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Monthly Archives: December 2007

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2007 Financial Ups & Downs

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As we did last year, we’ll be taking a look at our financial ups and downs for 2007. (Looking back on this post feels like a lifetime ago!)

Miel opened her first ROTH IRA and maxed it out for the 2006 tax year.

Miel maxed out her ROTH IRAs in 2007.

Miel survives the DRCongo while managing to shell out over $20k cash during her three week visit!

James invests in Southern Copper Corporation (PCU) and Provident Energy Trust (PVX)

Miel maxes out her 401(k) for the first time!

By April we began rethinking our approach to prosper.

In April we also reset our net worth goal – having already reached out initial annual goal- and set this at $340,000.

In May we enjoyed a fabulous trip to California to visit family!

In July we enjoyed our one year anniversary and set a new 2007 stretch goal of $400k!

Miel accepted her current position in Afghanistan – changing our status to the international DINKs!

We enjoyed a fabulous vacation in Hawaii where the best things are free!

September was marked with enjoying more dinners at home together and romantic things like looking at our budget and drafting wills and power of attorney docs in preparation for Miel’s departure to Kabul.

We also started to have our own sub-prime meltdown with prosper.

We set our current finance goal of paying off our second mortgage of $20,187.28.

Over the last couple of months we’ve adjusted to some of the financial implications of our long distance marriage.

Miel and James finished the year with a total increase of 26% in their wealth.

Looking back at a year of blogging it doesn’t appear that our financial lives are too sexy, but we seem to be making steady progress. The biggest change over the last year is that it really feels that we’ve moved on from the stage of being newlyweds to an established marriage. We’ve certainly managed to work out many of our quirks. In the last year of posts I was only able to find one true financial argument; about buying an ottoman!

I know we are both looking forward to what 2008 may bring. Next we can’t wait for our first vacation as a long distance couple in Switzerland for Valentine’s Day! We’ve bought the tickets and now it’s all set. Wish us luck!

Miel & James

Burden of Student Debt

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I’ve been an advocate of paying off highest interest first. For us this has meant aggressively paying off our second mortgage and paying close to the minimum for student loans. This in principle seems like a very sound proposition – pay off highest interest debt for the fastest possible pay down overall.

I’ve also advocated for this on the basis that the odds of someone coming along and paying off your mortgage are unlikely, but the odds of help or forgiveness of student loans from employers and so forth is a remote possibility.

All this being said, it feels different now that my student loans are coming due. Given that I’m in Afghanistan and have one more course to finish towards my Masters degree, my deferment status has recently changed. I will also have one final payment due next summer when my independent course is complete.

Sure the payments aren’t too retched, around $400 a month, but the thought of it makes my throat tighten. It feels extremely restrictive to have this payment looming over my head for the next umpteen years.

This is particularly the case given that if we choose to graduate out of the DINKs category, it would fall during that time period. Right now I have every capability of readjusting my budget and making this monthly payment. However, should I ever want to take off any time for the possibility of children, this would become even more restrictive.

My twin sister has faced this as a challenge herself. I’ve seen her have to deal with being forced to work only to cover the cost of day care and her student loans. Not having the flexibility to choose if that was her priority.

I’ve told myself that I don’t want to end up in that situation. Now it feels that it’s time to put my money where my mouth is. Thus it seems that after we’ve reached our goal of paying of our second mortgage, that I might just have to buck up and settle my debts for the attaining the education that has allowed me to get where I am today.

While the idea of forking my extra Afghanistan cash towards student loans doesn’t feel as fun as looking into additional rental property or starting a business, the reality is that it would give me the freedom I seek later in life. In the end we will work to find a balance between the two to reach our goals.

Money can’t buy you everything, but it can give you options. I’ll still need to think about it some, but this feels like a reasonable use of my time here.

Wish me luck!

Miel

49% Raise

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Though my most recent raise was a mere 1% (due to my promotion in the second half of the year), I can’t complain about this year’s salary hike.

Looking back from a year ago I’m now earning 49% more than I was then. I can’t say that I saw it coming, but it feels good to be doing what I love and be financially rewarded for it to boot.

I guess this makes up in a small way for not having reached our 2007 stretch goal. We’ll work on our end of year net worth and share that soon.

Congrats to all of you who just got an annual raise. My advise – pretend you never got it and sock it away towards a goal.

Cheers,

Miel

Getting Ready for Baby

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Hi All,

Today’s posting will be brief because I’ve got a hot date at the library with a stack of reading. Today we’re featuring a quick video on the topic of getting your finances ready for childbirth. Since most of us will have kids, the video says two things. First, that you’ll want to reduce your debts a year before having children and second, that its okay to buy high quality used gear for your infant.



Click To Play

Prosper: A Cause for Concern?

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Hi All,

If you frequent personal finance websites, you’ve probably heard about prosper.com. Prosper is a person to person lending platform that allows you to make loans directly to borrowers without going through a bank.

We DINKs have a little under three thousand invested in the service. We were optimistic about prosper at first, but I’ve since become a little more disillusioned with the company. This is largely due to the high rate of defaults in our portfolio – we had nearly a third of our first batch of loans default. Granted, we initially lent to persons with poor credit, but just this week two more of our loans had to be written off. To make matters worse, one of these loans had a “B” credit rating, which means that even some of our borrowers with pretty good credit are defaulting on their debt.

