I’ve managed to get writer’s block while trying to finish my last 2 posts in my core principle series, so I thought I’d take a minute to provide an update on my Lending Club investments.

I’ve been investing in Lending Club for a little over 6 months, so it’s probably a good time for an update anyways.  I originally wrote about my strategy (which was using a filter on lendstats.com to find the most optimal notes to invest in) and I targeted a 14%-15% overall return on investment.  So far, things are looking good.  If you haven’t read the lending club investment strategy post, I recommend you go back and read that before you read this update.

The Funding Process

In order to increase my overall ROI with Lending Club, I set up a pretty strict filter on lendstats.com.  I only invest in high return loans, and filter out high risk characteristics such as loans for education or loans to people that have not held long term employment.  Historically, the data has shown that these loans are more likely to default.  Because my filter was so strict, I’ve found it a slow process to get $10,000 invested in active loans while diversifying at $25/loan.  About 2 months ago, I transitioned from $25/note to $50/note so I could get the rest of my money actively invested.

Currently, I have almost all $10,000 invested in active loans.  In order to accomplish this I spent about 5 minutes per week to look for loans and click a bunch of buttons to confirm the loans.  Now that most of my money is actively loaned out, I expect that time to drop to about 5 minutes per month to reinvest my profits.

In order to purchase new loans, all I need to do is click on this link.  The scroll down to the bottom and click on the links under “Active Listings.”

The Results

Up until last month, I had an annualized return of 16% and no loan defaults.  This past month, I saw two notes default (I knew that was coming, since Lending Club shows that the borrower was over 60 days late on payment).  What’s interesting is that both of these notes were loans I made before I created the loan filter I described above.  What’s even more interesting is that these non-filtered loans were categorized as “low risk” by Lending Club.  In a way, these defaults were a positive sign that my filter was working.

Here are the numbers:

I’ve made a total of 283 loans with an account that I initially opened with $10,000.  Of the 283 notes I’ve purchased, 97 were considered “low risk” and were not part of my filter.  Of those 97 loans, 2 have defaulted and 4 are late and at risk of default.  Overall, not good.  On the other hand, 186 loans were chosen using my loan filter and classified as “high risk” (averaging over a 19% return).  Of those 186 loans, I have no defaults and no late payments in the 6 months since I began the experiment.

While not conclusive, these are pretty exciting numbers!  There is a statisticaly significant difference between my filtered loans and the unfiltered loans.  I’m now considering raising my investment from $10K to $20K, which could quickly grow to about $250/month of passive income.

Feel free to ask any specific questions about my Lending Club experience in the comments below.

Here is a snapshot of my investments:

A few items for full disclosure:

1. If you sign up for LendingClub.com from this site, I get $25.  It’s not the purpose for writing the update (I would write the same article regardless of this income), but I want to be open about it.  So far I’ve made $250 in commissions over the past few months.  If you’re one of the people that signed up after reading my results, I’d love to hear about your results!

2. While my personal results are currently good, there is still significant risk in this investment – as with any investment.  Keep in mind that my $10K investment is still only 1% of my overall investment portfolio, so this is still a relatively small personal investment.  I may go up to 2%, but probably not more.

I’ve been getting an increase in emails lately that are asking a common question, so I thought I’d take a short break from the Core Principles series to address it. The question that has been asked many times can be summarized like this:

“Hey, Brave. I’m totally on board with everything you’re saying and want a similar lifestyle for myself. The problem is, my husband/wife/boyfriend/girlfriend just isn’t on board. Did you have any problems like this?”

The short answer is “Yes!”

My wife has always had major reservations with my financial strategy. In fact, despite the fact that we started dating when we were 16 and married at 25, we’re only now becoming aligned in our financial decisions at the age of 33. I always wanted to save and invest, she always wanted to spend. It makes sense, though, because she grew up with the typical middle-class baby boomer parents that believed “the good life” was achieved by buying it. Her dad’s motto on spending all of his money and having no savings is “you can’t take it with you,” as if the fact that your money is useless in the afterlife is an excuse to spend more than you make today. They are now 65 and have no savings and a small pension.

