A Better Way To Lend Money To Friends & Family

Lending money to friends and family can be a strain on the relationship (not to mention your finances). Seeing that you’re doing well, everyone wants to hit you up for a small loan. If its a short-term thing its fine, but if you’re worried about the borrowers ability to repay your loan either due to poor financial responsiblity or income limitations it sometimes becomes difficult to say no.

One way is to steer them towards micro-finance sites like Prosper.com. Tell them that if they sign up on Prosper, you’ll contribute as much as you can towards their request and also give you a recommendation.

This helps you in several ways:

1. It doesn’t sound like you’re saying no. You’re trying to help them and will even
contribute towards their loan.

2. You get paid interest. This is based on their credit history. The better they’re
credit history, the lower the rate.

3. You don’t have to keep on asking them when they’ll repay you and they don’t have to avoid you because they feel like stiffing you. (Isn’t it amazing how people who don’t have enough money to repay you still seem to have enough money to spend on movies and fine dining?)

4. Their credit is on the hook if they don’t repay you. Even if you lose money, atleast they didn’t get away without incurring some loss. You don’t even have to bug them. Prosper will pass on the info to collections after a few months of non-payment.

Prosper is also currently running a promotion. If they sign up using the referral link, both you get $125. If they join your group, you get group rewards which can be a % of the loan and an ongoing % of the monthly payments! If you refer a lender, then you both get $25.

You can even borrow money from friends and family this way. If you need a small loan just sign up on Prosper and forward your request to your friends. The smallest amount they can lend you is $50. If your friends can’t lend you $50, you need to find richer friends or (more likely) to work on your image!

Borrow Money From People. Low Rates. No Banks.

Debt-free At What Cost?

I know a couple who are completely debt-free. They’re in their early to mid-thirties and have no mortgage, no car loans and no credit card debt. Pretty impressive.

While they don’t live unnecessarily frugally (no, they didn’t eat noodles and boiled rice for a year) they have made some major decisions that helped them achieve debt-free status.

1. They’re not having kids

Not having kids means major savings! In San Diego, day care runs about $800-$1,200 per month depending on where you live. Thats a $10,000/year per kid saving! Not having to worry about college expenses means you don’t have to save for it either. Thats another $2,000-$5,000/year.

Plus, you don’t have to buy diapers, baby clothes, baby books, those darn expensive Baby Einstein DVDs which probably amounts to another $2,000/year. All added, thats roughly a $15,000-$20,000 savings for the first few years.

Of course, once the kid is old enough to place in school your expenses drop. Until they’re about 7, at which point you’ll be paying through your nose for activities, classes, trips and gadgets. I read an article in the Wall Street Journal about how it costs about $180,000 to have a kid and I didn’t believe it, until my friends started having kids and I started seeing all these crazy expenses.

2. None of their friends are having kids.

They dumped most of their friends who started having kids and started hanging around with like-minded people. This helps saving money since you don’t have to spend money on other people’s kids. I didn’t think this would be a major expense but if you have 6 friends and each of them have 2-3 kids, this can easily add up. Between birthdays and christmas you’re looking at spending several hundred dollars.(One of my friends had 72 people at his wife’s baby shower!) Plus there’s the trips to disney land. Heck, even a trip to the movies costs $25/person with soda and popcorn.

3. They put off saving for retirement.

They decided not to start saving for retirement until they debt-free. While this isn’t a good decision, atleast now they have more money to sock away for retirement.

On the flip side, should you really be debt-free?

Your home mortgage is the cheapest money you’ll ever borrow (provided you don’t get ripped off on your home loan). It also provides you with a tax-break. Of course, paying a dollar in interest to save 35 cents in taxes is pretty stupid, but if you invest the money instead of paying off your mortgage and get more than the 6% your paying, you can arbitrage your way into early retirement!

Plus, starting your retirement later is never a good idea. You’ve lost the compounding effect on your savings and its very difficult to make up for that just by contributing extra.

But thats the way it is and its hard to find fault with their choices. They were willing to sacrifice for their goals and they reached them.

What would you do to be debt-free?

Do You Recycle Old Magazines?

Most people subscribe to several magazines. They’re either discarded or put in a box in the attic or basement, only to be thrown away decades later (unless they’re comics or playboy magazines, in which case they’re hold their value).

