Is a Good Investment?

Almost three years ago I discovered peer to peer lending, in the form of the then widely hyped For a week or two I was enthusiastic on it as an investment, until I crunched enough numbers to decide it was not so US-Treasury-Small exciting after all. In the meantime, I had put $1000 in ten $100 loan slices.

Loans on Prosper are three years in duration, so next week this little experiment will finally wind down. Assuming that I get the last $15.46 that is owed me, I will have received a grand total of $1029.50 over three years. A zero percent return is pretty lousy, but at least I have the solace that quite a few other things that I could have invested in in January 2007 would have done a lot worse.

But, as it turns out, breaking even makes me an above average lender on Prosper. According to the delightfully data laden Eric’s Credit Community, which tracks and analyses Prosper loan data, the average lender on the site has an ROI of –2.29%. Again, it could have been worse.

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IRA Conversions: What’s Special About 2010?

As all us personal finance geeks know, 2010 is a special year with regard to converting your traditional IRA to a Roth. For the benefit of non-geeks who have accidentally brought up this blog on their browser, it is worth explaining1040 that there are actually two separate changes in the rules that kicked in on January 1, 2010.

The first is that from now on there is no income limit for doing a conversion. In the bad old days, to be eligible you needed to have an income of less than $100,000. Today anybody with a traditional IRA can convert it to a Roth, and this is true for all future years, not just 2010. (Unless, of course, Congress changes the rules again.)

The second IRA conversion change for 2010, and the one that makes 2010 "special" is that if you convert during 2010, and only during 2010, you have the option of deferring the income from the conversion to 2011 and 2012. So if you convert $100K from your traditional to Roth, you have the choice of either increasing your taxable income by $100K in 2010 or by $50K in both 2011 and 2012.

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Bond Prices Go Down When Interest Rates Go Up

A headline in the Boston Globe caught my eye the other day. Study says many Americans are in the dark on basic financial concepts. It turned out to be old news, about a study from FINRA that came out about six weeks ago.

Sears Bond But there was one tidbit the Globe highlighted that I had missed last month. When asked "If interest rates rise, what will typically happen to bond prices?" only 21% of Americans got the right answer, that they will fall.

Now I am, to say the least, not easily surprised by financial ignorance, but 21% correct on a multiple choice question with essentially two choices is pretty amazing. Even if you allow for a third possibility, that bond prices neither go up nor down but stay the same, 21% is still well below the monkeys and dartboards threshold of 33%.

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Frugal Friday, Finally

Due to the confluence of a holiday and an internet access snafu, as unlikely as it may seem, this is the first Friday post of the month. That means it’s time to round up the best frugal tips from the frugalosphere from December.Christmas Tree

Needless to say, December is dominated by what is politely referred to as "the holidays" but which we all know to be that most un-frugal of occasions, Christmas. This annual orgy of unnecessary expenditure comes ’round each year and hypnotizes otherwise savvy people into parting with their precious cash.

Can there really be such a thing as a frugal Christmas? I’m not entirely convinced, but many bloggers gave it a try. Many of the tips were, like the seasonal music piped into all public spaces starting on November 1, familiar and repetitive. Give dad a book of "coupons" for hugs, wrap presents in newspaper, shop for decorations after the 25th, etc.

My Super-Charged Life did share the revelation that there are 7 Free Toys Your Kids Will Love More Than Expensive Gifts. They are a cardboard box, a cape made of an old pillow case or towel, a balloon, two sticks, a fort made of sheets or blankets, empty paper towel tubes, and a paper airplane. Click on the link for details. It’s probably too late to swap that bicycle you got your son for a pair of sticks, but now you know better for next year.

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Invest? Borrow? Why Not Both?

Free Money Finance had a "Help A Reader" post the other day with an email from a woman asking if folks thought it was a good idea to take money out of her mutual funds to  pay off $24K in credit card debt.

The broad consensus from commenters on the post was yes, cash out the mutual funds and pay off the cards, C Cards 2 (Andres Rueda)provided those funds are not inside an IRA or something similar. Okay, fine.

A few commenters obliquely approached the core craziness here by asking if the reader would have borrowed money on her credit cards to invest in the mutual funds. Of course that sounds like a really loopy idea, and of course that is what she (effectively) did.

Not paying off a credit card or other high-interest consumer debt so you can save or invest is, or at least should be, an intuitively bad move. The returns on the investments are unlikely even to approach the cost of borrowing the money.

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