While I take responsibility for having made the decision to engage in high risk lending, our extremely elevated level of defaults gives me some cause for reconsideration about prosper as a company.

So, after poking around a bit online, it turns out that I’m not the only disgruntled lender. For example, the company has received an unsatisfactory rating from the BBB. In addition there have been allegations that prosper has misappropriated lenders funds, and has failed to aggressively follow up on collections and defaulted loans. Of course, misinformation and allegations are rife on the internet, so you should probably take these with a grain of salt.

However, all things considered, I may put prosper on the agenda for our next family meeting with to a mind to decrease our involvement in the service. Our high level of defaults and the allegations made against management suggest that we might consider taking our free cash elsewhere.

Thanks,

James

p.s. in the interests of full disclosure we currently have an advertising relationship with prosper.

Why Married People Are Richer

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Married people are richer. If you read much personal finance literature, you’ll have learned this by now. While it’s an interesting observation, what’s more interesting is why this is:

Speculation has involved a variety of topics:

1) Economies of Scale: In married households, there are economies of scale. Basically, its more efficient for two people to live together than for a single person alone.

2) Personality: Married people have personalities which are more conducive to building wealth. For example, if you’re a looser, an idiot or flaky it’s less likely that you’ll both get married or build wealth. In other words, it might be that married people are richer simply because they have personalities more conducive to building wealth (e.g. they aren’t losers). In this case, its a selection effect, that is people with personalities conducive to building wealth are also those who get married.

3) Expectations and Lifestyle Changes: Society values marriage. It might be that after people become married, they change their behavior to meet social expectations. As their behavior changes, they become more responsible, save for the future, etc. It may also be once married, couples receive more financial support from relatives, etc. Basically, social processes surrounding marriage make people get their act together.

If you’re looking to seriously understand why marriage builds wealth, you might consider the book, The Case for Marriage.

Personally, I think the reason why married results in greater wealth is probably due to some combination of the three topics.

Most recently, a study last year by Jay Zagorsky has drawn a lot of media and blog attention to this topic. I’ve read the Zagorsky article. While it’s important, one should remember that it’s not exactly a new finding. Sociologists have known that marriage builds wealth for years.

For news on Zagorsky’s study:
Here

Blogland commentary regarding Zagorsky:

Free Money Finance – The impact of marriage on net worth
Science Blog – Divorce cuts person’s wealth by 77 percent

In terms of my and Miel’s situation, we got married last July out in Oregon. So far, wealth has increased by 26% this year – From $300,000 at the start of the year, to $380,000 when we added it up a couple of weeks ago.

Hope you enjoy!

-James

Wealth Building Strategies

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Hello All,

This posting is on the topic of long term wealth building strategies. While I’m certainly not an expert, if you read enough in the personal finance literature, you’ll start to get a sense of the long term wealth building strategies that are available to you. This posting briefly addresses three strategies and some of the advantages and disadvantages surrounding them.

1) Winning the Lottery: I secretly fantasize about winning the lottery, probably you do to. However, strictly speaking relying on winning to lottery to build wealth is for chumps. This is harsh, but lets lets reason it through with some basic mathematics. In a typical state powerball lottery, you get to draw 6 numbers out of a total of 49 possible. That’s a probability of 49!/6!*(49-6)!, or chances of winning rough equal to 1 in 13.9 million. Some degree of daydreaming about wealth is actually healthy, but relying on 1 in 13.9 million odds isn’t much of strategy. So, in fact, relying on the lottery is actually no strategy at all.

2) Starting a Business: Many of Americas wealthiest individuals became rich by starting and managing a profitable long term business. In fact, when serious researchers have tried to sample the wealthy, they tend to find that business owners are overrepresented in their samples. For example, in Stanley & Danko’s The Millionaire Next Door, 66% of the data used by the authors were self employed business people. This makes sense, because successful ventures can be quite profitable. For example, business like 7-11 franchises, above ground pool installation, retail clothing stores and real estate investing companies can all provide gross annual sales in the high five figures. Starting a business brings along a somewhat high risk of failure, but this risk is balanced by greater long term profit potential.

3) Saving and Investing Over Time: This strategy assumes that by saving and investing over the course of an individuals career, one can achieve long term wealth by retirement. Proponents of this strategy usually argue that the long term impact of saving and investing will result in a very high net worth after a long period of time. In short, you consistently build up your wealth until the effects of time and compound interest take hold.

I cribbed a picture off the internet to show you what I mean by this. The example (above) displays an initial investment of $1,000, but the effects of time and compounding is the same regardless of your start up amount. The main idea here is to save and invest over time while doing your regular job, having children, etc. and let the money take care of itself. No business is required – this third strategy is based on your learning enough to make good saving and investing decisions.

Of these three strategies, the third is probably the most practical. The laws of probability suggest you won’t win the lottery and for good reasons many people choose a 9 to 5 job over full time entrepreneurship. We DINKs have chosen a hybrid approach, we’re saving and investing, but also have a couple of side businesses like this blog and our investment property.

Best,

James

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