Start

I must begin by apologizing for my delay in posting on my blog.  I have been enjoying an all-expense paid vacation to Kandahar for the last nine months, courtesy of the American tax payer.  For those of you who paid your taxes to make this possible, I thank you as you helped me experience my awesome.  As I am now returning from said vacation I will be able to pay more attention to my blog and provide financial insight. 
 

During my absence, I have not stopped in my pursuit on learning and understanding of the financial troubles which enslave those who fall victim to the business model of banks.  As of today I have finished an amazing book titled “Start” by Jon Acuff.  Although this book is not about increasing your financial status, it is about increasing your personal status.  I felt this book was important for those who wish to be financial independent as it is insightful about moving yourself from average to awesome.  Awesome is a place where everyone should aspire to be.  After reading the book, Acuff illustrates that there is no financial status of awesome.  It is not measured on the size of your house, the manufacture of your car, or where you buy your cloths.  Rather, awesome is living the life you want to live because you chose it.  I wanted to share with you a story of my life several years ago where I made my first move from average to awesome and for me, launching into a better life.

 

Nearly 15 years ago, while I was a junior in high school, I was offered a job by a man name Nick.  Nick was a friend and counselor at Christian youth club that I attended.  He had gotten to know me and offered me a job at the company he worked for to be his assistant.  I had never been offered a job before in my life and was honored by the proposition given to me.  I gladly took Nick up on the offer and began working there.  The job was working for a civil engineering firm that performed testing on soil to determine the strength of structures to be built.  For a high school kid I felt like I blasted past the average of working at a fast food restaurant and landed in what Jon Acuff would describe as awesome.  For the summer between my Junior and Senior year, it was awesome.  I was making money and doing what felt like work that mattered.  During my Senior year of high school the head gasket of my 1979 Diesel Volkswagen Rabbit went out leaving me without a vehicle.  I purchased, with assistance of a loan, a new (the definition of new was relative to a senior in high school) 1986 Toyota Cressida.   Although understanding math and sciences was easy to me, my calling was not to civil engineering but rather computer engineering.  I quickly realized I was no longer living in awesome, as testing soil was not what I wanted to do for the rest of my life.  My enjoyment and desire to work quickly diminished as my employment went from a status of “career” to a status of “job”.  I wanted to quit so badly, but I couldn’t.  What kept me leashed to this job was the loan, my obligation to provide money to a bank.  Being a young man of my word, I honor that word to the bank and lived a life of average working for a company I grew to resent. 

 

Just prior to my graduation from high school I had my car paid in full.  I was free, free to do whatever I wanted to do.  My parents took me on a vacation to Canada for a month to celebrate my graduation.  Upon my return I continued with my job.  After just one day of work I realized quickly I was employed by a “job” and not a “career”.  I no longer felt tethered to the job as my financial obligation was completed when the car loan was paid.  The fear which kept me enslaved by a job I did not want was no longer present.  I was also blessed to have not informed my employer I would be working full time as it was now the summer time.  The very next day I drove my paid for vehicle to the local college and applied for a computer technician job, since it was my new awesome.  The college hired me on the spot and I actually started working immediately after the interview.  That afternoon, when I was scheduled to work for my “job”, I gave them my two weeks’ notice.  I had escaped from average to awesome for the first time in my life.

 I have learned two valuable lessons during this experience.  The first was having an auto loan.  The fear of not being able to pay off the loan kept me enslaved at a job I did not enjoy.  The lesson learned here was to not owe anything to anyone.  If you have debts, be it student loans, auto loans, credit cards, payday advances, ect., pay them off.  Be free from debt.  Debt is nothing more than modern day slavery placed in a friendly package.  I worked a job not because I wanted to, but rather I had to.  I currently do not have any debt other than a mortgage.  Becoming free from debt made it easier for me to “punch fear in the face” and move my life to a better place called awesome.

 

The second lesson was not staying with a job when I could be in a career.  I learned to “escape average, do work that matters” when I moved from one employer to another.  As I have grown and matured, the definition of awesome has changed significantly.  With the change of the definition so too have I changed my life.  If you told me 15 years ago I would be living awesome in Kandahar, I would have asked you, “where?”  Don’t ever settle for the average, pursue your own awesome.  If you are having trouble with your own awesome, please read “Start” by Jon Acuff.

