The College Investor

Investing in Consumer Debt for Retirement

Robert — Wed, 22 Feb 2012 08:15:07 +0000

Saving for retirement is key if you want to ensure a certain standard of living once you leave the working world for good. That means saving and investing your money wisely while you still have time to make a difference.

While there are many different places to invest retirement savings, many people turn to the stock market for the best return on their money. That’s not the only way to get a good return. In fact, diversifying your retirement investment is the best way to maximize your profit and lower the risk. Investing in consumer debt is one way to achieve this.

How To Invest in Consumer Debt

One way to invest in consumer debt is to make loans to individuals, perhaps family and friends, and then collect interest on their payments. However, there are downsides to this method. Not only do you risk not getting your money back, but you also risk ruining a personal relationship.

You can invest in consumer debt and keep your friends by investing via a peer-to-peer or P2P network. There are currently two big players in this arena: Prosper.com and LendingClub.com. P2P networks act as middlemen between individuals looking for loans and individuals who have the money to fund them. Borrowers often go to a P2P network to avoid big banks. The network vets the borrowers through a qualification process and collects a portion of the interest paid on loans.

How It Works

Both the major P2P networks operate similarly. You start by choosing an amount to invest, or loan. You can either loan a lump sum to one person, for example, if wanted to lend to someone you know, but wanted to legitimize the transaction. Or you can spread your investment among several different loans. The network can also automatically invest for you if you choose the amount you want to invest in each loan and the credit risk you’re willing to accept.

You make money on the loan by receiving interest payments. The amount of interest you receive is based on the borrower’s credit risk as determined by the P2P network. Each borrower is given a letter rating that indicates their default risk. Lower letters, e.g. A, typically indicates a lower risk while bigger letters, like F, show a higher risk.

The riskier the borrower, the higher the interest rate and the more interest you receive. However, those higher interest rate loans also have a higher risk of default. A borrower defaulting on their loan is similar to a stock that plummets and you lose what you had invested in that loan. You can lessen the impact of default and maximize your return by spreading your investment among high and low risk loans. Annual returns of 10% are widely reported.

Investing in debt via peer-to-peer lending is a relatively new concept for many people. As with all other investments, you should thoroughly research the investment before you put money in. And, don’t put all your money in the investment upfront. Start with a small amount so you can see how it works and figure out the loan amount and rating that works best for you. Then, once you’re comfortable, you can increase your investment amount to increase you earnings!

This is a guest post written by Eliza Collins, a professional writer specialized in the personal finance space. Eliza’s experience includes working for financial institutions, private debt relief companies as well as years of balancing the family budget. You can read more of her articles at the debt settlement blog.

Investing in Consumer Debt for Retirement is a post from: The College Investor. Please check out the site at http://thecollegeinvestor.com or follow him on Twitter @CollegeInvestin. Thanks!

Why Term Life Insurance is Best

Robert — Mon, 20 Feb 2012 08:15:56 +0000

If you are considering getting life insurance, make sure that you are looking at term life insurance, and not whole or any other type of policy. There are a lot of insurance options out there, and you usually have to go through an insurance broker who has a financial incentive to steer you into something that costs more than it should. You could very well end up with something more expensive than you really need.

Term vs. Whole Life Insurance

Term life insurance is just like it sounds: it is life insurance for a set term. A term can range anywhere from 1 year up to 30 years, or sometimes even longer. On the death of the insured, as long as it falls within the term, it pays out the amount of the policy to the beneficiary.

Whole life insurance, however, takes everything you get with a term policy and attempts to add an investment component. Some of these investment components are simple money market funds that accrue interest, but others invest in bonds or seek to mimic indexes like the S&P 500. The policy builds a cash value in this investment component which you can borrow against or cash out after a certain time. The most common types of whole life policies are traditional whole life, universal whole life, and variable whole life.

Whole life insurance is more expensive because you’re not only paying for insurance, but you’re also paying for the investment portion.

The Life Insurance Math

Let’s look at a 25 year old male, excellent health, and non-smoker. The policy is for $1,000,000 for a 30 year term.

For a term policy, you would pay about $80 per month, or about $960 per year.

For a traditional whole life policy, while rates and accounts vary greatly, you can see a premium payment of around $250 per month, or $3,000 per year. Remember, this is much more expensive than a traditional term life policy.

Let’s just look at the difference between these two policies. The term policy has no cash value, but you get to keep the difference in the premium you would have shelled out for the whole life policy ($2,040 annually).

After 10 years, the cash value of the whole life policy would be roughly $28,000. This money is also after-tax, since it is an insurance investment.

After 10 years, if you just invested the difference between the policies, you’d have a before-tax investment value of $36,321, assuming a 8% rate of return. Even if you include taxes at the 28% rate, you would still see an after tax return of $31,691. This is over $3,000 more than the cash value of the whole life policy.

What You Need To Know

It is also essential that you keep this is mind: term life is simple – a straight term, nothing fancy. But whole life is a complex instrument that is designed to return more than a term life policy to the insurance company.

Since it is complex, you also have to speak to an insurance representative to even get a quote, and policies vary widely from insurer to insurer. The most easily compared metric on whole life policies is the internal rate of return (the yield on the policy minus fees). With a little analysis, you can figure out if the policy will provide a decent return, and you may even be able to figure out the minimum cash value at any given time.

