As I just mentioned in the post below, I bought an Ooma Hub/Scout system which advertises Unlimited Home VoIP Phone Service with no future monthly fees. Features included free domestic long distance, 911 service, caller ID, voicemail, and call waiting. It was a bit of an impulse purchase, as I can still return it later but who knows how long the 20% cashback will last.

One major concern of Ooma is that it seems like just a matter of time before the FCC shuts it down. I have done some reading on the technical background of Ooma, but not enough to really write intelligently about how their business model can last long-term. I’m basically betting it’ll be around long enough so that I’ll at least break even. (Upfront cost/monthly savings = # of months to break even, often less than 10 months for those with landlines or Vonage.)

After reading a few reviews, there seems to be no real voice-quality difference between Ooma “Classic” and Ooma Telo, the primary difference being a sleeker design and some added multi-handset functionality. However, the new Ooma Telo is subject to a “regulatory recovery fee” of $12 per year after the first year. Not huge, but still not “100% free”. Ooma “Classics” are exempt from this fee per the Ooma Blog:

New or Unactivated Ooma Hub/Scout Combinations
a. No changes to your promised feature set, includes voicemail and a 60 day Premier Trial.
b. If you want to purchase an annual Ooma Premier subscription, you can do so until 12/31/09 at $99.99, after that the price will go up by $20 to $119.99
c. No regulatory recovery fee will be charged

I really like the idea of not having any recurring phone bills, and I might even get fax to work on it. I hope to get it soon and provide a more detailed review.

What are your thoughts? What’s keeping you from buying this?

If you have an Ooma already, what do you think of it?

Here’s some of the fine print:

A waiting period (of up to 60 days) and $5 minimum applies to payouts. To earn your cashback, stores will provide us (Microsoft) non-personal info about your purchase, and you will need to provide us with personal information (like your email address above) to create a Bing cashback account. We may use this information to personalize your online experiences, and will treat all your information in keeping with the Microsoft privacy statement. cashback is available only for personal purchases made during your store visit directly from the Bing site. You cannot use coupons or discounts. See Bing cashback terms. Additional store terms may apply.

If you follow the rules, right now you can get some pretty sizeable cashback, including 20% off Walmart.com and 20% off eBay.com purchases*. These stores carry many items that can be hard to find at an additional discount. For example, Walmart sells Apple iPods and eBay sells gift certificates and physical gold.

Always look for an link that looks like this, with the Bing cashback coin:

For example, I just bought an Ooma Hub & Scout from Walmart for $229 minus 20% ($45.80) and also a $25 Walmart gift card, for a net price of about $158. Otherwise, the lowest I could find from various price comparison sites is the price at Amazon of $215, although in some states you may be able to avoid sales tax. After finishing checkout, I immediately received an e-mail saying that I’d get $45.80 after 60 days payable to my PayPal account.

* Visit bing.com/shopping and run a search for “sony”. Look for an ad about cashback from eBay (see above). Click and you should see this image at the top to confirm your 20% cashback:

This is what they looked like after one washing:

See anything missing? Caveat Emptor!

Sure, email is great, but there’s something uniquely heartwarming about the kind of card that comes in the actual mail — especially for folks who don’t hear from us as often as they should, simply because they aren’t online.

So we’ve made it as easy to send snail-mail holiday cards as it is to send email. Simply fill out the form below and we’ll send one free holiday postcard on your behalf. Yes, through the mail and everything.

Courtesy of Google, via Gizmodo. Send a happy thought today! All the cards have a little Gmail logo hidden somewhere.

Fees on indexed plans will be cut in half, while fees on actively managed and advisor-sold plans will be cut by a third, the firm said. Fidelity manages plans sold in Arizona, California, Delaware, Massachusetts and New Hampshire.

The changes mean a family with $50,000 in an indexed portfolio might now pay $125 a year in fees, instead of $250, assuming the amount in the plan remained unchanged. [...]

Fidelity, which is based in Boston, said total fees for its direct-sold indexed portfolios will now range from 0.25 percent to 0.35 percent of assets. Total fees for actively managed plans will now range from 0.59 percent to 1.04 percent of assets.

Here is a PDF of their current expense ratios for their active and passive investment options.

