New Blog is Up and Running

After a lot of hard work, my new self-hosted website is up and running. I have put a lot of work into modifying my theme (which meant re-learning html), importing my current blog posts and setting up plugins, feeds and stat counters. I’ve updated my about section and hope that I can foster a more personal atmosphere at my new site, which will hopefully lead to a strong community for learning about personal finance.There is still a lot of work to do, but the site is functional and I will now be posting strictly on that site.

I would be honored if you followed me over to the new website for the Personal Finance Start-Up Blog. Don’t forget to sign up for the new RSS feed to continue following me on my journey.

Moving to a New Domain

After posting my goals for 2009, I began looking into buying a domain name and domain hosting services. For the next few days I will be putting all of my efforts into setting up my new domain, new theme and transferring my blog. For this reason I will not be blogging until after the weekend. I apologize for those of you who are subscribed to this domain, but the new website will be even better and I hope you sign up for the RSS feed at my new site. I will let you know what the new site is as soon as I have it up and running.

Biggest Lesson Learned from this Bear Market

The bear market has taken a huge toll on everybody’s investments. I read numerous personal finance blogs, most of which write an end of year financial status round-up. Many of these bloggers are experiencing significant declines in stock market investments, so much that their net worth has decreased over the course of 2008. Fortunately, the majority of my savings was held in cash for a condo down payment. For this reason I didn’t experience too much of an effect from this bear market, however, I did learn a very valuable lesson from this bear market, know your risk aversion.

Risk Aversion

Risk aversion is how well you handle risk. A risk averse person will trade higher returns in order to lower risk. A less risk averse person will take on higher risk to gain higher returns. Risk aversion is not something that is consistent from person to person. Knowing the degree of your risk aversion is crucial to surviving the ups and downs of the stock market.

If you have never experienced a bear market, which was true for me up until now, you may think you aren’t risk averse, that is until you’ve lost 50% of your portfolio. Everybody can ride the market highs, but can your stomach handle the lows?

Not knowing your how risk averse you are can lead to making one of the largest mistakes of your investing career: buy high and sell low.

Past Bear Markets

Even though I didn’t have a lot of money in the stock market, I have learned that I have a high tolerance for risk. I know that I am just beginning my investment journey and I have over 30 years to recoup any early losses. Studying past bear markets has made me confident that the market will rebound and rebound in a big way.

Investing at today’s discounted prices is the equivalent of investing in 1997, at least according to the S&P 500. Back in 1997, the S&P 500 was in the 800 range, the same as it is right now. That’s 11 years worth of stock investing that I hope to take advantage of when the market rebounds.

Also, a market similar to the current market existed between the years of 1963 to 1974. In 1963, the S&P 500 was in the 60’s. The S&P 500 peaked around 118 in 1972 before taking a nosedive back to the 60’s in 1974. If you had sold your position because you did not correctly know how risk averse you were, you would have missed out on the gains the next 11 years provided. Over the course of the next 11 years, the S&P 500 increased in value into the 250’s.

Conclusion

The stock market is not guaranteed to increase over the short-term. Over the long haul, however, the stock market will outpace inflation and help secure a happy and financially independent retirement. A bear market such as our current market, is the only time to really be able to determine how risk averse you are. Can you sleep at night knowing that up to 50% of your retirement savings have vanished over the past year? Can you sleep easily knowing the loss is only a paper loss and the market will rebound? Are you willing to pump extra money into the market during a bear market? Your answers to these questions will help you determine a suitable stock/bond ratio for your investment plan. I’m confident that the stock market will rebound and if you don’t believe me, check out the history of the S&P 500 for yourself.

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Sign-Up for a Lending Club Account and Receive a $50 Lending Bonus

Lending Club is a social lending network that connects lenders and borrowers through investing in notes. You may loan as little as $25 or as much as you want. Lending Club makes money by charging a processing fee from the borrower and a servicing fee from the lender. The processing fee is a percentage between 0.75 and 3.00% of the loan amount. The service fee is 1% of each payment from the borrower.