So, as with most couples with different financial perspectives, we argued a lot. Luckily I knew I was right and she was wrong, so I stayed persistent. (Just kidding, honey) OK, I’ll be honest – we were both wrong. The reason we argued about money wasn’t because we disagreed, it was because we were trying to have a rational discussion based on irrational opinions. She was equating “spending” with “happiness” because that’s what her parents and friends did, and because that’s what the people on TV told her to do.  I, on the other hand, was just a money-hoarding cheapskate with no real purpose or strategy.  We were both wrong because neither of us had deliberately come up with a strategy.

Luckily, I finally saw the error of my ways.  And now I’ve put together a simple guide on getting your spouse to embrace the brave new life.

Step 1 – Create a personal strategy for yourself

This is the most important step.  You should have your own set of core principles.  You can use mine, or you can create your own.  But if you want to convince anyone to change their ways, you first need a solid and complete philosophy of your own.  Frugality for the sake of frugality is a life of deprivation, and you’re not going to get anyone on board by advertising deprivation.

Now start living those principles.  Don’t talk about it, don’t plead your case, don’t ask anyone to change, just live by your philosophy.  ”Be the change you want to see in the world,” as Gandhi would say.  Show that you can spend less and be happy.  Heck, show how you can be even happier with less stuff burdening you.

In my particular case, I didn’t quite follow this advice (I didn’t know any better).  I started by encouraging my wife to work with me to start getting rid of excessive “stuff” in our house.  I pointed out that we were constantly picking things up, constantly re-arranging our stuff to make room on a shelf for more stuff.  I was repeatedly getting upset because I couldn’t find my keys that were, of course, under a bunch of stuff on the table. It was time-consuming and mentally unhealthy for me to always be so frustrated.  So we started out small, just taking boxes of stuff to Goodwill. Once we did this, I found that my wife actually liked it. She practically got addicted to it. And so we expanded the effort, we talked about having less utensils and plates in the kitchen, less toys on the shelves, less knick-knacks on the mantle, less pictures on the wall, etc. It became easier to keep the house clean, and this made us both happy. Thus began a foundation for my wife’s frugality because there’s no better way to avoid having excessive stuff than to never buy it in the first place.

Eventually, this led to larger changes.  For example, we talked about how having a smaller house would mean less stuff, and less rooms to keep clean.  This is something that would never have been acceptable to my wife had she not taken the mental baby steps of learning to let go of material things.

It’s also important not to ask too much of your significant other.  For example, I decided to sell my car.  I’m not asking my wife to do the same thing, especially since we have 2 little kids at home.  I choose to cut my own hair, rather than pay someone.  I don’t ask my wife to do the same (OK fine, I’ll admit it, I did offer to cut her hair for her to save a few bucks).

Once you begun making the changes for yourself, then you can begin casually mentioning the benefits you’re receiving.  ”Wow, it sure is nice to be able to eat desert guilt free since I bike 10 miles to work every day,” or “Check this out honey, just got another dividend check.  $150 bucks for doing nothing, can you believe it?”

Step 2 – Find common grounds

Once you have a solid philosophy, you can begin searching for common ground between you and your significant other.  Obviously you must share some common desires, goals, or priorities or you likely wouldn’t be together.  This is where it becomes so important to have your own set of core principles.

My wife an I are very different in many ways.  She likes to spend money, I like to save it.  I make decisions based on environmental sustainability, she doesn’t.  I would prefer to bike to the store, she’d rather take a car.

But we also share some common priorities.  We love each other and our kids.  We value our kids’ educations, and are very interested in learning about alternative forms of education besides traditional classroom settings. We are, for the most part, both introverted and would prefer to spend time at home watching a movie than going out to a party.  We both see the value of a simple life.  And finally, although she won’t admit it, we both enjoy doing things a little different than everyone else.

So these common grounds were the things I focused on when first getting my wife to embrace the brave new life.  For example, she would have never moved into a smaller house if I had simply proposed it as a way to save money.  However, a smaller house saves time cleaning, and I knew she’d appreciate that.  A smaller house meant the family would be closer together, and I knew she’d appreciate that too.  So I focused on these things when we first discussed it.  Once we got serious about it, and we recognized that an early retirement was possible (and all the side benefits that came with an early retirement), I could then bring up the huge financial benefits of a smaller house.