According to this WSJ article, they’ll also be changing up their age-based asset allocations a bit:

Fidelity also said it plans to increase the international equity exposure in both its direct- and advisor-sold plans’ age-based portfolios to 30% of the overall equity allocation from a current range of 0 to 20%, and plans to add an emerging-markets fund to its age-based portfolios.

Both changes will be phased in over the next 12 to 18 months.

The reason for this is hardly altruistic, as Fidelity is a privately-held for-profit company. They needed to do this in order to stay competitive. The only reason I have 529 fund at Fidelity is that I have had it connected to their 2% back credit card. I’m still happy with the change though, which follows their recent addition of index fund options back in August 2009.

Despite these improvements, I still plan on shifting everything eventually to my account at the Ohio CollegeAdvantage 529 Plan, which offers inflation-protected bonds (TIPS) at a very low expense which I think are a great “safe” option for saving up for college. (They also offer a variety of low-priced index options from Vanguard.) Fidelity has no such TIPS option.

Also, until December 15th (soon!), they are still running a promotion where you can get $25 for signing up, $50 for referring others, and $25 for starting up automatic deposits. (A couple could earn $150 free for their kid’s education this way.) If you need it, my CollegeAdvantage referral code is 2439350.

Wow, December already…

Credit Card Debt
Up until now, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn up to 4-5% interest (less recently), and keeping the difference as profit. However, given the current lack of good no fee 0% APR balance transfer offers , I am no longer playing this “game”. The balance that you do see is either before the end of the statement or during the grace period, where I’m also not paying any interest.

Retirement and Brokerage accounts
Mrs. MMB and I have both maxed out our 401k salary deferrals for 2009. We have also started to invest in regular taxable accounts by investing $30,000 that was previously being held as cash. I’ll outline the trade activity in an upcoming portfolio update.

Our total retirement portfolio is now $231,368 or on an estimated after-tax basis, $191,475. At a theoretical 4% withdrawal rate, this would provide $638 per month in after-tax retirement income, which brings me to 26% of my long-term goal of $2,500 per month.

We are also getting ready for a Traditional-to-Roth conversion once the income limits are removed in 2010. We’ll need to gather up some information in order to see how much tax we owe on any gains. More details on this to come.

Cash Savings and Emergency Funds
We keep a year’s worth of expenses in our emergency fund. Potential large expenses include $10,000 for home improvement projects (minor roof repair and solar water heating), as well as $15,000-$20,000 on a new car to replace our 1995 Nissan. Hope it can last us 15 years as well!

Home Value
I am no longer using any internet home valuation tools to track home value. Some people have suggested using my tax assessed value, but I also think that is too high. I simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. (Currently on month 3 out of 6.) For the most part I am concerned about mortgage payoff, which I still plan to accomplish in 20 years at most.

You can view previous net worth updates here.

That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.

In his 2005 book Unconventional Success: A Fundamental Approach to Personal Investment, he proposed a model asset allocation using what he believes are the 6 “core asset classes” that an individual investor should own:

Asset Allocation For 70% Stocks/30% Bonds (with ETF examples)
30% Domestic Equity (VTI, IYY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
20% Real Estate (VNQ, ICF)
15% U.S. Treasury Bonds (SHY, IEF)
15% Inflation-Protected Securities (TIP, IPE)

But in the Yale interview, he proposes a slight change that reduced real estate exposure in exchange for increased emerging markets holdings:

Today, Swensen says, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.

This interview was printed in March/April 2009, so I’m not sure if you could call this performance chasing or not. I don’t follow his model asset allocation exactly anyway - I think the best idea is to read his excellent book and find out his reasoning for holding each asset class. The exact weightings you can hash out later. It definitely added another dimension to my investing views.

No, I didn’t get an iPhone. But I did get an iPod Touch over Thanksgiving weekend. (Hurray for Amazon matching Apple Store Black Friday prices!) I know, I know, as a financial blogger I’m supposed to shun such trendy toys, but it was a gift! My parents got one for my sister as well as themselves, and I am assigned to teach them how to use it when I visit in December.

(I’m excited because my HTC TouchPro2 with my $30 Sprint SERO can be hacked to share it’s 3G connection as a WiFi Router, so I can get my iTouch online anywhere I have cell coverage. Nearly an iPhone!)