The benefits of investing money through loans is that Lending Club allows you to earn between 6.69 and 19.37% depending on the rating of the borrower. Lending money does involve some risk as the borrowers may default on the loan. Another benefit is the $50 bonus for signing up through my referral (I don’t believe I make any money on this transaction). The following is a step-by-step guide on how to sign up for a Lending Club account and receive your $50 bonus.

Create Lending Club Member Account

Creating a Lending Club member account is super easy. If you are interested in a $50 referral bonus leave a comment or email me (pfstartup@gmail.com) and I will send you an email invitation. I don’t think I get anything out of this, but $50 is enough to fund two separate loans.

If you’re not interested in a $50 bonus, just follow this LINK. Creating a member account requires the following information: email address, password, security question, security answer, screen name and a human verification code. Also, you have to agree to the Terms of Use. After selecting next, all you have to do is wait for a confirmation email.

Enable Investing

Once you receive your confirmation e-mail and have followed it to Lending Club’s website, you can click on “My Account”. You are given two options: Invest or Get a Loan. Select Invest and you are taken to a 4 step set-up process.

The first page is your personal information and a few agreements. For personal information you have to enter the following: first name, last name, SSN, DOB, street address, city, state, zip code and home phone. Additionally, you have to agree to the note purchase agreement, no tax withholding and declaration of trust.

Step 2 deals with identity verification. Apparently, my identity has already been verified, moving right along…

Step 3 requires the necessary banking information to link to an external account. The required information is account holder’s first name, account holder’s last name, name of bank, routing number and account number. Also, a bank account verification and debit authorization agreement is required.

The final step is unique when compared to other investing account sign-ups. Lending Club claims that borrowers are less likely to default on a loan if they feel connected to you. The final step allows you to designate your geography, education, workplace and other associations, which will appear publicly next to your screen name.

Now you are ready to be a Lending Club lender. They use an interesting method of verifying your bank account. Most places send trial deposits into your bank account. Lending Club removes a value less than $1 from your account and puts it into your Lending Club account. You then verify this amount in your account section of Lending Club.

Security

Lending Club uses Secure Socket Layer (SSL) certificate technology to secure website connections. SSL also ensures that all data entered is appropriately encrypted. Lending Club ensures that all sensitive personal and financial data is stored in a highly secure environment.

Conclusion

Creating a Lending Club account is very easy and can be done in about 5 minutes. I have not done any lending yet, but when I do I will write a review. Until then, Jonathan at My Money Blog has written a few times on his opinions of Lending Club. Again, if you are interested in giving Lending Club a shot and are interested in a $50 sign-up bonus either leave a comment or email me at pfstartup at gmail dot com.

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Book Review: Winning The Loser’s Game

The last time I went to the library looking for a new book to read, I didn’t plan it out very well. I have a list of books that I want to read. I didn’t remember any of those books and was forced to search the personal finance archives for something that sounded interesting. In Charles D. Ellis’ “Winning The Loser’s Game” I was hoping to find a book with a different message than the standard “invest in index funds” message that I’ve read in my recently read books. The book delivered that standard message, but in a completely different way.

The Loser’s Game

I selected this book because I was intrigued as to why Ellis described investing in the stock market the loser’s game. In reality, the loser’s game is not investing in the stock market, but trying to beat the stock market.

Ellis contends that trying to beat the stock market has evolved from a winner’s game to a loser’s game. The reason for the evolution is due to the number of professionals associated with the stock market. Investing institutions currently make up 90% of total public transactions. For this reason, in order to beat the market, investors must find and exploit other professional investor’s mistakes. Attempts to beat the market usually leads to active investing, where returns are eroded by trading costs and taxes on top of the already powerful eroding force that is inflation.

Winning the Loser’s Game

Ellis’ solution to the loser’s game is to just not play. If you don’t play you can’t lose. He does not suggest stuffing your money under the mattress for preservation. Ellis believes in applying a long-term investment policy to take advantage of compound interest. He advocates developing a long-term investment policy that is based on selecting an appropriate level of risk. The appropriate level of risk is determined by the highest ratio of equities that you handle during a bear market.