Step 3 – Show the benefits of investing

When you focus on not spending, you’re focusing on deprivation.  You’re fighting the natural human desire to have things now, rather than later.  Instead, focus on the benefits of having investments.  And don’t talk about it, show it!  Here’s how I did it:

2 years ago, my wife got a $25K inheritance. We share our finances, but I told her that she should keep this money to herself. I suggested that she open a separate bank account, I’ll have no access to see how she’s spending it, so for the first time since our marriage she could spend as frivolously as she desired. At first, she was going to upgrade her car, then just spend the remainder on various little things like clothes, expensive salon haircuts, and occasional massages. While reminding her that it was er decision, I suggested that she might want to consider investing in dividend paying funds. I told her that I’d be happy to help her put together a little portfolio consisting of 50% reliable dividend stocks and 50% Treasury Bonds. It would yield her about $85/month for eternity, while slowly growing in capital and dividend payouts. She had never considered anything like this, but she liked it and we set it up. Then I realized something: It wasn’t until this time that she truly understood the amazing power of making money work for her. It was at this time I realized what a bad husband and terrible person I was. I realized that I had spent a decade asking my wife to make deprive herself of things in order to save money, but I never taught her about the benefits.

But all is good now.  With her passive income, she can go get a massage, get $50 haircuts, or buy other luxuries – and not ever deplete into her capital.  Actually, her capital gains are up quite nicely.

If I could do it again, I would have given her $25K the day we married and taught her the wonders of investing and getting passive income.  In fact, I will probably do something like this when my kids get a little older, so they can learn this lesson while young.

Step 4 – Discuss the benefits of financial independence

The point of saving money is to increase financial security and, eventually, achieve financial independence.  What you do with your independence is up to you.  But no one can deny that there are huge benefits!

For me, it’s retirement from the corporate life.  I’ll free up time to relax at home, venture out into various small entrepreneurial gigs, ride my bike, read, write, and stare into space.  But none of those things do any good for my wife, other than perhaps give her a happier husband.  So instead, I talked to her about how she and our kids will benefit.

My kids will have their daddy around to play with.  Daddy is a little more silly than mommy, so with him they get dance parties, wrestling time, and random spontaneous games like “bounce the bouncy ball off the kitchen wall into the basket.”  Since our personalities are so different, we talked about benefits of having both of us in their daily lives.  We both want to be proactive in our kids’ educations, and the more I’m around the more we can each spend with them exploring and learning.

But mostly, I know my wife’s real motive.  She knows that the more I’m home during the day, the more she gets to take naps!  :)  So I talked about that to.

That’s it

With these 4 steps, you can show your significant other a vision of a better life that they may not have seen before.  Don’t assume they already see it, you need to show it to them.

That’s really all there is to it.  First you come up with a total philosophy for yourself and start living it.  Then you start showing (not talking about) how a simpler life is a better life, how investing money can create passive income, and how that passive income can ultimately result in financial independence.  Finally, you show them what life will be like when financial independence is reached.  Everyone’s goals and strategies will be different, of course, but I think this outline should work for most couples.

And if all else fails, point your significant other to sites like mine, MMM, ERE, or suggest they read Your Money Or Your Life.  For some reason, the words of a random anonymous guy like me writing on a blog can sometimes be more persuasive than the words from your own spouse.  (Seriously, I have personal experience from this)

I’m sure some of you will have a personal situation that I haven’t solved in this post. That’s OK, put it in the comments below. I’m sure our collective brain can come up with some solutions.

And if you have other suggestions that worked for you, we would all benefit from you sharing them here.

Last week a blogger colleague of mine and a guy I greatly respect, Mr. Money Mustache,  asked me whether I would like to guest post one of my “brave new life” core principle series articles on his site while he’s out of town snowboarding.  While I find myself intimidated by his large audience, I decided to do it anyways.

So…  The next installment of the series is located  on his site here.  Hopefully you’ll appreciate the post, and if you’re new to MMM I highly recommend you check out the rest of his site.

Core Principle #5: Understand The Marginal Utility of Money

Here’s an excerpt from an article I read recently:

I am a hospice chaplain. I visit people who are dying – in their homes, in hospitals, in nursing homes. And if you were to ask me the same question: What do people who are sick and dying talk about with the chaplain? I, without hesitation or uncertainty, would give you the same answer: Mostly, they talk about their families: about their mothers and fathers, their sons and daughters.

They talk about the love they felt, and the love they gave. Often they talk about love they did not receive, or the love they did not know how to offer, the love they withheld, or maybe never felt for the ones they should have loved unconditionally.