Another perk is that now I can review all those personal finance apps out there. I know there are a lot of budgeting apps, the Mint.com app, and various ones for banks and brokerage companies.

What are your favorite apps? Which ones were worth the money, and which ones weren’t? Which free and non-free apps would you like me to review? Share in the comments below.

What is the Transaction Account Guarantee (TAG) Program? In response to the financial crisis, the program basically allowed participating banks with all noninterest-bearing transaction accounts - like many checking accounts that earned no interest - to have unlimited coverage by the FDIC. It was part of the Temporary Liquidity Guarantee Program, and was designed to help calm the fears of depositors with lots of money in possibly shaky banks.

Now that some banks are feeling better about themselves, they decided that they’d rather save the money and not participate in the extension through June 30, 2010. According to Bloomberg, the cost of participation will increase to a range of 15 cents to 25 cents annually for every $100 of covered deposits, up from 10 cents currently.

But for most people this shouldn’t be a concern, as you’ll just revert back to the standard $250,000 per depositor covered by FDIC, currently set to last until December 31, 2013. I would hope if you had over $250,000 in cash, it wouldn’t be sitting in a non-interest bearing account!

Despite my initial skepticism about these things, many readers responded that they indeed found these certificates very useful in savings some money. Read their comments here.

Here’s a example positive scenario. You find a restaurant on the list that you like that usually runs around $20 + tip per person (~$48 for a couple). You buy a $25 certificate for $2, which usually comes with a $35 minimum purchase + 18% required gratuity on full price.

In that case, you can save around 50% on the total bill. These might make good gifts to the right person, but I wouldn’t pass them off as worth face value!

Participating stores include City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry’s, King Soopers, QFC, Ralphs and Smith’s. Valid retailers are: Applebee’s, Bass Pro Shops, Bath & Body Works, Best Buy, iTunes, Sears, and Spa Finder.

I would also check on eBay as I know iTunes gift certificates can be cheap there, but it would seem like 10% off of Best Buy or Sears gift cards could come in handy. [Source]

I’m still in a tryptophan coma, but here’s a timely mention of the story of the turkey from Nassim Taleb’s book The Black Swan which I am (supposed to be) reading. The following excerpt is taken from the transcript of a Charlie Rose interview.

——
CHARLIE ROSE: And what is the story of the turkey?

NASSIM NICHOLAS TALEB: In the book, I have the story of a turkey that is fed for 1,000 days by a butcher, and every day confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days…

CHARLIE ROSE: Gets fatter and fatter and fatter.

NASSIM NICHOLAS TALEB: Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.

CHARLIE ROSE: Yes.

NASSIM NICHOLAS TALEB: There will be a surprise for the turkey’s economics department, all those Ph.D.’s. Will it be — after all, there’s maximum (inaudible)…

CHARLIE ROSE: But it’s not a surprise for the butcher, is it?

NASSIM NICHOLAS TALEB: Not a surprise for Charlie Rose as well. Not a surprise for humans. It’s a surprise for the turkey. So the whole idea here is we are not to be a turkey.
——

Who or what might be the next turkey?

Yeah, you read that right. You should make the credit card companies pay for your holiday spending! (You thought I meant something else?) Since they offer juicy incentives to get you to switch to their credit card, take advantage of these loss-leaders and use the money to pay for your gifts. Sure, technically it may take you a bit to actually get the check or gift cards in the mail, but a few hundred dollars can go a long way. Just remember to pay off your balances in full, or they win!

I chose one card from three of the major issuers - Chase, Citibank, and American Express, and you can get at least $100 from each one. If you apply for all three on the same day, it is more likely that you’ll be approved for all of them since they won’t be able to see that you applied for other cards.

Free $100 Cash

The Chase Sapphire Card is a new rewards credit card that is offering 10,000 bonus points after any first purchase on the credit card, which can be redeemed for $100 cash. No annual fee.

As a rewards card, it offers 1 point for every dollar in purchases (100 points = $1, or the usual 1% back). The nice part is that redemptions are easy - you can even redeem in $1 increments as long as above $25, so you could cash out $27 or $113 without anything left over. There are no earning caps, or points expiration dates.

