deter Bank of America from offering them, does it?

The fact that the bank can’t debit your bank account to pay unpaid credit card bills doesn’t stop Chase from getting you to apply for them, right?

And the banks seem to be making quite a bit of money off unsecured loans. They are certainly making record profits, according to this Wall Street Journal article from late 2014 which also pointed out that banks’ outstanding loans have topped $8 trillion (yes, I know much of this is mortgage lending) since research firm SNL Financial first started tracking them in 1991.

As part of their Weekend Update. [Photo courtesy of Wikimedia Commons]

As part of their Weekend Update. [Photo courtesy of Wikimedia Commons]

My response to someone worried about borrower defaults is to diversify. Diversify heavily!

Banks are able to withstand loan defaults of tens of thousands of dollars per borrower not just because they already have billions of dollars in assets, but because each loan is such a tiny part of their overall loan portfolio that the loss of the entire principle of one loan is completely covered by the interest payments on the rest and then some.

You should do the same! Don’t loan $15,000 to one borrower. Loan the minimum of $25 to as many different borrowers as possible.

In the end, the cost of a borrower default will be greatly minimized and your losses will be nearly non-existent.

Even the lending platforms themselves recommend this tactic. And make no mistake; it is the single most important thing you can do to protect yourself.

Prosper’s website even states that since 2009, every investor who has purchased at least 100 notes (loans) has had a positive return on their investment.

Using the website Nickel Steamroller, which allows us to see the actual results (including ROI and default rating) of past loans, we can see that even a portfolio with only the riskiest loans gives us a positive ROI.

More than “positive”, if you had started in 2009 blindly throwing your money Prosper’s riskiest loans with no regard for the purpose of the loan, the borrower’s credit score, income, number of recent credit inquiries, etc., you would have had a staggering 12.61%  return on your investment (with at least one year in there passing the 17% mark)!

More importantly (with the exception of 2010 and 2011), the rate of defaults has steadily decreased since 2009.

Now this doesn’t mean that you should go out and pour all of your money into the riskiest loans than P2P lending has to offer. I am simply showing you the numbers (actual real-world results, not just theoretical models or future predictions) that show the power of diversification, which in turn shows that the risk of borrower default is not something that should scare anyone away from this form of investing.

Even if 20% of our hypothetically lazy and careless lender’s loans had defaulted because he was targeting “the riskiest of the risky”, he still would have made $12.61 for every $100 invested as long as he simply diversified and invested only the minimum amount spread out across the maximum number of loans.

 

Argument #2: “You’re not investing! You’re just gambling! You have no way of knowing if these random people will pay you back!”

It’s true that past performance is no guarantee of future success, and that even with the numbers I quoted for you, it’s still possible for any individual loan to default.

You don’t see past the numbers on the screen. You don’t see the borrower behind it. Who knows if “bob_almighty111” is going to pay back that $25,000 loan?

Lots of things can happen. What if Bob loses his job? What if Bob is a deadbeat? Are you a deadbeat, Bob?

"He won't stop using me as a running gag." [Photo courtesy of pdpics.com]

“He won’t stop using me as a running gag.” [Photo courtesy of pdpics.com]

But two things about that.

First, Prosper and Lending Club are major companies that deal in consumer lending. Don’t you think that they have strict underwriting guidelines that they follow?

Lending Club goes over their basic requirements here, and it’s pretty much the same criteria that the banks use.

Peter Renton, a respected member of the P2P community and the owner of the popular P2P lending blog Lend Academy which I mentioned earlier in this article, detailed in 2013 some of the changes in Lending Club’s underwriting requirements.

While these changes make it easier for borrowers to get approved for loans, it does so in a way that doesn’t increase the lenders’ risk, showing the care and effort Lending Club puts in their analysis of both individual loan applications and historic trends.

Prosper had a more storied history.

Remember how I wrote before that all their lenders since 2009 made a positive ROI if they diversified? Well, Prosper was around before 2009. The Prosper of old was a wildly differently run business than the Prosper of today. We are better off for it. The old Prosper, or “Prosper 1.0” as it’s commonly called, pretty much handed out loans to anybody who asked nicely, which is what my customers seem to think my bank is obligated to do (pro-tip: Having a checking account with over $1,000 does not guarantee you a loan).

This led to default rates reaching obscene levels of roughly 35%. Eventually they got busted in 2008 for selling unregistered securities and had to be reorganized into what is now informally called “Prosper 2.0”, complete with SEC regulation and everything.

So now operating within a proper regulatory environment and maintaining an underwriting process that doesn’t involve the words “yes to all”, Prosper’s ability to filter out the bad loans from the good has been almost immediately visible.

Their investors are earning positive returns and they have an A+ rating from the Better Business Bureau.

But why take anyone else’s word for it when you could be your own underwriter?  … Sort of.