They talk about how they learned what love is, and what it is not. And sometimes, when they are actively dying, fluid gurgling in their throats, they reach their hands out to things I cannot see and they call out to their parents: Mama, Daddy, Mother.

…

We don’t live our lives in our heads, in theology and theories. We live our lives in our families: the families we are born into, the families we create, the families we make through the people we choose as friends.

This is where we create our lives, this is where we find meaning, this is where our purpose becomes clear.

On your deathbed, you won’t be thinking about work or money or some social cause.  You’ll be thinking about your family and friends.  I don’t know about you, but I don’t want to spend those last hours in regret.

The brave new life is all about achieving a peaceful and joyful state of mind, and having good relationships is a requirement to achieve this.  Because of this, it’s important to not only enjoy your relationships, but also to actively nurture them.  Just as a garden won’t flourish without proper nourishment, neither will your relationships.

There are many ways to nurture a relationship, but I think there are a few fundamental ways that will work regardless of the type of relationship.  Whether it’s your parents, spouse, kids, boss, friend or neighbor – these 8 methods will always make your relationship stronger:

1. Use open and honest communication
2. Be flexible and willing to compromise
3. Be reliable
4. Offer emotional support
5. Make situations more fun
6. Be quick to offer forgiveness and to ask for forgiveness
7. Admit your mistakes
8. Respect the person

Just as frugality, self-sufficiency, and the other core principles each require deliberate effort, so does nurturing your relationships.  It’s important to look at each relationship that you value, and reflect on whether you are properly nurturing it. Be honest with yourself about it.

And the benefits of having good relationships aren’t limited to just the satisfaction of having good friends and family.  Much like the other core principles, nourishing and having good relationships intertwines with the other principles of the brave new life.  Having good friends and family that you can rely on (and who can rely on you) is a widening of your self-sufficient community.  Need a baby-sitter?  There’s no need to pay, you can just have your neighbor watch your kids tonight, and you can do the same for her tomorrow night.  Your car AC isn’t working? There’s no reason to pay $100 for an anonymous mechanic to add refrigerant, your buddy knows how to do it and he’ll do it for a 6-pack of beer.  I’d surely prefer sharing beers in the driveway with a buddy over paying $100 to sit in the mechanics lobby.  This is communal self-sufficiency at it’s best!

Conveniently, as you become more self-sufficient you’ll also be able to help your friends with things they are not yet self-sufficient at.  This, of course, will further strengthen that relationship.  Thus, a positive feedback loop is built.

The Visualization of the Brave New Life

As we continue with this series, we’ll see that positive and reliable relationships will further support future core principles.  For now, let’s take a look at how the brave new life is coming together.

(click to enlarge)

There is a deep and important correlation between frugality, self-sufficiency, and sustainability.  Recognizing this relationship is critical to the brave new life philosophy. There are hundreds of books and blogs on each, but rarely do you see the three tied together.  The inter-relation between them is why I chose to make them a single core principle.

It’s very important to tie them together.  Bind them in unison, let one support the other and become a philosophy.  Some life decisions are hard when you only consider one, but become very easy and obvious when all 3 support the same decision.  And it’s quite often that all 3 do support a single decision.

Part 1 – Frugality

Frugality, for most people, is a means to an end.  For some (those not seeking a brave new life) it’s a way to save money on stuff so you can just spend it somewhere else.

Hey, if I cut coupons and stop drinking that daily $4 vanilla mocha latte with soy milk I can save up for a Carribean cruise (because I deserve it!).

This is not the frugality I’m talking about.

For the BNL type, frugality is a means to an end to achieve financial freedom.  Financial freedom buys you freedom from doing things you would rather not, like sitting in a cubicle on a beautiful sunny day.  A financially free person can make personal decisions that make them happy and satisfied.

Part 2 –  Self Sufficiency

Self-sufficiency is the state of not requiring outside help in order to survive.  But by ”self-sufficiency,” I don’t mean that you need to move out to Walden pond, chop wood, and eat only what you hunt or gather.  (Although this does sound like a nice week-long getaway).  Instead, the self-sufficiency I’m proposing is a group state that consists of your family, friends, and local community.

