Uncommon Cents

I first learned about Prosper.com through Tricia over at Blogging Away Debt. Prosper is an online community that’s focused on peer to peer loaning and borrowing of money. In some ways it’s similar to eBay; borrowers create listings that lenders “bid” on to fund.

Given how low interest rates on money market or other “high yield” savings accounts have gotten and the current volatility in the stock market, I wonder if it wouldn’t be at least an interesting experiment to put some of my money into a Prosper loan, although with the way that, for instance, the Vanguard GNMA Fund has been performing, I’m not sure that might not be a better idea.

Interest rates for borrowers on Prosper are fixed, there are no pre-payment penalties, and, according to Prosper, no hidden fees. Borrowers pay Prosper a closing fee of between 1-3% depending on their credit rating; borrowers must be U.S. citizens with minimum credit scores of 520 and a bank account. Borrowers are screened in an identity verification and anti-fraud process. Lenders face similar scrutiny; all participants in the loan process can remain anonymous with Prosper serving as the middle man for both sides.

Prosper loans are all unsecured for terms of three years and a total of up to $25,000. If a borrower defaults or pays late on a loan, they have the same types of consequences that a borrower from a bank faces: a late fee and potentially a lower credit score and a negative item on their credit report.

The advantage of being a lender on Prosper vs., say, my iGoBanking account is the possibility of a higher rate of interest. The disadvantage is, of course, increased risk. I would never recommend to anyone to put their emergency fund or other “chicken money”–money you must act like a chicken with, because you can’t afford to lose it–at risk; however, if I had money that wasn’t quite that much of a “no lose”, I’d consider some of the lending opportunities on Prosper. It appears some borrowers on Prosper have tried traditional banks and credit unions and not been successful, so there is obviously risk involved for the lenders; the upside is a higher potential return.

Have any of you used Prosper? What are your experiences like?

Here’s some of my favorite posts as of late in the personal finance blogosphere:

The Simple Dollar is right on the money (no pun intended) on investing in yourself. This post discusses exercise; I don’t talk about it much on this blog, but in 2002 I weighed (according to my doctor’s scale) 272 pounds; today I’m right around 180, so I do believe that this is something that can seriously pay off!

Lynnae over at BeingFrugal.net talks about something I preach to parents regularly: read to your kids! Talk about investing in your family; this is something I believe pays off big. Nothing is equal to the amount of time you spend reading to your kids.

Debt Free looks at reasons why most people can but few people will get rich. I’ve long believed that it’s certainly possible for the working class/middle class person to save enough and invest enough wisely enough spending very little time and energy to do well, if not “get rich” (I guess it depends on the true definition of “rich” today).

I’ve Paid For This Twice Already again discusses the art of snowflaking, which I’ve discussed here and many other personal finance bloggers have discussed over and over again. Snowflaking pays off, trust me!

Making Money Journal has a similar interest to me: photography. This week they look at making a zero cost macro lightbox. I’m going to work on making one myself when I get a few minutes!

Finally, Mrs. Micah asks a question that many may be afraid to ask: who do your financial decisions reflect on?

Related to our discussion on frugality is a newer term for some electronic mail: bacn. Bacn, which is pronounced “bacon”, is not the same thing as Spam; it is, in many ways, the Spam you ask for. Bacn is email you actually might want to read, but not this second; it could be a notification of a coupon at your favorite online store, for instance.

So does Bacn end up saving you money?

The answer may be a huge “maybe”.

For instance, returning to my bicycle tube example of a short time ago; I get regular emails (a few times a week) from both Nashbar and Performance. Sometimes the sale information in them is great, and sometimes it’s not so great. I also only look at them (Bacn!) if I’m actually considering buying something.

However, if you are prone to impulse buying or buying something because it seems like a great deal whether or not you actually need it, you may wish to avoid bacn. If you don’t need a $100 watch even if it’s selling for $10, then you don’t; just because it’s a great deal doesn’t make it worth $10.

To continue with the watch example: if you need a watch or you have someone you can sell it to for a profit or give it to as a gift, then it could be very worthwhile to be receiving a piece of bacn from a vendor of watches. But considering that most people don’t really need more than a couple of watches–if they even need one–getting bacned by a watch vendor is either going to result in plain old ignored email (treated almost the same as Spam) or, worse, impulse spending.

So be careful signing up for bacn. The Spam you ask for could help, but also could hurt you in the pocketbook.

I’d like to welcome those of you who are here linking from this week’s Festival of Frugality, hosted by Mighty Bargain Hunter. Stay awhile!

