I’m very pleased that I was asked to sit on the blogger panel at Prosper Days. If I hadn’t been invited, I probably would not have made the trip. The other panelists on the blogger panel were Jim Bruene, Editor in Chief of the Online Banking Report and NetBanker blog; Kevin Gillett, Editor in Chief of the Official Prosper Blog and CTO of Panoramic Software; and Dave McClure, Master of 500 Hats. I was in excellent company and I really enjoyed the discussion that took place.

I was a bit surprised to learn that we were the only session taking place in our time slot. With no other session taking place, everyone was observing the blogger panel. I was surprisingly at ease and wasn’t all that nervous. It probably helped that there was a crew filming the session with 10,000 watt light bulbs that made it difficult to see the crowd. It also helped that I hadn’t prepared a whole lot and simply responded to questions with my experiences and knowledge.

I’m anxious for the video to come out so that I can see how I performed. It’s difficult for me to assess my own performance, because it almost seemed as if I would just open my mouth and words would come out. I have a difficult time recollecting the things I said and how well I answered the queries. I’ll post a link to the video as soon as it’s available, along with my self-assessment.

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Today marks my first trip ever to the West Coast. Although contrary to my intuition that my trip would be uninteresting to others, including regular readers of this blog (my thanks to both of you!), I’ve decided to dedicate a post to to my expedition. I must say that I have been greeted with open arms. I have met with fellow natives and residents of the great state of Florida, residents of the great states of Hawaii and Alaska, as well as those that reside in the home of Prosper Days, San Francisco California. Although I am known (although not very well) as WealthBoy, I have found myself in the habit of introducing myself with my birth-given name.

Regardless of my introductions, I believe that Prosper Days will prove to be a productive and exciting trip for me. I only wish my better half could be here as well as our beautiful young ones. Unfortunately, we decided the trip to be much too taxing on them, and they would be better off back at home with Mom. Instead, we decided to tax Dad by sending him on the redeye back from San Francisco to Philadelphia from 10PM PST to 6AM EST (5 hours in the air). Ultimately I will arrive from Philadelphia to Jacksonville at 10:20AM the following day (8.5 hours travel time).

The story isn’t much better from there. In my haste to secure my trip from Jacksonville to San Francisco, I failed to secure transportation from the Jacksonville airport back to my home upon my return home. Much to my chagrin, after I booked my flight I came to learn that my wife had previously scheduled a play date from 10:30 until 11AM. It takes about a half-hour to get from our home to the airport, so that means it is likely I will be home no earlier than noon.

Being the analyst that I am, I surmised that WealthBoy(.com) does not yet provide sufficient income to merit a cab ride back home, so I am more than glad to await for the family to complete the play date to go pick up Dad. Later that day we will make the two-and-a-half hour drive to Orlando for our soon-to-be two-year-old. To be honest, it’s not really a big deal but I’m doing my best to make this story as interesting as possible. I would do anything for my family, especially if it involves having a good time with Mickey Mouse.

All of this in the name of peer-to-peer lending. RateLadder asked if I would be blogging about the trip. I told him that I was having a very hard time with the blogging. Despite his encouragement it is hard for me to come up with original material. I told him that my best (well…. most popular) article (Gas in the U.S. is Cheap) actually began as a repost/commentary on an article about the U.S. Auto Market being in recession. So how the hell did I come to conclude that Gas in the U.S. is Cheap?

That’s a good question that at this point I would have a hard time answering. Perhaps it may be obvious to you, or perhaps some other day when I am not wrought by jet lag and oversized west-coast margaritas I might be able to answer that question. Actually I only had one oversized west-coast margarita, one shot of excellent tequila, and many beers, but again… That’s another story.

I’m still finding my place as a blogger as well as becoming a dispenser of good information. I’ve found that the most interesting bloggers have a propensity perform both acts exceedingly well. We shall see how I ultimately perform in my endeavor. I suppose I summed it up well when I told RateLadder, “I guess most bloggers become truly successful (bloggers) when they are able to integrate their blog well with their life.” Up until now I have not done that, but perhaps beginning with this post I will make a greater effort to do so.