Free $100 Gift Card + Cashback from Restaurants & Amazon.com

The Citi Forward card is offering 11,000 ThankYou points for making just $250 in purchases and electing for paperless statements within 3 months of account opening. That’s enough points to exchange for $100 in gift cards from stores like Sears, Staples, Overstock.com, Macy’s, or Gap. No annual fee.

In terms of ongoing rewards, you get 1 reward point for every $1 you spend on other purchases like most other cards, but this card offers a special 5 reward points for every $1 you spend on books, movies, music and restaurants. You also get 100 points each month you pay your balance on time and don’t exceed your credit limit. See my Citi Forward card review and Amazon.com & restaurants follow-up for more details.

Free $150 in Gift Cards
The American Express Premier Rewards Gold Card offers 15,000 Membership Rewards bonus points when you spend $1,000 in your first 3 months of Card membership. MR points are very versatile, and can be converted to 15,000 frequent flier miles in a number of programs (or 10 Southwest credits), or you can simply get $150 in gift cards at several stores like Home Depot, Crate & Barrel, or Macy’s. You can view the reward options at MembershipRewards.com. I think you can also get cash equivalents at a reduced ratio.

You can also earn another 15,000 Membership Rewards bonus points when you spend $30,000 per calendar year. No annual fee for your first year. After that it is $175, so remember to cancel within the first year if you don’t want to continue.

It may ask you to install the AmazonMP3 Downloader software, but you can go to “skip” this for individual songs. Entire album purchases may require installation.

I’ve decided to go without cable TV for at least 6 months from January 1st, 2010. I actually don’t mind paying for cable that much, it is simply an entertainment expense and given the overall convenience, not that expensive in my mind (especially if you haggle every so often). Primarily, I want to cancel it as a passive barrier against my future kids don’t watch too much TV. Also, I want to experiment with ways of re-allocating that $50-$70 per month into other entertainment methods.

Potential Experiments. This gives me a little over a month head-start to find some solutions to fill the gap. I’ll probably start up NetFlix again, and considering getting a PS3/Wii with PlayON or a WD Media Player-like device for viewing downloaded content on my TV. I’ll need to figure out a smooth way to stream internet TV like Hulu to the living room with remote control (Roku?). For live sports, I wanted to see if I could grab some network channels (ABC, NBC, CBS, FOX, PBS) off the air using an HDTV antenna for those that have an HDTV.

I’m not really A/V-savvy, but after some reading all I got was that getting HD channels from an antenna is not necessarily like using the old rabbit ears, but also still similar. I mean, it’s digital, so with a good signal you’ll be getting HD-quality images that is just as good as cable TV. However, it’s still over-the-air, so reception quality matters; It’s not like you either get nothing or 100% clarity.

Finding what’s available. To see what broadcast channels are generally available in your area, visit Yahoo TV and input your zip code > Antenna > Broadcast TV. Next, visit AntennaWeb to get a better idea of what you’ll actually get, and tips on where to point your antenna if needed.

Buying an antenna. If you actually have “rabbit ears”, break them out and try them first. There is actually no such thing as an “HDTV-specific” antenna. I don’t have any, and to try this it out I wanted to buy an antenna from a local retailer so that I could return it easily if I didn’t get adequate reception. I stopped by Radio Shack and picked up their Amplified HDTV Antenna for $35. The online reviews were mixed, but there were some positive ones, so I gave it a shot.

Result. In a word, disappointing. I was only supposed to get ABC and FOX in my neck of the woods, but the reception wasn’t that great for either one. The image was widescreen and HD but was “blocky”. If I stood near the antenna or held it just right for a minute, it would get acceptable but wouldn’t stay that way. It may be just my antenna, review site HDTVAntennaLabs and Amazon users seem to like the indoor Antennas Direct DB2 at a reasonable $38 and the outdoor Winegard HD8200U at $140, not including installation poles and such.

I don’t know if it’s worth the bother for a few channels, but if you’re in a nice flat metro area you may be able to do much, much better.

Even if you’ve had a trial with them before, try signing up for their new 1 month free trial offer. I’ve had a trial before and I was still approved for a free month. Perfect timing, as it runs through 12/23. If you don’t qualify, you may try signing up with a new e-mail address + new credit card number.