A capital gain is the amount by which the sale of a capital asset (such as an investment in stock or real estate) exceeds the purchase price. For tax purposes in the United States, a capital gain may be considered “short term”, meaning the asset was held one year or less, or “long term”, meaning the asset was held for longer than one year. Typically, short term capital gains are taxed at a higher rate than long term capital gains; in this country most short term capital gains are taxed as ordinary income, while long term capital gains have a maximum tax rate of 15% at this time. This is designed to encourage entrepeneurship and long term investment. If the asset is sold for less than the purchase price, this is termed a capital loss and may result in a tax break for the seller.

Mutual funds, particularly actively managed mutual funds, may accumulate capital gains that are eventually distributed to the fund owners. If the mutual fund is not held in a tax advantaged account such as an IRA or 401(k), the fund holder will be responsible for taxes on the capital gain distributions.

In practical terms, let’s say I bought a share of stock for $100 on January 3, 2007 and sold it on December 28, 2007 for $110. It would have been held for less than a year, therefore I would incur a short term capital gain of $10 and that $10 would be taxed as ordinary income in my case (25%). If, instead, I bought the stock for $100 on January 3, 2007 and sold it for $110 on January 4, 2008, it would be considered a long term capital gain, and the $10 gain would receive favorable tax treatment at a rate of 15%.

Understanding what capital gains are and the way they are taxed can help you make better decisions about buying and selling assets. Hopefully, this was of some help to you.

In considering frugality, many times the thought process considers a more expensive vs. less expensive product to do the same task; for instance, it may be looking at a 17 inch MacBook Pro vs. a 13 inch MacBook when you need a notebook computer. One has more ability than the other, but they both can fit the vast majority of mobile computing needs. It may be comparing a closeout Nikon D40 vs. a Nikon D3 if you’re interested in digital SLRs–for the pro, one is likely to offer more, but the “more” may not be applicable for the casual photographer.

However, while extravagance–paying more for things that might be beyond your use and expectations–is considered to be a nemesis of frugality, the real archenemy of frugality is not extravagance: it’s waste.

While I have an interest in digital photography, I’m far from a professional. A low end digital SLR would more than suit my needs, at least for the next few years, so the Nikon D40 might be an ideal choice for me. To get a Nikon D3 would be paying for more than I could ever use, but if I did so and made use of the D3, it wouldn’t be absolutely awful; I’d have spent more than I needed to, but I’d have and used a great camera.

The real potential for being anything but frugal would be waste. In the case of this example, if I got a camera–even the low cost D40–and never opened the box, it would be a total waste; it would be about the same if I used it for a month and then never did again. Buying and using something extravagant may be spending more than necessary, but it’s far better than buying something of lower cost and not using it at all.

Eliminating the waste in your life–the “stuff” that you don’t use, you won’t use, or you no longer use–is the best way to be frugal. It can result in more simplicity, less clutter, and money in your pocket, either by preventing money from going out in the first place or selling things you no longer use or need.

In the first installment of Hunting for Discounts, I discussed my love of mail order shopping and comparison shopping and using the Internet to combine the two. In this second installment, I’ll take a look at a real world example.

One of the things I need to purchase every year are bicycle tubes. I typically go through about 10 of these a year, so it’s worthwhile to buy them in bulk or on sale. The local bicycle store I use has standard issue tubes for $3.98 apiece; add tax and I end up at $4.17 for a single tube; for a set of ten we’re talking $41.68. If I purchase a 10 pack of equivalent tubes from Performance Bicycle online, they’ll go for $24.99; add on $7.25 for shipping and we’re at $32.24, about $3.22 per tube. We’re already at almost 23% less without looking for any further discounts, and even if the local place is running their occasional 20% off special on tubes, I’m still spending less via mail order.

If 10 tubes is cheap, would 20 be cheaper? It really depends on what the shipping ends up being. In this example, $49.98 for 20 tubes plus $8.75 for shipping makes for a total of $58.73; that comes out to $2.94 per tube.

It’s possible ordering more tubes would result in additional per tube price reductions, but having more than 20 tubes here would probably result in them being lost or possibly even starting to go bad (rubber does not last forever), pointing to the possibility of waste, which is the true archenemy of frugality. So I believe that in the next few days, it’ll be time for me to order enough tubes for probably the next two years.

How thoroughly do you compare prices when you shop?

I admit it freely: ever since I was a kid, I’ve been a fan of buying mail order. It’s not always feasible (if for no reason other than the price of shipping), but I love the discounted prices, greater selection, and just the thrill of getting something in the mail.