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If you ask the average American what they think of current gas prices, they would probably tell you that they think $3 per gallon is too high. If you ask me, I think that Americans are spoiled and they don’t realize how much cheaper gas is here compared to the rest of the world. Not only is the absolute price of gas cheaper in the U.S. than anywhere else, but with one of the highest per capita GDP in the world (ranked 4th in 2006 according to the International Monetary Fund) it is even cheaper in relative terms. Here is the average end-use price per liter for January 2008 in several nations:

France	$1.988
Germany	$2.061
Italy	$1.961
Spain	$1.568
UK	$2.037
Japan	$1.427
Canada	$1.050
USA	$0.809

Source: End-User Petroleum Product Prices and Average Crude Oil Import Costs report from the International Energy Agency

By comparison, the average price of fuel in the U.S. for January of 2008 was $3.06 per gallon, but in Germany it was $7.80 per gallon! The UK isn’t that much better at $7.71 per gallon. Even our neighbors to the north (Canada) are paying nearly $4 per gallon ($3.97 to be more precise) so I think those of us in the USA really have very little to complain about.

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When I purchased my new home about a year ago, I went with the builder’s preferred lender because of the lower closing costs with the incentives. Because I also hadn’t yet sold my prior home and really had no cash to put down, I did 100% financing with an 80/20 loan. What’s an 80/20 loan? Well, if you have excellent credit, it is a method of doing 100% financing and avoiding having to pay PMI. It is actually two loans. A primary mortgage for 80% of the value and a second mortgage for 20%. Because the loan-to-value on the first mortgage is 80%, you do not have to pay PMI. Another thing I did was make the primary mortgage interest-only for five years.

Never in a million years would I ever recommend someone do 100% financing with interest only loans, especially in this market! So why did I use this kind of financing when I would never recommend it? First of all, I had plenty of equity in my old home. I owed $190k and ultimately it sold for $290k. Even if I hadn’t sold it, I could have rented it for break-even.

I also anticipated that my prior home wouldn’t sell before closing on the new home (and I was right). I wanted to be able to pay down the mortgage on the new home and be able to improve my monthly cash flow, which is why I did interest-only on both loans. If I had bought the new home with a fixed mortgage, paying down the mortgage would reduce the balance but the payment would remain the same. Paying down a fixed mortgage reduces the amount of time to pay it off and reduces the total interest paid over the life of the loan.

Do I have any regrets? The interest rate on the first mortgage is 6.625%, which seems a bit high to me, especially for a 5-yr fixed period and adjusting after that. I wish I had shopped around a bit for similar terms but at a lower rate. Mortgage rates have been on a fairly steady decline since the middle of last year, so I will likely be refinancing this spring or this summer.

I’ve been keeping an eye on the 30-year Treasury Bond. Although not the same rate, fixed mortgage rates trend similarly to long-term treasury bonds and notes. The yield on the treasury bond also sometimes trends with the stock market indices as well. The 30-year bond hit a low in January right behind the Dow Jones Industrial Average. I’m looking forward to the next time Wall Street has a tough time with economic reports, because it may present the perfect refinancing opportunity.

Shopping for a mortgage can be tough. I had been using BankRate’s mortgage comparison tool for a while, until I came across Yahoo!’s. I like Yahoo!’s better because it allows you to enter an estimated range for your credit score (only has three ranges, but it’s better than 0). It also allows you to filter the results based on the term, monthly payment, points, lock term, and fees. The best feature of all is that the results are a single click away, rather than having to click through several screens on BankRate.

I’ve also been working on improving my credit score. I want to watchdog my score over the next month, so I’m trying out myFiCO’s ScoreWatch free for 30 days. It allows you to monitor your credit score, and when it changes you can receive alerts. Overall, ScoreWatch seems like a pretty good product, although I’m very disappointed in the simulator. You can try different scenarios to see how it improves your credit score, but it gives you a large range for the result (20 points or more) rather than an exact score. You would think that the people that invented the FICO score would be able to give you an exact number! I simulated paying my credit card balance in full, and the result was a score of 760-780. Not very helpful since I already have a score in that range, albeit on the lower end.

ScoreWatch is certainly a great thing to have if you’re looking to refinance soon. Right now my score is 760, so I’m basically right on the line of the top-tier for a 30-year fixed mortgage. I’d like to get just a little bit over the line. Although I never carry a balance on my credit cards, because there is a balance when the statement closes (that I subsequently pay off in full), it appears as a balance on my credit report. I use only one credit card to take full advantage of cash back. This month I’m going to experiment and try paying the balance in full (or as close as I can, give or take a few transactions) before the statement closes. We’ll see if it improves my score.