I mentioned a couple paragraphs back a site called Nickel Steamroller, right? Right.

And as I very briefly mentioned, that site lets you back test actual loan results, complete with filters. This means that you can actually apply certain sets of criteria, plug in the data, and see how well real loans that fit that description did in earning their investors a return during a certain time period.

For example, you want to know if lending to the state of California would increase your loan defaults. Or perhaps you are looking to see which loan purpose will net you the highest return.

You can apply filters such as credit score, home ownership, open credit lines, loan grade, literally anything. You can search for how loans that fit that criteria did during a time period of your choosing.

This isn’t how some analysts or a computer program think such loans might do. These are actual results of real loans and what they made for real investors.

Gambling is throwing your money on red and hoping for the best.

Gambling is putting all your money into one or two loans and hoping that you see that money again. But with the ability to back test loans—to look at loans of different criteria and see their real world results—you can effectively do your own “underwriting”, formulate your own strategy, and know what loans are more likely to be paid back and what loans are more likely to fail.

Again, you have no way of knowing if any individual loan will be paid back, and it is true that defaults are just part of the game.

But knowing that certain types of loans in certain areas for people underneath a certain credit score have historically had high rates of default allows you to lower your own default rate by avoiding those loans.

You’re not just closing your eyes and throwing your money at random people when you have real world data that tells you which groups of borrowers have paid back loans in the past and which ones have a history of taking lenders’ money and running.

 

Argument #3: “Has this asset class been stress tested? Who knows what will happen if another financial crisis strikes!?”

Oh yes, P2P has been stress tested.

This has been stress tested through more financial crises than you think. And it has survived the worst of the worst. Forget the Great Recession, this asset class has survived the Great Depression!

How is this possible, you ask? Are all bankers mighty and omnipotent time lords?

Yes, yes we are, but that has nothing to do with P2P lending. Again, I point you right back to my first counterargument as we look at the borrower’s side of the equation.

Before, we looked at one aspect of P2P loans that were similar to bank loans; the lack of collateral. Not all bank loans involve collateral such as your home and car.

Credit cards are a prime example of unsecured debt, or debt backed by nothing but a borrower’s credit history and promise to repay.

But let’s take a closer look at the actual loans offered by Prosper and Lending Club and see what else is similar.

Let’s see: P2P loans are fixed rate, unsecured loans offered with three to five year terms. The loan amounts range from a couple thousand dollars to $35,000 and are paid back in monthly installments with principal and interest being applied to every payment.

Hmm … these don’t sound similar at all to bank loans. No, instead they sound exactly the same!

Literally, the only differences between a basic personal loan from a bank and a P2P loan is that the bank directly profits in the former while individual investors directly profit in the latter, and I have to deal with angry customers wondering why they haven’t been given a closing date yet in the former while I don’t have to deal with the general public at all in the latter.

… Wait, I think I figured out why I like P2P lending so much.

"Three cheers for peace and quiet!" [Photo courtesy of stockimages at FreeDigitalPhotos.net]

“Three cheers for peace and quiet!” [Photo courtesy of stockimages at FreeDigitalPhotos.net]

So if a P2P loan is simply a standard unsecured personal loan that you would find at any bank, then surely it’s an asset class that has been around for decades and decades and has been stress tested through many different financial crises and economic downturns.

The banks are still here, still offering these loans, and still making money on them.

In my eyes, P2P lending isn’t really a new asset class at all.

It’s not some exotic new thing that even the most seasoned financial advisers have trouble understanding. They aren’t mortgage backed securities or anything like that.

They are the same simple, easy to understand fixed rate bank loans that people have been dealing with for decade upon decade upon decade upon decade. They have been stress tested to Hell and back and they have passed.

The only thing new is that you have a chance to earn money from these loans rather than Jamie Dimon (Chase’s CEO).

 

Argument #4: “The people applying for these loans must be some serious deadbeats! If they had good credit, then why wouldn’t they just go to the bank like everyone else?”

P2P lending is just starting to dip its toes into the world of mainstream finance, but it’s not there yet. It’s still a brand new asset class as far as your average investor is concerned.

Most people have never heard on it and have to have it explained to them, while everyone knows about the stock market or buying rental property. And when the average person needs a loan, the first thing they do is go to their bank. Or their parents.

I have seen many people imply P2P loans to be “the back channels of lending”, as if the borrowers were dealing with shady loan sharks in the basement of a Mafia-owned bar. They ask why would someone go out of their way to borrow money at ridiculously high interest rates (Lending Club’s highest APR is over 26%, while Prosper loans can hit the 35% mark) from a lender that no one’s ever heard of when there is a reputable bank on every street corner that they can deal with (and speak to a lending professional as well).

The thing is that many of those reputable banks have very strict underwriting criteria. While they have been loosening their requirements, those underwriting requirements became much stricter in the years immediately following the financial crisis and still have not returned to those levels.