Responsibility of an Investment Client

A large portion of the book is spent breaking down the investment client and investment manager relationship. Ellis claims that the client must play the most important role in this relationship. Most individuals think they are paying an investment manager to make all of the decisions. This is not the case. The client should be responsible for defining an investment policy (optimally a long-term policy), after which the manager must adhere to this policy.

History of the Stock Market

Knowing the history of the stock market goes a long way in developing a long-term investment policy to win the loser’s game and establish a successful relationship with your investment manager. An understanding of the turbulent nature of stocks in the short-term goes a long way towards developing an appropriate ratio of equities, while also tempering your expectations from an investment manager. Ellis argues that you should select an investment manager based on your willingness to double up with him when he is losing to the market based on the reversion to the mean theory.

Conclusion

“Winning The Loser’s Game” can be slightly more difficult of a read than I was hoping. A few times I had to re-read sections to truly understand his argument. Otherwise, it was a very interesting read that put a different twist on the stock market. I had never thought of the stock market as being run by professionals with limitless information. I would recommend this book, but it does not even come close to matching “A Random Walk Down Wall Street”.

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Increased 2009 401k Contribution Limits

In developing a plan for my 2009 goals, I stumbled upon some changes to the 401k contribution limits in 2009. I currently don’t participate in my company’s 401k, but I set up a Vanguard Individual 401k for my self-employed income. Depending on my level of self-employed income in 2009, the following changes may affect my maximum contribution amount.

2009 401k Contribution Limits

The 2009 salary deferral contribution is limited to $16,500 if you’re under 50. If you’re over 50, the 2009 salary deferral contribution is limited to $22,000 ($16,5000 plus a $5,500 catch-up contribution). This results in a $1,000 increase in the salary deferral contribution and a $500 increase in the catch-up contribution when compared to 2008.

Total contribution limits also increased for 2009. If you’re under 50, total annual contributions (salary deferrals and employer contributions) max out at $49,000, which is increased from $46,000 for 2008. If you’re over 50, total annual contributions max out at $54,500, which is increased from $51,000 for 2008.

Individual 401k Maximum Contribution Limit

My Individual 401k maximum contribution limit is roughly calculated in the following way (for a sole proprietor under the age of 50):

• If you’re net income is less than the salary deferral contribution limit ($16,500 for 2009) you may contribute your entire income reduced by 1/2 of your self-employment tax.
• If your net income is greater than the salary deferral contribution limit, you must calculate your net compensation.
• Net compensation is net profit from IRS Form 1040 Schedule C with 1/2 of your self-employment tax removed.
• As a sole proprietor, you may contribute up to 20% of your net compensation in addition to the salary deferral contribution with a maximum value of $49,000 in 2009.

A plan contribution calculator from Vanguard can be found HERE.

Conclusion

Although I doubt I will earn enough self-employed income to reach the salary deferral limit, it’s always good to know what the limit is so you can plan accordingly. Between maxing my Individual 401k and my Roth IRA contributions, I have a lot of work ahead of me for 2009.

For another resource on the new 2009 401k contribution limits:

Increased 401k Contribution Limits in 2009 by Cash Money Life.

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Developing A Daily Schedule To Achieve Goals

Recently, Kevin over at No Debt Plan posted about his daily schedule and if it was appropriate for what he wanted to achieve. His excellent post got me thinking about whether or not a more structured daily schedule would allow me to better achieve my goals for 2009.

Current Daily Schedule

Currently, I don’t have a very structured daily schedule. My employer doesn’t seem to mind what hours I work so long as I get my work completed. In fact, I have a coworker who routinely arrives at 1:30 pm.

Throughout the past year I have arrived as early as 7:00 am and as late as 10:00 am. Knowing that I can show up whenever I want usually leads to a lot of snoozing on my alarm clock and lots of wasted time in bed. I’m hoping laying out a strict schedule will allow me to put an end to this wasted time.

Other than work, I tutor 4 hours every Monday and Wednesday night (at least for the rest of the school year). Most days I like to find time for exercise. Depending on the season, I swim, bike, run or lift weights either immediately after I get home from work or sometime after dinner. The rest of my evenings consist of blogging, watching TV and playing video games.

Proposed Schedule

The following is my proposed daily schedule and the reasons behind each activity.