 

 

Savings Deposit Program

For many, the perk of a deployment is the extra money you will be making.  Combining basic allowance for subsistence, hostile fire pay, separation pay, and a tax free paycheck makes for a nice increase in pay.  But there is another way you inflate your pay while deployed, the Savings Deposit Program (SDP).  The SDP allows for service members to deposit up to $10,000 and earn interest at a 10% rate, compounded quarterly while you are deployed, and an additional quarter upon your return from deployment.  Many of the service members I have talked with about investing have been scared to invest due to the potential loss of principle.  If you are in this boat, then pay attention.   There is no risk.  The SDP is possibly the best no risk investment out there.  As of today a one year Certificate of Deposit will yield just over 1% and I Series US Savings Bonds are currently yielding 2.2%.  

So how much can your investment in the SDP yield?  Well let’s just do a quick calculation of $10,000 placed in the beginning.  Then compile your money at 10% quarterly for five quarters.  Four quarters for your yearlong deployment and the fifth quarter is for the extra three months it can collect interest after you return from the deployment.  In the end, you pocket  an extra $1,314 when you collect your money back.

 I hope by now the free money with no risk has captured your attention.  So let’s get you qualified to start investing.  To qualify, you must be deployed to a region where you will qualify for hostile fire pay for a minimum for thirty consecutive days or at least one day of three consecutive months.  The thirty day requirement gives yourself some time to get your finances straight and see how much money you can invest.  You do not have to invest all of your money in the beginning.  Instead you can add to your investment every month with an allotment.

You can collect the funds back upon completion of your deployment.  The funds will be direct deposited to your account after 120 days redeployed.  If you would like to request your money sooner, you can request the funds with your MyPay account.  Under times of emergency, you can request your funds while still deployed; making this a safe and liquid investment opportunity.

Now you have decided to start your SDP where do we begin?  Simple, meet with your unit’s S-1 or your local finance office to begin your investment. 

Check back in about a week when I will have a review of a new peer to peer lending research tool called Number Whale.  As with any form of investing, having the ability to perform research gives you the edge.  Follow the link to their site to pre-register and receive discounts at their October launch.

Become your own Bank

Advertisements surround us showing great 1.05% interest rates on Certificate of Deposits (CDs) and savings accounts.  Meanwhile, the same bank is loaning your money for a personal loan at rates over 12% interest.  Doesn’t seem fair right?  Especially when you consider inflation, then you are just losing money by saving. 

So what can be done to curb this trend?  How about becoming your own bank?  The idea sounds expensive, but about a year ago I saw a report on a company called Prosper Marketplace who provided peer to peer lending.  The idea sounds simple enough, take out the bank and the barrower gets a smaller rate and the lender gets a larger rate.  On paper, everyone wins.  I was quickly excited to try this idea back then and I was hit with the problem of being stationed in a state who did not allow for peer to peer lending.  Just over a month ago, I saw another article on this company and decided to give it another shot to see if regulations have changed.  Unfortunately the citizens of this state cannot use the product, but instead Prosper has added a way to check a box if you are military and provide what state you are from.  Great! They have created a work around for those displaced due to military service.  So my account became funded.

Looking around the program, the interface is rather simple to use.  In a way it feels like Facebook as I browse the profiles of people requesting money for loans.  The reasons people need money are endless.  But like I said, this is like Facebook, and talk is cheap.  Prosper does require the lenders to provide a copy of their social security card, photo identification, proof of income, and other documents to prove the person is who they claim to be.  Additionally, the lender is able to see a current credit report on the borrower to see information such as delinquencies, credit card usage, inquiries, and credit score.

I would like to toss out a word of caution.  The website may attract investors to choose higher risk investments because of the high yields and deter investors from the safer investments due to the lower yields.  But the reality is that people can and will default on these loans.  Just like the stock market goes down, so can this investment.  It is not a sure thing. 

