Remember, one of the surest ways to a financial freedom is spending less than you make. Don’t fall into the trap of spending more because you suddenly have more. The next time you get a raise, save it automatically every paycheck. Stash it in your 401(k) or 401(k)ondo. The next time you get a windfall (think Economic Stimulus check), save it. Put this new money to work. Invest in a rental property, buy some stock, or lend it out. Make this new money work for you, so you don’t have to work so hard to earn it in the first place… Never forget the most famous (in my opinion) financial quote of all time:

“The most powerful force in the universe is compound interest”
- Albert Einstein

The point is simple. Money will work for you if you let it. Every dollar you make with money at work is one less dollar you’ll need to work for. Stop working so hard; let your money do it for you.

Every 3 months or so, you get your 401(k) statements in the mail telling how you are doing. Over time you see the money grow (or shrink), thus giving you feedback on your investment strategy. Having fun? Are you enjoying watching your money sit in an account? Does it make you happy? Tell me this… Can you enjoy it right now? What is it doing for you TODAY? Instead of waiting years and years to reap the rewards on that 401(k), why not enjoy life today? Why defer happiness?

As an alternative, take that money and buy a nice piece of vacation property. Think of the beach, or the mountains, or the city… wherever would make you happy today. Buy yourself a 401 (k)ondo. Take that 10 percent (or more) from your paycheck and use it to pay the mortgage and expenses on a second home you can get some use out of. You’ll still get a tax benefit similar to the one the 401(k) is famous for. Every dollar you pay in interest and real estate taxes may be a write off (there are limitations just like with your 401(k)).

Typical questions I hear on this subject:

Q: Will the property appreciate over time, giving me a decent return on my investment?
A: Even in this tough real estate market, real estate has appreciated at about 5% nationally from October 2007 - February 2008. Areas will have ups and downs, but over the long-haul appreciation should fair well. Additionally, you are likely going to be paying down the principal with each monthly payment you make. Over time, your condo will be paid off.

Q: If the vacation property I buy only appreciates at 5% per year, how is that better than the S&P 500’s average annual return of about 9%?
A: One key point to remember is that your 401 (k)ondo will be highly leveraged due to the fact you’ll have a mortgage against it. So while the property itself might only rise in value 5% per year, your investment in it (the actual money you put down) will grow at a much higher rate. Let’s run through a quick example. Suppose you put down $10,000 on a $100,000 condominium. After 1 year of appreciation at 5%, the property will be worth $105,000. So your gain on the $10,000 investment is $5000, equaling a whopping 50% gain. Of course you would need to subtract the expenses of interest, taxes, and insurance, but you can see that the gain is much higher that what the appreciation rate is. Another thing to keep in mind is you might not have to pay a cent of taxes on the gains when you sell…

Q: Can I sell the condo and keep the gains tax free?
A: According to today’s tax rules, if you live in the property (as your primary residence) for 2 of the last 5 years, you can sell it without paying capital gains. Just move into the vacation property for a couple of years when you retire then sell it. That beats that pants off a 401(k)’s rule of having to pay ordinary income tax on every dollar you withdraw.

Q: Should I stop contributing to my 401(k) if my company is matching contributions?
A: No! Never turn down free money. Think of that match as an immediate return on your investment. If your employer is matching you 50% of your contributions, that’s a 50% immediate return. That’s pretty nice. Find out what percentage your employer will match to (usually around 3-5% of your salary). Contribute enough to get that match. Use any remaining money you would normally contribute to the 401(k) for that 401 (k)ondo!

Enjoy life while you are young. Why wait until you have reached retirement age to enjoy your life’s work? Get out and enjoy yourself today! If this sounds interesting to you, please read more in the book Missed Fortune 101 by Douglas R. Andrew.

I have been investing at Prosper.com very successfully for about 2 years now. My average return is 9.23% with an average rate of 14.98%. Why the 5% difference? Some people default on their loans and others get sent to collections. Defaults are what they sound like - they don’t pay back the money at all. This is usually a result of the borrower filing for bankruptcy. As for collections, payments that are not made after a month or two get turned over to an outside company to be collected. The collection agency takes a cut of what they collect, reducing the lender’s overall return.

Is a 36% return possible? In theory, yes. Practically speaking, I love to see it done. I have noticed that lending rates have been steadily climbing for the past year or so. Prosper.com has contracted with a Utah-chartered industrial bank to get around the maximum rates allowed by the states. So instead of various maximum rates, lenders now have a cap of 36% available to them. My newest loans are now averaging about 15% instead of around 10% as they did when I first started. I have even made some loans lately for around 30%!

Is now the time to lend money? I would say it has been time for a while now. Earning 9.23% on your money is no easy task - even in the stock market or the real estate market (especially in current economic conditions). Prosper.com makes it extremely easy to earn a great return. If you haven’t looked into peer-to-peer lending, now is definitely the time.

Your blood = money.

Tomorrow morning I’m going to have a visitor that will demand my blood in exchange for financial security. There’s really no reasonable way around it. I will need to submit to the torture… for a life insurance policy.

If you are visiting this site, chances are you consider your money important. And I bet you have (or will have) a family or other important people relying on you to take care of them with that money. The honest truth is we never really never know when our life will end. In the case where it ends sooner than expected, it is your responsibility as a provider to make sure those that depend on you are taken care of.

How much coverage do you need? I’ll point you to a few resources below that will help you answer this question. What I’d like to share with you is something most people don’t think about. I like to call it ‘policy layers’.

Layers of coverage can be used to increase or decrease your life insurance coverage based on lifetime events. By purchasing different policies with differing dollar amounts and terms, it is quite simple to structure a coverage plan that will self adjust over time.