I fully support the tightening of lending standards since banks can only afford so much risk on their primary method of making money (sorry, increasing the amount of deposits is worthless as far as increasing revenue goes since banks don’t make money that way), but that means that it is really hard for Bob the Borrower to get a loan.

But while the big banks are only dealing with borrowers that have perfect or near perfect credit, Prosper and Lending Club will deal with people that aren’t quite at that level but can demonstrate that they will be able to pay back a loan.

Someone who has been successful at making timely credit card payments at 30% interest should be able to pay back a debt consolidation loan at 15%, even if they don’t have the best credit or income. The P2P platforms have their underwriting guidelines, but they are less strict than the banks and will lend to people with subpar credit if those people demonstrate the ability to pay back their debt. They will deal with Bob when the big banks won’t.

But okay, so P2P platforms are geared towards riskier borrowers then? That sounds, well, risky.

Sure they can justify charging these people higher rates, but it sounds like an investor is playing with fire by de facto dealing with only subprime borrowers.

And if P2P lending is going to become mainstream in the investing world, it has to become mainstream in the lending world as well. It has to do that first. Which means attracting prime borrowers.

Why would someone with perfect credit go out of his way to learn about Lending Club when they probably have a Chase right around the corner?

This is where a personal banker is best suited to answer that question. The answer is the interest rates.

If you were to walk into my bank with your perfect credit score and apply for a loan, you will probably be offered a rate somewhere in the 9-10% range.

But look on the websites for the P2P companies. While they are known for exorbitantly high interest rates, those are only for their riskiest borrowers.

Borrowers with good enough credit to qualify for the highest rated loans (A-rated loans) earn the lowest interest rates, around 6.5%.

So imagine someone with perfect credit and a very high income is being offered two loans, one from Lending Club and the other from Chase.

They are both unsecured fixed rate loans with a 3 year term. The person can even apply online for each without leaving their home.

The two otherwise identical loans, however, come with different rates.

Lending Club’s is 6.5% while Chase’s is 9.5%.

Which do you think our hypothetical borrower will choose?

Exactly!

When you loan money to people, you aren’t just giving your money to deadbeats who survive off payday loans and minimum wage.

These aren’t the bottom of the barrel borrowers who were laughed out of the banks. These are prime borrowers who shunned the banks because they wanted a better deal.

Many of the borrowers are the sort of borrowers that the banks look for, that the banks make money off of.

But these borrowers have gone to P2P companies instead, where you make the money.

As a side note, we’d never laugh you out of the bank. We usually wait until you’re gone.

"Ha ha! Your rent check bounced, loser!" [Photo courtesy of stockimages at FreeDigitalPhotos.net]

“Ha ha! Your rent check bounced, loser!” [Photo courtesy of stockimages at FreeDigitalPhotos.net]

Final Thoughts:

……….Take care of yourself and each other?

I’m not expressly making the case for P2P lending here. Even though I am a lender, I am not arguing that it is awesome and everybody should do it.

There are pros and cons for all asset classes, P2P lending included. But these are arguments against P2P lending that I’ve heard here and there that I had to address because I honestly feel they don’t hold any water.

  1. We know the loans don’t have any collateral; they are the same unsecured loans that a bank offers.
  2. It’s not gambling; we can back test these loans to see how they’ve performed historically and only invest in the types that give us the most likely returns.
  3. It’s been stress tested; these are basic consumer loans that have been around for ages.
  4. And these aren’t deadbeats who can’t pay their debts coming for more money; many of them are prime borrowers who rejected the high interest rates of the major banks.

I’d like to thank MMD for giving me a chance to voice my opinions on P2P lending. I will now repay him by attempting to steal his readership using this picture of an adorable puppy.

My Money Design never--AWWWW!!!! [Photo courtesy of Witthaya Phonsawat at FreeDigitalPhotos.net]

My Money Design never–AWWWW!!!! [Photo courtesy of Witthaya Phonsawat at FreeDigitalPhotos.net]

Readers – Who among you has tried (or thought about trying) P2P lending?  What have your experiences been like?

 

Featured image courtesy of Pixabay.com.  See captions for all other image sources.

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How Much Do I Need to Save for Retirement?  Probably Much, Much Less Than You Think! http://www.mymoneydesign.com/personal-finance-2/retirement/how-much-do-i-need-to-save-for-retirement/ http://www.mymoneydesign.com/personal-finance-2/retirement/how-much-do-i-need-to-save-for-retirement/#comments Mon, 15 Jun 2015 06:00:04 +0000 http://www.mymoneydesign.com/?p=8607 When it comes to your retirement savings, how do you know when enough is enough? According to an article from CNBC, a global investment management firm surveyed investors and you know what they came up with? An average retirement nest egg of $2.5 million! That’s how much they believe it will take to have the […]

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how much do i need to save for retirementWhen it comes to your retirement savings, how do you know when enough is enough?