You’ll need to supply a credit card, but you can set it so you don’t even have to remember to cancel if you take the following steps:

1. Click on Your Account.
2. If you’re not there yet, scroll down and click on More Order Actions > Manage Prime Membership.
3. Look for green text. Click on the Do Not Upgrade button and you won’t automatically be charged $79 anymore. It’ll just end. You’ll still get the entire 1st month of free Amazon Prime shipping.

I am happy to be able to offer special Costco membership certificates again to MyMoneyBlog readers. Available only online, they are $50 each with free shipping, and are good towards new Gold Star memberships and also upgrades to Executive Membership. Just bring them into your local Costco to redeem.

This is exactly the same price as you would pay at a Costco store, but with each membership certificate you order, you will also receive a coupon booklet worth more than $50 by itself, including a FREE rotisserie chicken, FREE 100-print digital photo processing, a FREE Kirkland Signature™ 2 lb. bag of coffee, FREE Kirkland Signature 48 pk “AA” batteries – and more.

• Join as an Executive Member: Purchase two Membership Certificates at $50 each.
• To join as a Gold Star Member or upgrade your existing membership with one Membership Certificate at $50.
• Give the gift of Costco Membership Certficates for any occasion.

More details:

This offer is only valid online and is not available at Costco locations.

Restrictions: Valid for new memberships and upgrades to Executive Membership. See the Membership Certificate for details. Costco Membership Certificate orders are fulfilled by participating National Membership Program organizations. Please allow approximately 2 weeks for processing and shipping. Costco Wholesale Membership Certificates are not replaceable if lost, stolen or destroyed. Bring the certificates to your local Costco membership counter to activate.

Update: They added an initial front page verification system where you have to enter a captcha, but it still ends up at the same place and you can still read all the terms before buying. You can also read the reader comments from my older post with positive reviews.

Reward Checking Accounts
These are checking accounts, usually through local credit unions, that pay a very high interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. But for the very diligent, their rates are still averaging around 3-5% APY usually on balances up to $25,000. A current example is FAB&T Kasasa checking at 3.50% APY on up to $50k, which requires 10 check card purchases each month, a direct deposit/auto-withdrawal, must log into your account once a month, and online statements only.

For more, see my review of rewards checking accounts and also this list of accounts by state. I’d stick with small local credit unions with limited membership eligibility if possible, as the rates tend to be more stable.

Online Savings Accounts Rate Updates

• Everbank is offering 2.51% APY for the first 3 months for new accounts. This rate is higher than any 3-month certificates of deposit currently available.
• ShoreBank Direct is offering 1.95% APY on its online savings account with $1 to open and no monthly fees.
• Ally Bank Online Savings recently raised their “no fine print” savings account rate to 1.64% APY. No minimums, no monthly fees.

Certificates of Deposit
As stated above, for 3-months or less go with Everbank. In general, CD rates have been very low, and given how fast rates can rise as compared to how much further they might fall, I don’t see the benefit in locking up for money for a slightly longer period of time. For example, a top 1-Year CD might get you 2% APY, while stretching out to 3 years might bump you up to 2.80% APY, according to CD “auction” site MoneyAisle.

If you are in a high tax bracket and have a 5-6 year horizon, you may also want to research the Vanguard Intermediate-Term Tax-Exempt mutual fund (VWITX). It currently has an average duration of 5.5 years and an SEC yield of 3.01% that is exempt from federal income taxes. In the 35% tax bracket, that is a tax-equivalent yield of ~4.61%. A top 5-year CD from MoneyAisle yields 3.39% APY. VWITX is not FDIC-insured and invests in high-grade municipal bonds, so weigh your options carefully.

Remember, the new $250,000 FDIC & NCUA insurance limits per titled accounts are currently extended through 2013.

If you don’t know what I’m talking about, see last month’s post on Using Google Voice To Enhance Your Cell Phone Voicemail.

I’ve been using it for the last few days, and I must say that I like it a lot. I can have unanswered phone calls to my cell phone number (not GV number) forwarded first to my home phone or office phone. Then, if still nobody picks up the Google Voicemail system kicks in, which records the message online and shoots me a transcribed text message about 30 seconds later. Transcription accuracy isn’t perfect, but for the most part it works well enough to get the point of the message.