• Wake up around 6:15 and swim – I’m trying to swim as much as possible to increase my cardiovascular fitness and lose 10 pounds. Ideally I will be able to lose some weight before the end of January when I will start running very very low mileage in preparation for an 8k. I’m planning on swimming to start my day to provide me with extra energy for the day. Also, my only other option for swimming is from 9-10 pm, which really breaks up my evenings.
• Arrive at work at 9:00 am –Between swimming and leaving for work I will have to shower and eat breakfast. I’m hoping that I will have at least 30 minutes to work on my blog post for the day as well. I currently don’t eat much of a breakfast, just a granola bar of something similar. Having a consistent and semi-substantial breakfast should help me maintain a suitable level of fitness for exercising. Arriving at work at a consistent time should enhance my co-worker’s opinions of my professionalism.
• Leave work at either 4:30 or 6:00 pm –On days that I tutor I have to leave at 4:30, but on days I don’t tutor I will leave at 6:00. On Mondays and Wednesdays I will work less than 8 hours a day and Tuesday, Thursday and Friday I will work more than 8 hours a day.
• Personal time after work/tutoring – During this personal time I will complete any blog work that isn’t finished prior to going to work. Otherwise, I will play my video games, watch my TV shows or work to advance towards completing my 2009 goals.
• Get in bed as close to 10:00 pm as possible – Ideally I will be in bed at 10:00 pm. I have a hard time getting myself to bed. I usually decide that working on my blog more, or reading a book, or some other random task is more important than sleep. For some reason I am delusional and believe I can continuously work with very little sleep. Hopefully, this daily schedule will allow me to accomplish everything that I want to and at the same time sleep enough to maintain a healthy lifestyle.

Potential Future Modifications

This daily schedule may or may not apply when I begin running more mileage. At first I will start running on weekends only, however, eventually I will have to run during the week. I have yet to decide how my schedule will work when I start running more since I’m usually way too tight in the mornings to run.

Also, I’m hoping to start tutoring on my own, which will have a less defined tutoring schedule. This will allow for a little more freedom, and might be done on weekends only. Or I might be tutoring an hour here and an hour there during the week. Either way, I will have to take that into account later in the year.

Conclusion

I will try to provide updates every now and then with how strictly I’m adhering to my schedule. The hardest part about following through with this schedule will most likely be getting out of bed so early every morning, but I imagine it will get easier the more I do it. I’m looking forward to this schedule since I’m very motivated to get in shape. Now that I have my schedule defined, all I have to do is follow through. As the great Peyton Manning says “It’s on like Donkey Kong!!”

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2009 IRA Contribution Limits

I just published my goals for 2009. One of which is to max out my Roth IRA. The best way to achieve any goal is to plan. In doing my planning I had to look up the contribution rules and limits for 2009 to see if there were any changes from 2008’s contribution limits. The 2009 IRA contribution limits are as follows.

Traditional IRA Contribution Limits

The contribution limits did not change for 2009 as you can contribute up to $5,000. If you will be 50 years old by December 31, 2009 your contribution limit is $6,000. As a married couple, the contribution limits are effectively $10,000 and $12,000 as both you and your spouse are eligible for a traditional IRA.

Traditional IRA contributions have no income limitations, however, there are income limitations for deducting the value of the contribution.

Traditional IRA Deduction Limits

Deduction limits only apply if you are covered by an employer retirement plan. These deduction limits have not changed in 2009. If you’re unmarried, your contribution deductibility begins to phase out if your adjusted gross income (AGI) exceeds $53,000 and completely phases out at $63,000. If you’re married and both you and your spouse is covered by an employer retirement plan, your contribution deductibility begins to phase out if your joint AGI exceeds $85,000 and completely phases out at $105,000.

It gets slightly complicated if only one spouse is covered by an employer retirement plan. For the covered spouse, the contribution deductibility begins to phase out if your joint AGI exceeds $85,000 and completely phases out at $105,000. For the non-covered spouse, the contribution deductibility begins to phase out if your joint AGI exceeds $159,000 and completely phases out at $169,000.

