Rethink the need for a new car

The NADA (auto dealers association) estimates that the average car payment in the US is around $400 per month. With over 16 million NEW cars sold in the US every year, a great deal of the average number is spent on new cars.

Let me propose some alternate thinking that you should keep in mind the next time you go out to purchase a new car:

To make a $400 car payment (and I'm purposely excluding any down payments), an average worker would would need to have gross income of $670 per month, minus around $270 in federal, state, Social Security, and Medicare taxes.

What else could be done with that money? A large percentage of US citizens do not contribute the maximum to their 401k plans even when their employer offers them a pay raise in the form of a matching contribution. Remember that the same $670 in gross income is temporarily tax free and deductible in the current year. If an employer matches 50% of the employee contribution, the total is just over $1,000 per month.

Assuming simple stock index fund returns of around 10% on average, the individual who takes the 401k option will have around $75,000 in a retirement savings account. The person who bought the new car will be looking for another new car in five or six years and will repeat the pattern.

Saving $1,000 per month at just over 10% will generate a 401K of nearly one million dollars in twenty years due to the magic of compounding interest. New cars become used cars which become junk in very short order. Choose your 401K plan instead.

In case you are wondering, I have three cars: one is 18 years old and collectible, one is eight, and one is five -- used cars are just fine.

One penny per second

Here's a different view on money: if you could find a way to earn just one penny every second, you'd be approaching the income of the top 1% of all Americans. Sound outlandish? The math is very simple:

$.01 X 60 seconds = $ 0.60 per minute
$.60 X 60 minutes = $ 36 per hour
$36 X 24 hours = $ 864 per day
$864 x 365 days = $ 315,360 annually

Of course, you simply can't work 24x7x365. But your money can. Compounding interest in the bank, money market fund, bond fund, and, at least on average, real estate, stocks and stock dividends are earned and collected around the clock!

Switch to fluorescent bulbs

While fluorescent bulbs have been available for many years, the price and the color spectrum of the produced light make the latest generation bulbs useful in many applications. Fluorescent bulbs produce more light per watt than heat and can use one quarter of the power of a standard bulb!

Size the bulb appropriately for your needs. Amazon has some really good deals on these two models:

Globe 23-Watt Mini Compact Fluorescent Spiral Bulb (100-Watt Incandescent Equivalent), Cool White, 4-Pack #48426

Globe 13-Watt Ultra-Mini Compact Fluorescent Spiral Bulb (60-Watt Incandescent Equivalent), Cool White, 4-Pack #48412

Person to person (P2P) lending

In early March, I entered into an experiment with a relatively new concept of person to person (P2P) lending. Of course, this type of lending has been available in various formats for hundreds of years including pawn shops, family members, and the more recent 'payday" loan operations. To cut to the chase, P2P loans cut out the bank and connect the borrower and lender via the Internet.

Risks of losses and fraud are real but some sites, such as Prosper or Lending Club provide financial details including credit reports (summaries for late payments or delinquencies). There is clearly a growing trend in this market as other sites are coming into play including Loanio and Zopa in the UK.

Since March, I have funded or participated in eleven loans to various individuals via Prosper. Here's the kicker: while I see credit information (and Prosper assures lenders of quality and fraud checks), I do not know the specific identity of who I'm lending too. Further, borrows that I'm lending money to do not know who I am. Prosper works as both a broker and a proxy. Please visit Prosper for more details.

To date, all loans are performing though I have had one late payer which went to collections (also fully automated). This loan has returned to current status.

Two items have struck me as interesting with the P2P process. One, too many people make very poor credit decisions such as either not or "forgetting" to make a payment -- more on that later. Second, borrowers and lenders (remember, this is person to person) can often fall into a emotional element of either looking for help (borrowers) or "helping" others (lenders).

Regarding credit decisions: With borrowers that I've chosen to lend to, I take one absolutely solid line: while they may be over their heads with payments, looking for credit card consolidation, etc, just so they have NEVER missed a payment and have had established credit for seven to ten years I'm probably interested in reviewing further. My rational is simple: these folks take their credit seriously and will find a way to make the payment. How that happens is not my problem. I'm the lender -- I simply want to be repaid every month without stories, late or missed payments.

The social network item of "helping" others scares me the most because emotional investing is really speculating. Borrowers on Prosper are able to post a story line about why they are looking for funding, how they will repay the loan, why they are creditable, etc. Too many loans are funded by lenders looking to "help" individuals who just had a baby or "need" a down payment for a house. If you are going to get involved in these activities, remember to separate yourself from your emotions when lending. Your ONLY concern should be getting your funds repaid and making a reasonable return. Save your dollars for "helping" for local credible charities.

Do you trust your business partners?

Over the past two decades, I've had the privilege of investing with other individuals in small companies, real estate, and two aircraft partnerships. A friend mentioned to me years ago that at the end of the day, you must have full confidence and trust in those you invest or do significant business transactions with. If you invest with others, ask yourself these questions:

- Are you confident that on the toughest day of the partnership or deal that your partners will do the right thing for the partnership, even if they are personally impacted?

- If you were to become disabled or die, would your partners treat your heirs and estate with complete honesty and integrity?

If you can answer both of these questions with a resounding 'yes!' then consider yourself fortunate or well informed. If the answer is 'maybe' or 'no', you should consider exiting your current partnership or not engage in new activities that fail to pass these two simple tests.

Buying in bulk can be a good thing!

I frequent a top notch car wash in northern California which offers customers several pre-paid options. During a recent visit, I renewed a card with 25 washes for $425. Note that this car wash also waxes, vacuums, and does windows on both sides. While purchasing the pre-paid card, the attendent, a young teenager, was clearly struck wondering why anyone would make this purchase. My take away was that he was focused on the pure cash flow -- $425 is a king's ransom to many teenagers. My focus was purely on cost: I visit this location at least twice per month and individual washes are $23.95. Buying in bulk saves me near $7 per wash or nearly 30%!

Now if I can just get my dry cleaner to offer similar discounts....