The last thing I’m doing to prepare is paying down my current mortgage as much as possible. At the end of last year, I used my annual bonus to pay it down considerably. I will be filing my tax return soon, which will also provide a few thousand to pay it down a bit futher. My goal is to get it down to about $150k before refinancing. Right now it is sitting at $168k. Between some cash I have in brokerage accounts, my checking account, and the tax return, I think I should be able to get very close to $150k. I want to have as small of a balance as possible because it will also mean a smaller monthly payment after I refinance. I would be very comfortable with a $150k balance, because I could likely rent out my home at some point in the future for positive cash flow.

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Last month, the PMI Group released their winter 2008 risk index. The risk index ranks the nation’s largest 50 metropolitan areas according to the likelihood that home prices will be lower within the next two years. California and Florida had several metropolitan areas with very high risk. If you are looking to relocate any time soon, you may want to avoid those two states and perhaps look to Texas instead. Texas seems to provide a much more stable housing market in terms of price stability, with several metropolitan areas having less than a 1% chance of lower home values in the next two years. If you’d like to see the report in its entirety, you can see it here.

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RateLadder made a guest post on LazyMan’s blog on a strategy he is using to fund his Simplified Employee Pension Plan (SEP-IRA). A SEP-IRA is a retirement plan for individuals that are self-employed, and thus do not have an employer sponsored plan (such as a 401k or 403b). Basically, he is taking out a loan in order to fund his retirement plan. The thing that I really like about the idea is that the tax benefit will more than pay the interest on the loan (even though it is a 36-month loan)!

Of course, the best way to fund your retirement is to make regular contributions towards a retirement account, such as a Roth IRA or traditional IRA. For 2007, the contribution limit for an IRA is $4,000. If you made regular monthly contributions, that would be $333.33 per month (plus an additional $0.04 somewhere in there). Although it is now 2008, it is still possible to contribute towards the 2007 limit until April 15 (individual tax return deadline). If you would like to max out your 2007 contribution before the deadline, do not currently have the money to do so, and you are capable of contributing $800 or so over the next 12 months, you may want to consider a strategy similar to RateLadder’s.

If you are considering a similar strategy, I would recommend you take the loan for a year. That way your payments will approximate those for the annual contribution limits and you will pay less interest. Let’s do an example with a few assumptions (similar to RateLadder’s):

• Your current tax bracket is 25%
• You have at least $800 in discretionary income to contribute towards retirement
• You are funding a traditional IRA (although a Roth IRA is better for the long term, it does not have the immediate tax advantage that will be discussed below)
• A $4,000 loan will be taken to fund the retirement account
• The interest rate on the loan is 10%
• You will be making the 2007 maximum contribution of $4,000 with the proceeds of your loan
• The loan will be paid within 1 year

The monthly payments on a $4,000 loan that will be paid in 12 months will be $351.66. The total interest paid will be $219.96. The tax benefit from the traditional IRA will be $1,000. The net benefit from the strategy will be $760.04. If the monthly payments are only $351.66, why did I say you needed at least $800 in discretionary income to contribute towards retirement?

The strategy really only makes sense if you intend to max out your IRA contributions every year. So that means you will need to contribute an additional $416.66 per month if you are to max out the 2008 contribution limit of $5,000. Otherwise, you would have to take out another loan next year to max out the 2008 contribution, and you would be playing catch up each and every year. If you’re going to be taking out a loan every year, you may as well just start making regular contributions now until retirement instead of using the strategy I’ve described.

If you or your spouse already contribute towards an employer-sponsored plan (401k or 403b), there are limits to the amount that can be deducted on contributions made to a traditional IRA depending on your adjusted gross income (AGI). This will limit the amount of tax benefit for your contribution, but you can still contribute the maximum annual amount of $4,000. You can refer to IRS publication 590 for more information. The strategy could also be used to max out a Roth IRA, but you will not have the tax deduction benefit to help cover the interest expense of the loan.

Prosper.com is definitely a good place to get a loan. Although Prosper loans are 36-month loans, it is easy enough to make over-payments to pay the loan within 12 months. You could also use a home equity loan to fund the retirement account, and take advantage of the deductible interest as well! Whatever strategy you use to fund your retirement, it is important that you do it as soon as possible. The more time your money has to grow, the more comfortable your retirement will be.