So what can you do to mitigate the risk?  There are plenty of blogs out there providing advice on how to play the game.  Some people talk about the character and sincerity of the person requesting the money.  At the same time they discuss not investing in people who do not provide information.  That may be your thing, who knows.  But again, my opinion is that talk is cheap.  I can ask for a loan to pay for my son’s college tuition, but then use it to go on a cruise.  I have discovered in my month as a Prosper lender an amazing site, www.lendstats.com.  This site allows you to query all of Prosper’s data since they converted to their current system.  Since this 3 years worth of data, and 3 years is the most common loan length, you can get a historical data on what is safe and not.   I by no means am giving advice on how to invest your money, but some things to look at are new borrowers to previous borrowers, numbers of inquiries, number of delinquencies, and so on to see how loans have performed.  Additionally, you can look at other users’ accounts and see how they have invested to learn from their successes and mistakes.  Or even see where you are going right and wrong in your own account.

An additional mitigation tool is diversification.  Prosper’s blog provides data reflecting since the change in their program three years ago, all lenders with over 100 notes have some form of positive growth.  Wow, 100 notes, which must cost a lot.  But actually it doesn’t.  The minimum amount you can pledge to the loan is $25, making it cost only $2500 to own 100 notes. 

To me, the process is painful at first, as I am big into the stock market.  I like to see my money change every second.  But initially, Prosper moves at a slower pace.  When a listing is posted it has fourteen days to collect funds from the lenders.  Once the loan is funded, it can take another seven days to have the borrow provide the required documents, and be verified by Prosper’s personnel.  So three weeks could potentially by before you can begin to collect interest on your investment.  But when you have a three year loan and average out the wait time, it becomes 51 weeks a year of interest.  Not so bad after the wait.  In fact the stock market is closed for holidays making the wait comparable. 

And additional wait is the fact you are investing into a loan.  The person receiving the money isn’t going to pay you back right away.  There becomes a 30 day wait before the first payment is due to you.  This is why I have decided to write this blog today.  My 30 day wait will come due on Friday and I will begin to collect my little bundles of money.  If you have over 100 notes, then everyday will be a pay day.

After this first month, I have learned a lot.  One thing to remember, this is like investing in the stock market.  Your intent is to make money.  Earlier, I mention people talked about the importance of what they place in the loan’s listing.  Personally I believe in historical numbers.  If you play the stock market on emotion, you will get burned.  If you invest on emotion, and not numbers, you will probably try to buy stock in Enron after Ken Lay said it was a good idea. 

I will continue to update on my success as a bank.  Please feel free to give it a try.  It is completely free to lenders and it is free for borrowers to list a loan. 

What does your credit report say about you?

Reviewing your credit report is the easiest proactive means to protect your identity, but for some reason it is rarely done.  We are bombarded with many advertisements informing us on FREE means of obtaining your credit score.  Unfortunately, knowing your credit score is insufficient to protect yourself against identity theft. 

So what is the difference between your credit score and your credit report?  Your credit score is a number used by creditors, such as a bank, to judge the level of risk to loan you money.  From this number they derive the interest rate at which you will be charged. 

Your credit report, on the other hand, is the information used to calculate your credit score.  Information on the credit report includes lines of credit, delinquent payments, and inquiries for credit.  What should you be looking for when you are reviewing your report?  The simple answer is anything you do not recognize as your usage.  When your identity has been jeopardized, the thief will open up lines of credit and not make any payments.  As you review your credit report, look for any inaccuracies so you can immediately contact the creditor about the potential fraud.   

Congratulations, you have decided to check your credit report.  Which advertisement should you listen to so you may obtain your free credit report?  You may be surprised, but the answer is NONE of them.  Instead, www.annualcreditreport.com was created to provide consumers with one free credit report from Equifax, Experian, and Trans Union each year.  Not every creditor reports to all of the big three agencies.  Therefore it is important to check your report from all three companies.

Before you go and pull all three reports at once, check out this little trick.  If you pull one report now, then wait 4 months then pull you second report.  After waiting 4 more months, pull the final report.  If you are counting months on your fingers, you will run out so I will do the math for you.  After waiting four more months, your original credit report will have been a year.  This means you can pull the first report again for free.  With this schedule, you will be able to pull three credit reports each year for free.

You work hard to build your reputation and as such it is important you protect it.