Let’s go through a simple example. Let’s use a typical family of four with life events that include marriage, births of two children, the children growing up and leaving the nest, and finally retirement.

Let’s start with a simple illustration that shows the policy layers with the appropriate terms.

In this example, the breadwinner of the family marries his (or her!) spouse at age 25. Shortly afterwards, he decides to buy a life insurance policy to provide for his wife should something happen to him. This coverage is likely on the smaller side, perhaps enough to pay off their home mortgage and provide living expenses for 5-10 years.

After 5 years of marriage, the couple decides to have a baby and realize that they need more coverage. Instead of canceling or upgrading the existing policy to get more coverage, a second 20 year policy can be purchased to cover the additional needed security to raise the child and send her to college. This is repeated above for the second child.

This simple layering technique allows you to let each policy expire after it has served its own distinct purpose. In the case of each child graduating college, moving out and starting their own life, the 20 year policy expires just as it is no longer needed. Similarly, the 30 year term policy makes sense while the couple is growing their retirement accounts and paying down their mortgage. By the time they reach age 55, they will have likely accumulated enough net worth not to need the original policy.

To save the most money over the course of each policy, I recommend term life insurance. You get the highest coverage for the lowest premiums - plain and simple. I consider other life insurance products to be great money makers for insurance companies, but not for the policy holders. If you just pay for the coverage you need and stash extra cash elsewhere, you’ll likely be far ahead of the game. I just don’t buy the ‘forced savings’ arguments out there for whole life and return of premium policies. Do your own research and decide for yourself. Just make sure you don’t neglect this financial necessity!

Here are some links for further reading & research:

Term or Whole Life?
This is a good article at SmartMoney.com covering the differences between term and whole life.

Life Insurance Needs Estimator
This is a very good calculator you can use before buying a policy.

Insure.com
I bought 2 life insurance policies from Insure.com thus far. The rates are unbeatable.

Many people struggle desperately to save money for the future. The chart below says it all - savings rates are steadily declining into negative territory. It’s becoming the American way.

Let’s look at some more statistics. We as Americans are pretty good at being in debt for things that lose value. If you are the typical consumer your car, TV, furniture, and lots of garbage you’ll never use are probably financed. Given this, we have become extremely ‘disciplined’ at making timely payments. The average consumer has a FICO credit score somewhere between 675 and 707. This means that most of us pay our bills on-time.

How about using the fear of late payment fees and a lower credit score to pad your wallet? You can use these statistics to play a physiological trick on yourself to seriously boost your savings rates. The concept is simple; borrow money and deposit it into your savings account. The obvious goal here is to borrow at a lower interest rate than your bank is paying you to hold your money. If your credit score is good, you can accomplish this quite easily. Let’s look at the simple steps.

Open an online “direct” account. Many banks are now offering very attractive yields of over 5% in what are know as “direct” accounts. These accounts cut out the overhead of physical locations, tellers, and sometimes deposit options. One of the most popular banks for this type of account is Emigrant Direct (see below for more). When you setup an account here, all deposits are done electronically; saving the bank money typically spent processing paper. These savings are ultimately passed on to you.

Write yourself a check. Credit card companies often send promotional offers with your statement. These are typically checks on the last page of your statement. Most of the time these checks are eligible as a cash advance - meaning you can simply write a check to yourself and deposit it. The best deal is one that offers balance transfers until the balance is paid in full. To make this work well, shoot for a rate of 4.99% or less.

A few words of caution: Read every word the fine print on the offer. You may be required to pay a transaction fee to use these checks. Calculate the amount of interest you will actually pay during the time period. Depending on the amount you are borrowing, this may be a minor cost - so do the math! If the offer has a limited time frame, be sure to transfer to another offer before it expires, or pull the borrowed money out of your “direct” account to pay it off at the end of the promotion.

If you can’t deposit this check directly into your “direct” account, deposit into the account you linked electronically during the application process. Usually, you can link additional accounts by following the instructions on the web site. Transfer the cash to your “direct” account after the check has cleared and the funds are fully available for your use.

Make your payments automatically. Credit card companies are known to jack up your rates if your payment is just one second late. Don’t lose that great rate you’re leveraging to boost your savings. If you don’t already have a checking account that provides free or nearly free checking, find one such as Washington Mutual that provides free checking and free bill pay. It’s easy to setup automated payments on a monthly basis to your credit card company. This takes the thought and hassle out paying this bill and reduces the possibility of missing a payment.

Reduce your payment periodically. If you have setup bill pay to pay a fixed amount, or you prefer to pay your bills manually, you may notice that the minimum payment due on your statement consistently falls each month. Every payment you make reduces the principal you owe on the loan. The bank recalculates the interest payment monthly based on this balance. To make the most out of the spread between your credit card and the savings account, don’t pay more than what’s required.

Watch your money grow. The interest payments deposited monthly to your “direct” account will compound over time. Every month, you will notice this interest payment will go up slightly, while your payment to your credit card company declines. You’ll notice that in the time it took to pay off the credit card, you’ve accumulated much more in your savings account then if you would have simply been making deposits as most people do.

Repeat! Each time you pay off a loan, borrow again. This not only is helping you grow your net worth, but is also helping your credit record. As long as you stay disciplined, automate as much as possible, and repeat as often as possible, this process will reward you substantially over time.

Further Reading & Research

Direct savings accounts:
Emigrant Direct
HSBC Direct

Banks with free online bill pay:
Washington Mutual
Wells Fargo

Credit Cards with good promotional rates:
CitiCards
Capital One
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