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On Tuesday the Federal Open Market Committee (FOMC) dropped the federal funds rate by 0.75% in an emergency meeting. What does this mean for mortgages? The federal funds rate does not actually directly impact fixed mortgages. Because fixed-rate mortgages are long term loans, they tend to more closely follow long-term paper such as the 10-year treasury note and 30-year treasury bond. The 10-year treasury note and 30-year treasury bond have been on a steady decline since July, as have 30-year and 15-year fixed mortgage rates.

Treasury yields have dropped quite a bit in the past two days since the FOMC announcement which is good news for anyone looking to buy a home. The yields aren’t dropping so much as a direct result of the federal funds rate drop, but more because of the message the FOMC has sent as a result of the action they have taken. I read a good article this morning that describes the situation well:

Mortgage rates often dip when investors fearing an economic slowdown grow more conservative and buy up Treasuries and bonds. This causes long-term rates — and by extension, mortgage rates — to fall, creating an opportunity to get better terms on a loan.

Although normally this would be good news for borrowers with adjustable rate mortgages that wish to lock into long-term fixed-rate mortgages, they may still find themselves unable to refinance. During the housing boom many people used adjustable rate mortgages with small down payments to purchase their homes. They did this in anticipation that home prices would continue to climb, and the market value would allow them to build equity in the home. Unfortunately when the real estate market topped out, these individuals were left with very little home equity or even worse, negative equity in their homes.

With little or no equity in a home, it will be very difficult to refinance into a fixed-rate mortgage. Without at least 20% equity in a home, a homeowner will have to pay Private Mortgage Insurance (PMI). This helps lenders to recover losses from defaults and provides no benefit to the borrower. I have no doubt that PMI premiums have increased ever since the subprime lending issues began. This means a higher monthly payment which may not make it worth refinancing since it could possibly push a homeowner into negative cash flow. On top of having higher payments with PMI, payments on a fixed-rate mortgage will include principal as well as interest. Once again, the higher payment could force a negative cash flow situation. Even given all that, with lenders tightening borrower requirements, it may only be possible for those with excellent credit to refinance if they have very little or no home equity.

So what is a homeowner with an adjustable rate mortgage and very little equity to do? Well, one good thing about the reduction in the federal funds rate is that it could possibly lower the monthly interest payments. This would allow a homeowner with an adjustable rate to increase the amount of principal paid, hence build some equity. Hopefully the decrease in short-term rates will help homeowners with adjustable rates to build sufficient equity and allow them to refinance before fixed-rate mortgage rates begin to increase once more.

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What does it mean to invest? Investing is the process of providing capital for the receipt of future income, appreciation in the capital, or both. In providing the capital, the investor assumes some risk: the possibility of losing some or all of the invested sum. Typically speaking, when there is higher possibility of loss there also needs to be greater gains in terms of capital appreciation and income in order to offset the risk. The best investors are those that are able to best understand and manage risk, as well as analyze and understand the potential of future income.

Warren Buffett is no doubt one of the best investors of all time. Not only is he an excellent judge of risk and profits, but he has the uncanny ability to properly assess the value of an investment. Even if a company experiences excellent growth and profits, if it is overvalued there is some risk that eventually the valuation of the company may drop to a more reasonable level. Buffett will only invest in a company if he believes it to be fairly valued, or even better undervalued.

So how do you determine the value of a company? There are many methods, but fundamentally speaking I like using discounted cash flows (DCF). With DCF, you discount estimated future earnings by the sum of the risk-free rate (federal government bonds) and a risk premium. The Business Plan Store has a good example here. Robert G. Hagstrom wrote an excellent book called The Warren Buffett Way, in which he provides some insight into how Buffett performs some DCF analysis to value business he has invested in. Later this week, I’ll provide you with an overview of Hagstrom’s calculations along with some examples.

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I remember ages ago when Google Fight went viral (even before the term viral went viral). Just for grins, I performed a Google Fight between Prosper.com and LendingClub.com:

Prosper wins by a score of 135,000 to 13,700!!!

