Beating Broke

Personal Finance from the Broke Perspective

Lending Club Returns 1Q2012 Update

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If you’ve been following along, you know that I’ve been performing a bit of an experiment.  I’ve been taking 10% of my earnings from this and other online ventures and splitting it evenly between Lending Club and Sharebuilder accounts.  The idea was to see what kind of returns I could get from the two, and to test for stability.  I’ve been running the experiment for a little over 6 months now, and I’m calling it done.  The difference has been so drastic, that I don’t think there’s any point in running it any longer.

In short, Lending Club is kicking Sharebuilder’s butt.  Really, the only thing that the Sharebuilder account has going for it is that the chance of default on any of the investments is extremely low.  So, I suppose that it is possible that in 5 or so years, the gains on the Sharebuilder account could potentially be better.  However, as I’m about to show you, the short term results are strongly in Lending Club’s favor.

My Lending Club Returns

As of today, Lending Club is telling me that I’m seeing a return of 13.15% on my account.  My Sharebuilder account is currently reporting a return of -16.42%.  It doesn’t take a math major to come to the conclusion that Lending Club is performing far better.  To date, with a bit over 2 years of total history, I haven’t had a default in my Lending Club account.  I’m pretty sure that has more to do with just getting lucky, than with any effort of my own. Some other interesting numbers, besides the return: The portfolio has grown enough that it brings in enough in principle + interest payments to reinvest monthly now.  The monthly interest gains, as of the end of March, have now exceeded $4 monthly.  It’s not much, but it’s been fun watching that number grow.

My Lending Club Portfolio

Open a Lending Club AccountWhen I first started out investing in my LC account, I was investing in mostly A, B, and C investments.  I’ve recently shifted that to be mostly C and D investments. Why?  Well, as I mentioned in my post on selecting Lending Club investments, I have to purchase my investments through their trading platform rather than directly invest in the loans.  What that means is that in most cases, I have to absorb a small percentage of profit to the original investor.  So, a loan that has an actual interest rate of 14% might only return 11% to me because I bought it at a higher price than what it was worth in principle at the time.  Because of that, I have to invest in the higher grade loans in order to maintain a higher return rate.  But, I’m OK with that.  Even the worst graded loans that LC has are still well above what a traditional bank or credit union would lend to.  And, at less than $25 per investment, I can afford to take the risk.  I’ve diversified the account so that one or two defaults isn’t going to destroy the account.  Sidenote: If you can buy your LC loans directly, I suggest you check out Peter at SocialLending.net’s post on how he’s investing in 2012. He’s got several filters and some interesting insight into how he’s set up his investing that are worth the read.  They’re somewhat useless to me because of the way I have to invest, but will be useful to someone who can invest directly.

Lending Club, Going Forward

With the end of the “experiment”, I’m now putting the full 10% that I had been splitting into my Lending Club account.  The overall total for the account is still at less than 3% of my overall investment portfolio (including retirement investments), but it is growing.  At some point, I’ll have to decide if I want to continue to add to the account or not, but with the returns that I’m getting, and the luck I’ve had in the default area, I can’t see wanting to stop investing in the account.

Have you given Lending Club a try yet?  How have your returns been?  What’s your default rate?

Your Primary Home is NOT an Investment

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Home or Investment?Your primary home is not an investment in the normal sense of the word.  Dictionary.com defines Investment thusly*: “the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.”  Some of you will argue that you buy your house because it will appreciate in value.  But, to fit the definition, you must have bought it specifically for that purpose.  And in the case of a primary residence, that isn’t true.

When you bought (or buy) your primary residence, you’re looking for a home.  You’re looking for a place to call your own where the money that you spend on it goes towards your ownership of the home.  Sure, it may show some returns by way of appreciation of value, but those are locked into the house until you sell.  And, truthfully, you probably don’t care about that unless you sell, so if you plan on living in the house (the definition of primary residence) it makes little difference what the house is worth as long as it provides a home for your family.

So, don’t be fooled into looking for a good “investment” when you buy a house.  Look for an affordable home that will provide for your shelter needs.  When (if) you sell the house, it gets converted into an investment and you will have hopefully made some money, but when you’re looking for a home, pick the one that will fit your needs. Not the one that shows the most potential for return.  That’s what second homes and rental properties are for.