But today I found a novel way to get rid of them. You sell them on Ebay! Here’s a link I saw today when looking for a book on horse racing. The seller sold last years Economist magazines for around $16 including shipping. Not a lot of profit, but atleast you’re not filling up a landfill and someone else is enjoying them.

I like to read several magazines, but some of them like National Geographic are not time sensitive. Might be cheaper to buy them off ebay!

Buying Canadian Income Funds For Passive Income (and Financial Freedom)

Yesterday, I bought some more Canadian Income Funds, also called Royalty Trusts or Canroys. As I mentioned before, I recently refinanced a property and I managed to pull some money out (totally tax-free!).

Rather than spend the money on an SUV or a big-screen TV, I opted to divide the money into 3 parts. The first 1/3rd went towards replenishing my emergency fund which was drawn down by vacancies in my rental properties. The second 1/3rd went towards future investments in summer just in case there’s a pullback in the stock market and the last 1/3rd went to building up my passive cash-flow.

Long time readers will realize that I haven’t made any effort display my net worth or any goals of net worth.
That’s because I feel its a meaningless number. If I had a $1 million dollar net worth and it only generated $25,000 a year in income (like Cd’s did a few years ago) that’s pretty sad. On the other hand, if I owned a $1,000,000 car-wash that generated $125,000 that’s pretty significant.

My goal is to generate passive income. Its your passive income that provides financial independence, not your net worth. If you have $3,000/month through various passive income streams, you’ve got your basic food and shelter taken care of and you won’t starve if you lose your job. That is my short term goal. My longer term goal is generate $10,000/month in passive income so I can travel the world without worrying (or working).

I’m currently not even at 50% of my $3,000/month goal so at least 1/3rd of all future investments must take me towards that goal. That’s why I bought some Canroys yesterday. I bought Harvest Energy (HTE) and Canetic Resources(CNE). They generate revenue from oil and gas production and refining. The noteworthy part is that they payout around 12% dividend per year. Since the selling of oil and gas leads to a depletion of reserves, its important that they keep some of their revenue for future acquisition of new properties and for drilling new wells. Both of them have a payout ratio of under 80% which isn’t bad considering they have proven and probable reserve lifespans of 9.5 years.

There are Canroys with lifespans of 6-7 years and payout ratios of 95% that yield 15% but I’m suspicious of their longterm viability. These two seem like pretty safe bets. If oil prices rise there’s a chance of increased payout and also capital appreciation. If not, I’m still getting my 12% yield.

The only issue I have is that the Canadian Government takes its 15% tax straight out of my account. But even considering for that, my yield is still just over 10%. Besides, I get a US tax credit for that amount, so its not a total loss.

I also bought some units in Prism Income Fund(QSR.UN) which owns and operates nearly 500 fast-food franchises in Canada (Taco Bell, KFC, Long John Silver and Pizza Hut). Their stock has been pretty stable compared to other Canroys following the whole Taxation issue. Its also currently yielding 12% and while I don’t expect much capital appreciation, I don’t expect it to drop in value or its dividend to fluctuate with the price of oil and gas.

So now I’m one step closer to my goal of $3,000 in passive income. This brings my total passive income from Canroys to $300 per month. I’m also getting $300 from a loan to a developer at 2% per month. And I average around $300/month from my various online ventures. (Even though my online ventures aren’t passive, I enjoy pursuing them and I have geographic independence. Thats why I’m counting it).I’m also making around $150/month from my direct oil and gas drilling investments, so I’m almost 1/3rd of the way to my goal!

When I get the money back from the developer, it’ll be redeployed at a much lower rate. But I expect the cash flow from the direct oil drilling program to increase enough to cover this short-fall.

Personal Finance Haiku Contest

Make Your Nut is currently hosting a contest on Personal Finance Haikus. The winner gets $20 and some link love. Anyway here are my entries:

Refinance your home
Use it to pay off your debt
Brokers must eat too.

Open a brokerage account
Invest your earnings
Wall street needs your money.

The US Dollar is dropping
People have lost faith
Buy gold instead.

Starbucks coffee is expensive
Do not drink if you cannot afford.
Buy the stock instead.

Cheaper Diamonds on the Horizon?

According to this report on Bloomberg.com, Gemesis is planning on selling 1 million carats worth of man-made diamonds next year.