As I’ve gotten older and frugality has become an important value in my life, I’ve also become a fan of comparison shopping. I keep in my notebook a list of prices of things I commonly buy in certain stores I frequent; for instance, I know that between the two stores that carry 36 packs of Diet Pepsi locally–Costco and Foodland–Costco usually has the better price, but both occasionally have sales, so I scour the weekly advertisements and coupon books that come in the mail to see if I can find a better deal.

The Internet has made combining comparison shopping and mail order a lot easier. Not only are there so many great places to shop online, there are comparison sites and coupon sites, all of which can make for great ways to spend less money.

For instance, one of the earliest comparison sites I learned about was DealMac, which looked for deals on products related to the Macintosh; they also have related sites like DealRAM, DealNews, and DealCam. There are lots of sites like this on the Web; I’ve also frequented TechBargains and a newer site which I like a lot called DiscountCouponsGuide.

In combination with this are “coupon” sites; sites which direct you to online coupons or reveal codes to enter when you’re checking out of a site to get a discounted rate. FlamingoWorld, CouponMountain, CouponCabin, and many others exist to try to spread the word about discount codes.

Personally, I try to use these in combination whenever possible, and I also try to throw in use of a credit card that will give me some kind of reward, like the 5% Cashback bonus from Discover while shopping at Circuit City online (among many other retailers) or the free extended warranty offered on purchases made with certain kinds of Visa cards.

How do you use comparison shopping and coupons on the Internet to help you spend less?

The stock markets have been volatile the last couple of months. Three digit gains followed by three digit losses (at least as far as the too-closely-watched Dow Jones Industrial Average is concerned).

Volatility can be scary for investors. It shakes them up and makes them concerned that their investments are risky. There is risk in investing, no question; volatility magnifies the risk for investors, and the more closely an investor follows the market, the more scary volatility can be.

When someone says, “The stock market returns 10% a year,” it sounds very straightforward and linear, as in 10% this year, 10% next year, 10% the following year. However, that’s not the way it works; some years you have incredible gains, like 40%; some years, you have almost no gains; and some years, you have negative returns, like in the bull market years of 2000, 2001, and 2002. If you look at a graph of the stock market performance of, say, 1984 until now, the curve looks mostly like an upward sloping line, with a few dips. The dips don’t look all that pronounced, but they include the horrible early 21st century bear market and some significant falls along the way.

The point of all of this is that while day to day volatility in the stock market can be quite scary, perspective is important–the perspective of, say, 20 years time. Don’t let volatility scare you; keep in mind the long term goal and do the smart things of investing–diversify, asset allocate, dollar cost average, and keep your fees low. And don’t look too closely, before the emotion attached to the volatility has you do something that isn’t so smart with your investments.

I’ve been using Sharebuilder for some time for automatic monthly investments. Awhile ago I invested through them in the DVY exchange traded fund; I later switched to buying into Toyota when I came to the conclusion that not only did I need to look at companies based on some kind of magic formula for investing, but also companies that made products I understood and believed in. I’ve bought into Toyota for a couple of years now, and unfortunately, the stock price has gone down. But I have lots and lots of faith that the stock will recover, so I just think that I’ve bought a bunch on sale and I need to wait awhile to see how things go.

In the meantime, another company I like (and I have already bought shares of in my Roth IRA), Apple, has seen its stock price go south as well. I saw this before, in the summer of 2006, when it hit a low in the mid to high 50s. I thought to myself, “Wow, looks like a good time to buy Apple.” But I didn’t.

The stock then went on a tear; by the time I bought in, in early 2007, the stock was in the mid 80s. Right around the turn of the year, the stock touched the magic 200 number. Just a few weeks ago, Apple announced the best quarter they have ever had, and following that–the stock tanked, headed to the 120s.

To me, that’s time to buy, so I’ve switched my monthly stock buy from Toyota to Apple.

This is not an endorsement of the stock, but a discussion of my decision making processes. This is a highly profitable company that makes products I use and love. I understand their products, probably better than many others (since I’m a Geek), and I think very highly of their design and function. I own many of the things they make and I plan to own many more. For the same kinds of reasons, I own Toyota stock–I think it’s a profitable, well run company that make products I own and understand. However, there are many other companies out there that are publicly traded that I don’t own, largely because I don’t understand them or they make products I don’t care for and don’t own. For instance, I don’t own Microsoft stock, not because they aren’t profitable, but because I don’t believe in their products and I don’t own many of them. I don’t own Yahoo! because I don’t quite understand how a company that gives away as many services as they do without having the advertising income that Google does and doesn’t take in very much money for other services will be profitable over the long run.

In any case, I’m going with AAPL for awhile. Let’s see how that goes…