Check out my post on Ways To Save Money With Google Voice for several other useful features! They seem to be giving out invites to everyone who asks right now.

I went home, and remembered the Costco Auto Buying Program that offered a no-haggle pre-negotiated price. Ideally in true Costco style, they would offer a “good” deal as opposed to a rock-bottom pitted-six-dealers-against-each-other-in-a-deathmatch price. I figured, why not give them a try?

I filled out the form, and the person calls me back. I was surprised to hear that he was an employee of Costco, not of the dealership. He gives me the spiel about how Costco is all about volume so he can offer a better price than a salesperson. However, it turns out that my Costco-affiliated dealership is the same one I went to for a test drive, and since I met with a salesperson they were not allowed to talk specifics with me for a period of at least 2 weeks after last contact. If I start up negotiations again, the date resets. I’m not in a hurry, so I’m just waiting around because the original guy definitely isn’t earning a commission from me.

Has anyone out there used this program before? How did you like it? I found this link which offered a mix of experiences.

At the end of trading yesterday 11/18, Berkshire’s A shares currently cost $103,100 apiece and B shares were $3,430. After a 50-to-1 split, a B share would cost about $69. Several news articles are talking about how this brings the share price down to the “common man”. For a $69 investment, you should able to attend the Berkshire Hathaway Annual Meeting in Omaha this May, although you could also buy tickets for $5 on eBay directly from BRK.

But wait, you may already own a piece of Berkshire… or you may soon.

S&P 500
Right now, Berkshire Hathaway is not part of the S&P 500. Many folks (including me in the past) thought the S&P 500 was simply the largest 500 companies in the US, but not quite. I’ve read that BRK is likely excluded due to inadequate trading volume of their high-priced shares. If the stock split occurs, it is possible that BRK will become part of the S&P 500 and thus be bought by every S&P 500 index fund out there. I’m sure Wall Street traders have already begun the speculating.

As of 1/18, the market cap of BRK was roughly $160 Billion. Looking at this chart of S&P 500 components sorted by size, BRK would actually be #9 on that list, as it is worth more than even Chevron or AT&T. If included, BRK would constitute about 1.65% of the index.

Total Stock Market
However, you may already own a piece of Berkshire if you own part of a mutual fund that tracks an index following the “total” US stock market. For example there’s the Vanguard Total Stock Market Index Fund (VTSMX), which is held within all of the Vanguard Target Retirement Funds. By my rough calculations, BRK is approximately 1.3% of the broad US market. So for every $10,000 of VTSMX or VTI you hold, you own $130 of BRK already.

Sharebuilder
Of course, for years now you could own $1 or $50 or $500 of BRKB by buying partial shares of BRKB through Sharebuilder ($25 bonus). You wouldn’t want to go too small as the $1 to $4 commission would take too big a bite, but it can be one way to gradually accumulate BRK shares. I think I have about $45 worth right now, myself, mainly due to an opening bonus.

However, Kiva may not work exactly like it suggests on their website. You’ll notice that they post up pictures and stories of people needing loans, and you get to pick the exact person you want to lend to. Back in 2007, I thought I loaned $25 to Vitolina:

Vitolina owns a set of beach fales that she rents out to back-packers or picnickers passing through the village and works hard to keep the structures in good condition. Fales are simple, small open huts with thatched roofs built in the style of the traditional Samoan house. Vitolina?s fales are situated on a white sandy beach on the Samoan coast. She readily welcomes guests and provides them with a simple roof, unbeatable views, and home-cooked meals. She will use the loan to renovate the beach fales.

However, chances are that the person you clicked on already got the loan months ago. Your money is simply going to the microfinance institution (MFI) who already lent to that person, and will use that money to lend to another future person or general project. The direct “person-to-person” link does not exist like it does, for example, at LendingClub.

There is a lot of recent discussion on the web on this issue. Thanks to the commenter who made me aware of it. Check out this NY Times article and the blog post by David Roodman that started it all.