According to an article from CNBC, a global investment management firm surveyed investors and you know what they came up with?

An average retirement nest egg of $2.5 million! That’s how much they believe it will take to have the same quality of life they’re enjoying today.

As I found out first hand at a lunch outing with a friend, this sort of belief is all too common!

But what if it’s not at all true?  What if you really sat down and actually figured out how much do I need to save for retirement and concluded …

… it could be much, much less!

Perhaps you’re already a lot closer than you think!

Here’s my lunch story …

 

You Think You Need How Much To Retire?

how much do I need to retireI was out to lunch with a co-worker when we started talking about all the little things we do to save some money on our household expenses.

The conversation took a turn to our company’s 401(k) plan and how much we were each saving there.  That’s when she made the comment:

“My husband and I probably won’t have enough to retire until we’re at least 70!” 

(She’s only 45.)

That really confused me and caught my attention …

She had already told me she has DOUBLE what I have in my 401(k) account.  Why did she think she’d have to save another 25 years?

So I asked her … why do you think that?

She replied it was because they were a long ways away from having a few million dollars in their bank accounts.

A few million?

I asked her why they believe they needed a few million and that’s where I discovered the disconnect …

She didn’t know.

“Don’t you need a few million dollars to retire?” she asked.

I asked her if she and her husband had ever really sat down and figured out what their needs truly are and she said “no”.

A few million was just what they both assumed they would need …

 

How to Figure Out How Much Money You Really Need for Retirement:

retirement savingsSaving for retirement is often a struggle for a lot of people.

In the case of my friend, that part was no problem!  As I mentioned, her 401(k) savings were already double of mine.

But she had neglected the other half of the equation …  A very important part!

How much do they really need to save for retirement?

According to my calculations, their target was way, way too much.

How to Calculate This Yourself:

There are a million ways to figure out what your retirement nest egg goal should be.

But this one is by far the simplest one:

  1. Take your average monthly expenses.
  2. Multiply them by 12.
  3. Then multiply them again by 25.

Example: If my monthly expenses are approximately $5,000, then my retirement nest egg size should be:

$5,000 x 12 x 25 = $1,500,000

That’s it.  Not too complicated, is it?

Now here’s a little bit of the logic behind what you just did.

Monthly expenses.  It’s better to base your retirement needs off your expenses rather than your current income because your expenses can be a much more accurate basis.

If you’re happy with your quality of life now, then chances are you’ll probably have the same level of expenses during retirement.  If you want them to be higher or lower, simply adjust.

Multiply by 12.  This one is probably obvious – multiplying by 12 takes us from monthly expenses to yearly expenses.

Multiply by 25.  The reason you multiply it again by 25 is because of something called the safe withdraw rate.  A safe withdrawal rate is a commonly used figure in retirement planning that says you can pull out a certain amount of money “safely” each year for retirement with very extremely high confidence you won’t run out of savings.

According to the Trinity Study, the classically accepted rate is 4%.

The reciprocal of 4% equals 1/0.04 = 25.

Hence it’s a lot easier to tell people to multiply by 25 than to tell them to divide by 0.04.

 

Shaving 15 Years Off of Working:

enjoying retirementSo back to my friend at lunch …

The next day I asked her how much her and her husband thought they’d really need to have a “happy” retirement.

Based on the numbers she gave me, we quickly did some calculations in Excel and discovered they could actually afford to retire very comfortably by age 55 if they really wanted to!

She was floored!

By actually taking the time to figure this out, we had essentially erased 15 years of working and possible unnecessary retirement savings.  That’s 15 extra years to do whatever they want!

That’s pretty incredible!

 

A Little Bit of Planning Goes a Long Ways:

As you can see, taking the time to sit down and put a plan on paper pales in comparison to the 5, 10, or even 15 years of NOT having to work that you might save!

So why don’t more people take the time to do this?  This quick video series from Prudential shows some very interesting experiments as to why people put off retirement planning.  Take a look:

 

Refining Your Retirement Plan:

Please remember that the equation above is simply the most basic of basic methods to approximate your target savings.

Once you’ve got the general idea, if you’d really like to see how much you need to save for retirement, use a tool like FIRECalc to get a more statistical analysis of how your goals will stack up.

Again, I can’t say it enough.  It’s worth your time and planning!  Just like my friend you might find out that you need a whole less than you thought and end up saving yourself many years of working that you don’t need to put yourself through.

 Readers – How much do you believe you need to save for retirement to be happy?  Are you basing it on the things we talked about here or something else?

 

Images courtesy of Frankeleon | Flickr, Pixabay, and MorgueFile.  

The post How Much Do I Need to Save for Retirement?  Probably Much, Much Less Than You Think! appeared first on My Money Design.

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