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If you are a recent college graduate that has just entered the workforce, you have an excellent chance for a comfortable retirement if you begin contributing to your retirement as soon as possible. If you are 24 years of age or younger, you have at least 35 years until you reach age 59 1/2 (minimum age to begin withdrawing from a retirement account without penalty). That’s at least 35 years to let the magic of compound interest work for you. What exactly does that mean? Let’s look at some numbers as an example with a few basic assumptions:

• There are 35 years between now and your retirement
• Your retirement investments average a 10% annual return (fairly reasonable long-term return estimate)
• Inflation over the next 35 years is 4%
• You invest $50 a paycheck and you are paid biweekly (26 paychecks a year)

By investing just $50 every two weeks at a 10% annual return, in 35 years you will have $414,620.36! However, accounting for inflation, it would only be worth $154,839.47 in today’s dollars. That’s not bad pile of cash, but it won’t be enough to get you through retirement. That means you’re going to need more than just $50 a paycheck. If your employer has a 401k plan in which they provide matching contributions, it can help be a source of the extra money you will need.

A 401k is an employer-sponsored plan, where employees can make pre-tax contributions into a retirement account. The contributions made in the account grow tax-deferred, meaning they are not taxed until withdrawn during retirement. More often than not, as an added benefit employers will contribute matching funds for employee contributions. For example, my employer will match 100% of the first 3% of salary contributed, and 50% of the next 2% of my salary. Confused? Basically, it means if I contribute 5% of my salary my employer will match with 4% of my salary.

Let’s continue the example with the 4% match on 5% of salary. To keep things simple, let’s say that $50 biweekly is 5% of your salary and is your contribution in your 401k. That means for every $50 you put in, your employer will contribute $40 more. With $90 in biweekly contributions, in 35 years you will have $746,316.65 or $278,711.04 in today’s dollars. Of course, if you as me, you should try to contribute more than just 5% of your salary.

So what’s the catch with the employer matching? In order to become fully vested (be allowed to keep the match), you have to remain an employee with the company for a specified amount of time. Your employer may allow you to keep all or nothing after a certain period of tenure (cliff-vesting schedule) or they may allow you to keep certain percentages after reaching certain tenure milestones (graded-vesting schedule). Regardless of your tenure, if you leave the company all of your contributions will remain yours.

If your employer doesn’t have a 401k plan, there are other types of retirement accounts you can open on your own behalf. One of the best is a Roth IRA (Individual Retirement Account). With a Roth IRA, you make after-tax contributions into a retirement account that grows tax-free. That means when you withdraw during retirement, you won’t pay taxes on it. There are some income limitations, so if your income is too high (six-figure range) you won’t be able to contribute to a Roth IRA, but you can still contribute to a traditional IRA. With a traditional IRA, your contributions grow tax-deferred. That means you will have to pay taxes when you begin making withdrawals during retirement. So you can see, the Roth IRA is more advantageous if you qualify for it. There are annual contribution limits for both types of accounts.

When you first begin contributing to a retirement account, if you are young and a long way away from retirement, you should put your money into aggressive growth investments. The value of the account may move up and down considerably with aggressive investments, but in the long run it should increase. As you near retirement, investments should become less aggressive in order to preserve the earnings made over the years. That means that it may be possible you may not even reach the $278,711.04 in today’s dollars mentioned in the example. However, there is some good news that will help you accumulate more wealth for retirement. As you continue working, your salary should increase as you receive merit increases, cost of living increases, and advance into positions with a higher salary. This means that your contributions will not remain constant, but should gradually increase year-after-year.

How much money you will need for retirement depends on your life expectancy, how much you will need to withdraw each year, and what kind of return you are receiving while you are withdrawing. Maybe $1,000,000 sounds like a good number. Let’s see… Here are the assumptions:

• You have accumulated $1,000,000 for retirement
• You withdraw $70,000 per year
• During your retirement, your $1,000,000 is earning 3% interest
• During your retirement, inflation is growing at 4%, giving you effectively -1% interest

$1,000,000 would last you about 14 years. If you start withdrawing at age 59 1/2, that means it would last you until age 73. Hmm, that’s probably not long enough. But wait, it gets worse! Although we did account for inflation during the retirement period, we forgot to adjust the $70,000 annual withdrawal for inflation. The equivalent of $70,000 in todays dollars will be nearly $300,000 in 35 years (with 4% inflation)! If you want to withdraw $300,000, your nest egg is only going to last you about three years. Yikes!

If you need $300,000 year for 30 years in retirement, that means you will need to accumulate over $10 million! Although that may seem like an impossible task, it can be accomplished. The earlier you start, the better your chances of achieving a comfortable retirement. It gives you more time for compound interest and your increasing salary to work for you. The more you contribute each paycheck, the better your chances are as well. So what are you waiting for?!?

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