Identity Theft For Dummies - Amazon.com

Changes to the Thrift Savings Plan

Currently the Thrift Savings Plan (TSP) acts similar to a traditional Individual Retirement Account (IRA) in regards to the tax benefit.  TSP is currently working on phasing itself to provide a Roth benefit to TSP accounts which will make the accounts act similar to a Roth IRA.  Marines are currently able to take advantage of this transition.  Starting July 2012 civilian federal employees will be able to take advantage of the program.  Soldiers, Sailors, and Airmen will begin taking advantage of this program starting in October 2012.

For information on the Pros and Cons of traditional and Roth, please see the blog about IRA accounts.  Additionally consult with your accountant to see if the conversion is appropriate for your retirement goals.

TSP Investing Strategies: Building Wealth While Working for Uncle Sam - Amazon.com

Rule of 72

In a previous blog I discussed the power of compounding interest.  But how long does it take until your money doubles?  This is a common question, and should be as the point of investing is to increase the value of your money.  There are calculators you can easily Google which will calculate how long it will take to double/triple the value of your account, but there is an easy way to calculate an estimate.  This is called the Rule of 72.  It is a really easy way to estimate the time required to double your investment.  To perform the calculation, simply take 72 divide it by the interest rate (in percentage) of your return and the answer will be an approximate in the number of years to double your investment.

72 / 9% = 8 years

Remember, this is merely an estimate.  The actual time required to double your investment at 9% is 8.043 years.  Not too far off of an estimate.

Compounding Interest

Looking back to when I was a private, there were several retiring First Sergeants and Sergeants Major who were trying to instill their parting wisdom upon the minds of those who will replace them.  One message they all shared was to save, and start now.  Not being to financially savvy, they talked about starting a Thrift Savings Plan (TSP) as it was a new program Soldiers were allowed to participate in.  As these senior Soldiers were looking toward retirement, they did not want their subordinates to make the same mistake of not taking advantage of compounding interest.

Interest is the profit you can make from investing your money.  Let’s do some simple math to see how this works.  Suppose you have $10,000 to invest and place it into a program yielding 10% interest.  After 1 year you will have made $1,000 in interest, and have a total of $11,000.

$10,000 x %10 = $1,000

So how does compounding interest differ?  Well you aren’t going to stop investing after that one year.  Now on year two we still have our original $10,000 and our earned $1,000, all of which is earning 10%.  Again our $10,000 will bring in another $1,000, and the previous earned $1,000 will bring in $100 for a total account value of $12,100. 

$10,000 x %10 = $1,000
$1,000 x %10 = $100
$10,000 + $1,000 + $1,000 + $100 = $12,100

Why should you start saving now? The longer your money has a chance to grow the more it will work for you.  Let’s imagine you have just completed basic training and there are twenty years ahead of you until you are able to retire from the military.  In our scenario you will be placing $400 a month into a Roth IRA account from now until you retire.  Doing simple math, $400 x 240 months will mean there is $96,000 in your investment account.  But what would all of that money do if it was compounding interest for you?  I am now going to adjust the scenario to earn an average of %10 a year.  After doing some computations, your account would have the $96,000 you contributed plus an additional $207,747 in interest for a total of $303,747. 

But what about your senior leader who is getting ready to retire and has only five years left in the military?  Running those numbers of $400 x 60 months you would only have $24,000 in contributions.  After letting this money compound for the 5 years, the total account value would be $30,974.  That means less than $7,000 interest earned.  Looking at these numbers, you can see why your senior leaders wish they could go back in time to when they were a private and begin saving then.

Earlier I mentioned in our scenario we would be placing this money into a Roth IRA account.  Just because your service in the military has ended doesn’t mean you can start taking deductions from your IRA. Suppose you enlisted into the military at 18 and served 20 years, you would still have another 21.5 years until you are eligible to use money from your IRA.  What would your $303,747 be at that time without any additional contributions?  Using the same interest rate as above, your account would value $2,280,750!  Wow, who would have thought being a Soldier would make you a multimillionaire? Best of all since you were placing these funds into a Roth IRA account it’s also tax free.

Please consult with your accountant for your unique situations.

A Beginner's Guide to Investing: How to Grow Your Money the Smart and Easy Way - Amazon.com