Roth IRA Contribution Limits

The contribution limit for a Roth IRA also did not change and is $5,000. If you will be 50 years old by December 31, 2009 your contribution limit is $6,000. As a married couple, the contribution limits are effectively $10,000 and $12,000 as both you and your spouse are eligible for a traditional IRA.

As opposed to the traditional IRA, the Roth IRA has income limitations for contributions. The income limitations have changed for 2009 so take note. For unmarried individuals, the contribution limit begins to phase out with an AGI of $105,000 and completely phases out at $120,000. For married individuals, the contribution limit begins to phase out with a joint AGI of $166,000 and completely phases out at $176,000.

Conclusion

Even though 2008 is officially in the books, you can still contribute to a 2008 IRA up until the tax filing deadline of April 15. After 2009, the IRA contribution limits will be indexed to inflation, which will make IRAs very powerful investment vehicles.

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Personal Finance, Alternative Income And General Goals For 2009

I recently posted a round up of my 2008 financial goals. Due to poor planning I only accomplished one of my goals. The one goal I did accomplish (completing my condo down payment) was major. I did not lay out a plan prior to selecting my goals and therefore did not accomplish them satisfactorily. I have put a lot more thought into my goals for 2009 and feel confident that I can accomplish them with a lot of hard work. I’ve also decided to extend my goals beyond just personal finances for 2009, so without further ado…

Personal Finance Goals

• Fully fund 2008 Individual 401k ($0/$10,427.33) – I have not funded any of my individual 401k for 2008, but I have until the tax filing deadline, April 15th, to fund the account. I currently have nearly $9,000 in cash and $6,100 in stock (Target and US Growth Mutual Fund) that I am willing to transfer into retirement accounts to tax sheltered. Originally, I was not planning on using these funds for this purpose as they are depressed and it’s not wise to sell funds when the value is low. I would be buying funds that are equally battered in my retirement accounts, so I would not be losing value.
• Fully fund 2008 Roth IRA ($0/$5,000) – See above. I hope to be able to fully fund this retirement account as well before the tax filing deadline, however, the individual 401k is my first priority.
• Fully fund 2009 Individual 401k ($0/$??????) – I will not know how much I can invest in this account for 2009 until I tabulate all of my 2009 self-employed income, which may come from tutoring or this website. I hope to put everything I make away as was the plan in 2008. I believe this is possible as I do not need this income for any of my monthly expenses.
• Fully fund 2009 Roth IRA ($0/$5,000) – Even if I am unable to fund this account until after the tax filing deadline, I should still be able to fully fund it by the end of the year. I will have 8 months to fund this account, which translates into $625 a month. After generously estimating my monthly expenses I should have that amount to invest. When estimating income I didn’t include tutoring income and I did not assume an annual raise as this economy makes that uncertain at this point in time.

Alternative Income Goals

• Turn blogging into a source of income – I’ve been blogging for over 5 months now. The knowledge I ‘ve gained since I started has been invaluable, and I hope that I have provided others with knowledge as well, but I would like to make some sort of income off of this blog to make my total income less dependant on one source. I don’t know how to make a quantitative goal, so I will be rather conservative in this goal by saying that I want to earn enough to pay for the expenses of running a blog (hopefully this includes a new laptop!).
• Increase monthly page views and subscribers – I haven’t been blogging long enough to notice much of a trend in terms of my page views or subscribers. It’s very difficult to project quantitatively for this goal as well. My high month for page views was December with 2,119, but I would love to get over 10,000 a month. I currently have 17 subscribers. I think a goal of at least 100 subscribers would be attainable yet challenging. In order to accomplish this goal I will try to participate in more carnivals, host a carnival and try to associate more with other personal finance bloggers.
• Replace tutoring income through a company with my own personal clients – I currently tutor as a contractor through a tutoring company. The company requires keeping the same hours all the way through the school year. Also, they pay about half of what I can expect to earn on an hourly basis if I find the clients on my own. I hope to earn more money and gain more flexibility with my work hours by tutoring on my own. The tutoring company is about 30 minutes from my condo, so I should be able to tutor kids closer to my condo. In order to accomplish this goal I have to quit the tutoring company after this school year and tap my contacts in the school system. I also want to start a website for my tutoring services and begin advertising at local grocery stores. I previously blogged about expanding my tutoring and outlined a good path for doing so.