For warning, a whole life policy usually doesn’t even yield a worthwhile return unless you hold it for over 20 years. Then it starts to be a little better, but still not usually on par with outside investments. Second, whole life policies usually have surrender charges, so if you accidentally bought one and now want to switch to a term, make sure you read the fine print. You could see large fees required to get out of your whole life policy.

Finally, since 30 years is a long time, you want to make sure that the insurance company you are insured with will be around. Insurance companies are rated by two main companies – S&P and AM Best – who look at the company’s ability to pay claims. Most financially sound insurers are rated AAA, so make sure that you go with the best.

Readers, what are your thoughts on the term vs. whole life insurance debate?

Why Term Life Insurance is Best is a post from: The College Investor. Please check out the site at http://thecollegeinvestor.com or follow him on Twitter @CollegeInvestin. Thanks!

How To Pay For College Without Student Loans or Debt

Robert — Fri, 17 Feb 2012 08:13:49 +0000

It may seem daunting to be able to pay for school without getting a student loan or going into debt, but it is possible. In fact, many people are able to do it. You just have to be smart about it – which is going to be a great skill beyond just the college years!

Save Money

This may seem trite, but it is true – you can save money to be able to pay for school. You can save money from gifts from friends and family (such as graduation gifts, birthday gifts, and more). You can save money from working a summer job or another job while you were in high school. Whatever you choose, there are a lot of ways to save.

If you haven’t saved enough to start, maybe you consider going to a junior college for your undergraduate studies. This can result in substantial savings, and allow you to save up even more since you can work as well.

Look For Free Money

If you need a little something extra to cover the difference between your savings and the cost of tuition, you could look for free money through grants and scholarships. There are millions of different grants and scholarships available, you just need to search.

Just about every school or university has a list of available programs, and even the government puts a list of grants available on Grants.gov.

Also, just about every charitable organization and service group offer some type of scholarship. While you may not be eligible for all of them, there are so many that you can usually find something to fit your needs and criteria.

Furthermore, groups of individuals just get together to help with the cost of school. For example, the Yakezie Network has a writing contest which helps a young student with the cost of education.

If you just look around, you can find free money!

Check With Your Employer

Finally, if you are working and considering going back to school – whether for your first college degree or graduate school, many employers are willing to help out, if not cover the full cost.

You should check with your HR Department and see if tuition reimbursement is offered, or any other type of education assistance programs. Some employers will even send their employees to get their full MBA at no cost to the employee.

No matter what you are looking to do, there are options to afford school without going into debt. You just need to look around and put some effort in. Every bit of effort you put to staying debt free in school with pay huge dividends after graduation!

Readers, what are your thoughts on getting through school debt free? Is it doable?

How To Pay For College Without Student Loans or Debt is a post from: The College Investor. Please check out the site at http://thecollegeinvestor.com or follow him on Twitter @CollegeInvestin. Thanks!

Spring Break Vacations with HostelBookers.com

Robert — Fri, 17 Feb 2012 08:07:52 +0000

Where to go for Spring Break? Miami, Daytona, Cancun, PCB or Fort Lauderdale? How much should I spend for 2 weeks of partying? These are the important questions in life for any student right now with the biggest party season just around the corner. Wherever you decide to go the beer needs to be cheap, the sun needs to be shining and the cocktails lethal! That’s why HostelBookers.com, who offer cheap student accommodation like LA hostels and Cancan hotels within staggering stance from the beach, have created these great playing cards below! Pit the cities against each other to find out which has the cheapest pizza or the longest stretch of beach miles and other important factors!

Spring Break Vacations with HostelBookers.com is a post from: The College Investor. Please check out the site at http://thecollegeinvestor.com or follow him on Twitter @CollegeInvestin. Thanks!

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2 Months Until Taxes Are Due!

Robert — Wed, 15 Feb 2012 08:30:00 +0000

As of today, there are about 2 months left until your taxes are due. I say “about” because traditionally your taxes are due by April 15, but this year, because that date falls on a Sunday and that Monday is a holiday, your taxes are actually due on April 17, 2012. That can be a helpful two days, but really, why not get started now?

Getting Started

By now, you should have received most of your tax related documents. In fact, today is the deadline for financial institutions to have mailed out any 1099-Bs (for transactions relating to the sale of stocks, bonds, or mutual funds) and 1099-Ss (for real estate transactions).

By now, you should have already received your W-2 and 1099-INTs (for dividends and interest), which had to have been mailed out by January 31.

Things to Know

Be aware, however, that if you have any mortgage securities, or own a REIT, you could get an amended 1099 which you would receive as late as March or April. However, you can still file now, especially if you are slated to get a refund. If you do get an amended form, you could simply file an amended return and pay any difference owed.

Many times, the differences are so small that it makes a negligible impact on your tax return.

I’m also a big believer that if you get a return, file as early as possible to get your money! There is no reason for the government to keep your money any longer. And if you owe, you can setup direct debit to occur on April 17, 2012, so you still won’t have to pay until the very end, even if you file early.

TurboTax Giveaway

Also, if you haven’t entered yet, I’m still giving away a copy of TurboTax 2011. Check out my TurboTax 2012 Giveaway and Review, and enter to win a free copy of TurboTax Premier! Even though the cost of tax software is tax deductible, why pay for it to start with when you can win it!

Readers, do you have any other tips for getting ready to file your taxes?

2 Months Until Taxes Are Due! is a post from: The College Investor. Please check out the site at http://thecollegeinvestor.com or follow him on Twitter @CollegeInvestin. Thanks!