*I know that thusly isn’t really a word.  I blame it all on Alton Brown.

Photo Credit: svilen001 @ sxc.hu

What is the Roth IRA?

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Retirement.  Have you thought about that yet?  Still think you’re too young to deal with that?  Or, just assume that your company 401(k) is enough, so why even worry about anything else?  Let me introduce you to the Roth IRA.

IRA is an acronym that stands for (I)ndividual (R)etirement (A)ccount.  The Roth part is named after the Senator that sponsored the bill that created the Roth IRA.  But, what really matters is that it could be really important to your retirement fund building.  So, pay attention to the next few paragraphs.  Do it for the retired version of yourself!

Source: goodfinancialcents.com via Jeff on Pinterest

Why is the Roth IRA so important?

Unlike the other versions of the IRA (Traditional, SEP, SIMPLE, Self-Directed), the Roth gets some special treatment when taxes come into play.  Instead of being a pre-tax contribution, like a 401(k), or a tax deduction contribution, like other IRAs, the Roth is an after tax contribution.  That means that you’ll be taxed on the income before you contribute it to the Roth IRA.  That sounds terrible, doesn’t it?  It’s not.  And here’s why.  All of the gains on the account are tax free.  What that means is that, if you contribute $5,000 today, and gain $45,000 between now and retirement, you don’t pay any taxes on any of it when you start taking withdrawals.  That’s pretty significant.

If you had your money in any of the other retirement accounts, you’d be taxed on the whole $50,000 as you withdraw it.  At your then current tax rate.  While we can’t know what our current tax rate will be when we retire, we do know that one will exist.  Unless you think that your retirement tax rate will be significantly below your current tax rate, you really should consider adding a Roth IRA to your portfolio of retirement accounts.

How should I use a Roth IRA?

Why did I just say “adding a Roth IRA to your portfolio of retirement accounts”?  There’s a couple of reasons.  The biggest one, though is that the Roth has a contribution limit that is a bit low.  As of right now, that limit is $5,000 if you’re under the age of 50, and $6,000 if you’re over the age of 50.  Unless you really think you’ll be able to build a retirement nest egg that will be sufficient on $5k a year (hint: you won’t be able to), you’ll need to supplement with other retirement accounts. If you’ve got a 401(k) offered at your employer, use it.  At the least, contribute enough to get the maximum match from your company.  Once you’ve met the match, use the next $5,000 and put it into a Roth IRA.  (I’ve got mine at Sharebuilder, but just about every investment house does Roth accounts.)  Once you’ve got the full 5k in your Roth, you and your financial planner can decide what the next best idea is.  If you’re happy with your 401(k) and the investments offered in it, you can continue to contribute any further monies into the 401(k).  If you don’t like the 401(k), you might consider some other form of retirement account.  Maybe a traditional IRA.  The traditional doesn’t have the same tax benefit of the Roth.  Taxes are still taken out before you contribution, in most cases, and you get a tax deduction based on those contributions.  Any withdrawals taken after retirement are also taxed.  The contribution limit is the same, however.

How do I structure my retirement?

How your retirement portfolio and where/when of your contributions is very important.  There are tax codes to take into account, as well as changes to the way that you contribute.  Everyone’s retirement situation is very unique to them.  To really get a good handle on all of this, you really should talk to a financial planner who can get a good idea of what your unique situation is, and make suggestions based on that.  It will likely cost you a little bit up front, but the difference could be life changing when it comes time to retire.  (Check out these great tips on finding a great financial planner)

I’m writing this post as part of the Roth IRA Movement.  It’s a great movement, headed up by Jeff Rose of GoodFinancialCents.  He recently discovered that many of our youth are under-educated on what the Roth IRA is.  He’s gathered well over 100 personal finance bloggers (including Beating Broke) and we’re all posting a Roth IRA post today to try and help with educating on the Roth IRA.  You can read all about the movement as well as see a list of all the posts that are/were written as a part of it at Jeff’s Roth IRA Movement post today.  You can also see a list of the posts over at RothIRA.com.