General Goals

• Travel to two cities I’ve never been to – I really want to start traveling more. Saving for my condo down payment prevented me from traveling last year. I wanted to include this as a goal because sometimes I try to be too frugal and save too much and forget to prioritize traveling like I want to. Ideally I would make it to Europe, but a Europe trip is probably a few years away. I will probably focus on US traveling by visiting buddies from college. If I can squeeze an package deal to Mexico towards the end of the year, that would be AWESOME!
• Get in shape – As a competitive runner all the way through college, I never had to worry about staying in shape. Now that I don’t competitively run, it’s harder to stay in shape. I want to get back to running more, but I keep hurting myself before I get all the way back into shape. I want to try being in shape before I start running seriously again. To do this I have to lose 10 pounds, increase my flexibility, increase my leg strength and improve my balance. To accomplish these goals I will be trying to swim more regularly, bike when it gets warmer and lift and stretch regularly. To make this easier I will be trying to come up with a regular schedule in the next week or two. The ultimate goal would be to run a sub 16:00 5k by the end of the year, but that might be ambitious as it would require speed work, which is hard to do training alone.

Conclusion

I have put significant thought into these goals. I plan on updating my progress monthly and updating my goals page when goals are completed. I’m very motivated to accomplish all of these goals and think it is realistic, yet still challenging. If you have any advice feel free to leave it in the comments and good luck to all of you in accomplishing your 2009 goals.

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2008 Financial Goals, A Year End Review

As 2008 came to a close, I began to think about how I did in accomplishing my 2008 goals and how that would effect my 2009 goals. I only accomplished one of my goals, mostly because I didn’t really come up with an action plan to accomplish my goals. I will use 2008’s goal setting experience to better set and accomplish my goals for 2009.

Set up and fully fund a solo 401k ($0/$10,427.33)

I set up a Vanguard Individual 401k on December 26th, which was before the December 31st deadline. Since I beat the deadline, I will be able to fund my 401k until April 15th, the tax filing deadline. It was a pretty painful experience because I had to set up an Employer Identification Number (EIN) and send in proof by the deadline.

Every month I’ve been increasing the maximum value that I can invest for the 2008 tax year as I continued to make more money tutoring. This is the first month that I used a contribution calculator as I’m not able to invest 100% of what I earn, I have to take out certain self-employed taxes. The maximum contribution value is still not finalized, however, as I will modify my net income with the miles traveled for tutoring.

I have not invested anything in my account yet because I was waiting to finish paying off my furniture, TV and buy Christmas gifts. I have some cash left over and will begin investing, hopefully by the end of the month.

Fully fund my Roth IRA ($0/$5,000)

I have decided to fund my solo 401k before my Roth IRA for tax sheltering purposes. If I don’t put all of my self-employed income into a solo 401k, then I will have to pay taxes on both sides of the Medicare and Social Security.

I will most likely not be able to invest in my Roth IRA for the 2008 tax year. I’m not disappointed that I probably won’t be able to fully fund this account. I made the decision to prioritize my condo down payment for this year. It was an extraordinary effort to come up with 20% in such a short period of time.

Save for a 3-month emergency fund ($0/$7,762)

My 3-month emergency fund reflects monthly payments for my mortgage, property taxes, car payment, assessments, car insurance, cell phone, cable, internet, electric bill, gas and food.

For my 2009 goals I might re-prioritize and modify my emergency fund. I’m thinking about dropping my goal down to $1,000 as a true emergency fund. After reaching that goal and saving for my retirement funds, I will try to push it to a 3-month emergency fund, which is designed as insurance against losing my job.

Wrap-Up

Now that my 2008 goals are in the books, I will start finalizing my 2009 goals. Fortunately, I am still able to carry over some of my failed 2008 goals until the tax filing deadline. Overall, I’m very happy with my ability to come up with the down payment. I will put more time into my 2009 goals and try to outline a plan for my goals so that they are more realistic. I will also put out goals for my blogging and other personal issues such as my health and career.

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