After reading the posts and several follow-ups, it does make practical sense that Kiva can’t actually match a lender to a specific borrower - it would take too long for the borrower to get the loan. However, it does show that “good stories” do matter. Remember those “Save The Children” commercials where you’d get a letter from the child you helped? Same deal. Your money goes to the general organization, not any specific child.

As a result, Kiva has changed how it explains their loans and their homepage tagline went from “Kiva lets you lend to a specific entrepreneur, empowering them to lift themselves out of poverty.” to the more generalized “Kiva connects people through lending to alleviate poverty.”

The other common variable that is somewhat hidden away to new visitors is that while you loan money at 0%, the actual MFI will likely go on to loan money to the entrepreneur at around 30% APR. The difference pays the operational expenses of the MFI and may partially subsidize defaults in order to maintain the advertised tiny 0-2% default rates.

None of this means Kiva or microcredit is bad. Sure, it’d be nice if I could lend at 0% instantly to a borrower in Cambodia who could pay 0% interest too, but right now that’s not possible. I still plan on lending at both Kiva, but will no longer get the “warm fuzzy connection” feeling from Kiva and may direct more funds towards Microplace or Grameen Foundation.

Since P2P loan interest is taxed at ordinary income rates like interest from savings accounts, the ability to place them in a tax-deferred account is attractive. But since person-to-person lending is such a new asset class, I would hesitate to make it larger than say 5% of my portfolio, which would require a total portfolio size of $300,000. So, I’m out.

It is interesting that the custodian EntrustCAMA allows a lot of options in their Self-Directed IRAs like holding physical precious metals, investing in private small businesses, and investing directly in real estate. I’m not sure if you can only hold LC notes in this free IRA.

Human Capital
There are some differing definitions, but below is a brief explanation (taken from the magazine article above) of what is meant by human capital here:

Human capital is a measure of the present value of your client’s future wages, income and salary (net of any future income taxes and expenses). For example, if she is a doctor, lawyer, engineer or even a professor, she has probably invested an enormous amount of time, effort and money to finance her education. That investment will hopefully pay off over many future years of productive labour income in the form of job dividends over the next 10, 20 or even 30 years. Sure, clients can’t really touch, feel or see human capital, but like an oil reserve deep under the sands of Alberta, it will eventually be extracted and so it’s definitely worth something now.

Milevsky likes to talk about people as businesses and thus includes human capital on the balance sheet of “Me, Inc.”:

When you’re young, your human capital may very well dwarf your 401k balance. With this in mind, it may make you feel better about any short-term losses.

Your human capital can be viewed as a hedge against the losses in your financial capital. So, as a 50-, 40-, or especially 30-year old, you should be willing to take more chances with your total portfolio, perhaps even borrow to invest or leverage into the stock market, because you have the ability to mine more human capital if needed.

Am I a Stock or a Bond?
One characteristic of your human capital to think about is if it tends to act like a stock or a bond. As a tenured university professor, Milevsky offers himself up as a good example of a bond that offers a reliable and steady coupon (paycheck). However, an small business owner, investment banker, or even a car salesman would have an income that is much more correlated with current economic conditions - much like a stock would.

A common piece of advice that relates to this is when people are told not to hold too much of their employer’s company’s stock (often in 401k plans). Since your salary is already tied to that company, it would be wise to add some diversification so that all your eggs aren’t in one basket.

Along the same diversification argument, if you are a “bond” then you may be able to take more equity risk in your retirement portfolio. On the other hand, if you are a “stock” then you may want to reduce your exposure to stock market swings. “Your invested assets should zig when your salary zags… tilt your financial portfolio away from your human capital.”

Thoughts
Unfortunately, rarely are things so simple. Human capital is at best a guess of the future, and you could be really far off. And just because your income isn’t tied to the stock market, doesn’t necessarily mean you can stomach the swings of a highly risky portfolio. If you’re the type to panic and sell at the bottom, perhaps increasing stocks would only hurt your long-term investment returns.

I like to imagine a good financial couple as one that pairs up a stock and bond. Perhaps one person holds a steady government job with a pension and healthcare benefits into retirement, while the other is an entrepreneur that takes some risks and tries to strike it big.

Also, what if I don’t want take advantage of all my human capital? Sure I could work for another 35 years and consider a big chunk of human capital in my net worth, but I’d really rather not.

What do you think of this concept?

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