The major Diamond mining companies like De Beers, Anglo American and Rio are getting a little nervous. They undoubtedly come out with a marketing campaign to squeech sales of “fake” diamonds. Here’s what John Teeling, founder and chairman of African Diamonds Plc. (a Dublin-based mining company in which De Beers has a stake) says.

If you meet a woman that you are going to spend the rest of your life with and have babies with, are you going to give her a diamond made in a lab in Pittsburgh or are you going to give her the real thing?

Teeling doesn’t seem to be worried about it. But I own shares in Anglo American (AAUK) which owns 45% of De Beers so I am!

Synthetic diamonds cost about 70% less than real ones and you need a machine (which was developed by De Beers at a cost of $17 million) to differentiate between the two.

If your fiance or wife couldn’t tell the difference would you sneak in a synthetic? Maybe justify it by paying the same price but getting a rock the size of your big toe?

Too Rich To Save?

According to a study by HSBC,

49% of respondents with at least $250,000 in income aren’t saving more because they simply “want some spending money.” In 28% of the cases for those who earn between $100,000 and $250,000, respondents say they do not save more because “something unforeseen always comes up.” And in nearly one in 10 situations, people who earn $250,000 or more say they aren’t even earning “enough to make ends meet as it is.”

I feel so sorry for them. 10% of people who make over a quarter of a million dollars a year, can’t make ends meet! That’s just amazing. Maybe they should sell their fancy watches, cars and downsize to a smaller house for a while.

Or maybe not being able to make ends meet has a different meaning for rich folk. Maybe it means you can’t take the $20,000/week vacation to Turtle Island in Fiji, or you’re going to have to fire one of the nannies. Maybe downgrade the Porsche to a more humble 5-series BMW.

More people who earn between $50,000 and $100,000 save consistently than people who earn between $200,000 and $250,000 per year.

I can’t comprehend how anyone without a gambling problem can’t make ends meet on $250,000 income. I guess it boils down to living beyond your means.

The best way to become really rich is to save, invest and keep re-investing the gains for as long as possible. Investing only 5,000/year for 35 years at 12% will let you end up with approximately $2.5 million. If you not able to earn 12% or you don’t have 35 years of working life left, you need to save more. Compounding really is the greatest asset available. If you only have 25 years to save, even if you can get 12% return, you need to save $17,000/year to retire with $2.5 million.

If you’re not going to save even 10% of your $250,000 income, you’re either going to retire broke or going to have to work past 65.

Being rich isn’t necessarily about having money or material objects. Its about having the freedom to do whatever you like. (like Paris Hilton, only she’s not rich enough to stay out of jail. For that, you need to be Michael Jackson or OJ rich!)

How To Spend A Million Dollars On Gas

MoneyNing has calculated that paying $200/month on gasoline over a 45 year period totals over a million dollars.

Thats pretty depressing. But by the same train of thought, the $400 car payment you spend to drive a new car every 4 years will work out to be another $2 million over your lifetime. Add in another $200 for insurance and maintenance and thats another million, bringing your grand total to $4 million dollars just to get from one place to another!

I’m buying a bicycle tomorrow!

So, Tell Me About Yourself

One of the questions I dread at interview time is the “So, tell me about yourself” question. I usually never have a clue how to answer this. Although in the past 2 years, I have become a lot better at marketing myself and a lot more perceptive of what employers are actually trying to find out.

But its usually these questions that stump me. I once interviewed at Sony, and one of the programmers asked me “so, why do you want to work here?”. Unfortunately, I was speechless. I think he was trying to break the ice and by stumbling I just made it very awkward and I’m appalled that I couldn’t think of anything nice to say about Sony. All I had to say was “coz Sony rocks!”. Of course, I didn’t get the job and I don’t blame them. I certainly wouldn’t hire anyone who didn’t have anything good to say about my company!

Since that experience, I’ve gotten slightly better at interviewing but I until I read The interview that lasts for an hour over at Career Strategist, I didn’t really have an idea of how to lead an interview or even start one firing on all cylinders.

Its a somewhat long post, but by far the best I’ve ever read on that topic. It covers all the salient points concerning an interview including do’s and don’ts and what questions to ask the interviewer at the end.

Good luck with your next interview!