There are two ways to increase your self-sufficiciency:

1. Increase knowledge across each area of your life

Increasing knowledge can be accomplished by using books, the internet, friends’ knowledge, and experimentation.  Since making the decision to become more self-sufficient, I’ve used all 4 of these in the past year.  I read books about private money lending, and attend a free seminars in order to learn to make money independent of a job.  I had a neighbor teach me how to tune-up my bike, which I had never done before.  I used an website to learn how to diagnose my broken furnace, and a youtube video to figure out how to replace my busted furnace ignitor.  All of these things have led to an increased knowledge base and further self-sufficiency.  This increased knowledge is addictive, it becomes fun to do things yourself.  In each of the examples I just gave, I also saved quite a bit of money – connecting us back to frugality.

Now let’s explore this form of self-sufficiency with a hypothetical example.  It’s below freezing outside, snowing, and your furnace breaks.  (This isn’t that hypothetical, it happened to me 2 months ago).  You could call an expert to come in, but the fees will be $200, they can’t come until Monday (it’s Saturday), and the temperature in your house is dropping 3 degrees per hour.  So you have to book a hotel for 2 days, pack up the kids, and leave. Total cost is $400, two sleepless nights in a cramped hotel room with 2 kids, and no knowledge gained.

Alternatively, you could get on the internet and start diagnosing the problem. You figure out that your furnace doesn’t have a pilot light, instead it uses a silicon carbide ignitor – and you see that it’s not igniting.  According to the vast knowledge of the internet, this means it’s either not getting the voltage input it needs, or it’s gone bad.  So you get out your voltmeter and measure the voltage, which looks fine.  You get back on the internet, learn that your particular ignitor costs just $25 at a local HVAC store, and can be replaced in minutes.  Total cost: $25, 2 hours of labor/research, 2 good nights of sleep, new knowledge about how your furnace works, and a little bit of self-sufficiency pride.

2. Decrease complexity and quantity of what you need and want

The second method to increase self-sufficiency is to decrease the complexity and quantity of what you need and own.  For example, why have a toaster that will eventually break when instead you could use the broiler in your oven?  The toaster is just one more thing that can break.  Why have a complex and loud toy for your kids when they are equally as happy with play dough, crayons, and some paper?  Why have 2 cars when you can have 1 car and a bicycle?  Once again, in each of the examples above you not only increase self-sufficiency, but you also increase frugality.

Let’s again explore a hypothetical example.  Let’s say you own a Ferrari and your Ferrari breaks down.  This is a complex vehicle with a lot of foreign parts that have to be ordered by a high-charging specialist.  This is not self-sufficient.

Now let’s say you own a Ford Focus and your Focus brakes down.  You may not know how to fix it, but you probably have a neighbor or buddy that can help get you started.  That would be self-sufficient.  Or perhaps you don’t have anyone that knows how, but there are 10 mechanics within 5 miles that can easily service the car. This is at least getting closer to self-sufficiency, and you did it by having a less complex product to achieve your transportation needs.

Now let’s say that you decide to move to a place closer to work, and buy a nice bike.  But your bike brakes down, the chain pops. Even if you’ve never repaired or replaced a chain before, you are one YouTube video, 20 minutes of labor, and a $7 tool away from fixing it.  This is self-sufficiency.

Once you start embracing self-sufficiency, you realize that simple, mechanical tools are preferred over complex ones.  A bike is preferred over a car.  A manual powered reel lawnmower is preferred over a self-propelled gas powered mower (which is still preferred over a riding tractor). A toaster is just one more thing that can break.

A final advantage of self-sufficiency is that it saves money, reducing your time to financial freedom and retirement, which then gives your even more time to be self-sufficient.  It’s a wonderful positive feedback loop.

Part 3 – Sustainability

The Iroquois tribe had what they called the Great Law of the Iroquois, and it’s now referred to as Seven Generation Sustainability.  Basically, it goes like this: “Do what you believe will benefit your children seven generations down the road.”  This is how I define sustainability.

Example: Planting a tree is good, cutting one down to make a parking lot is bad. Patching a hole in your bike tire is good, buying a new one is bad.

Taking this philosophy is a huge burden, but an important one.  The unsustainable lifestyles common in the industrialized world means that each unsustainable act you do, you are taking away from your children and grandchildren.  When we run out of oil, when we pollute the water, when we use finite resources for our own pleasure, we are literally taking away from them.

When we talk about frugality, we are referring to the reduction of spending.  Sometimes this gets hard, even for me.  Sometimes I want to drive to the store when I know I could walk or bike.  Sometimes I want to buy a new laptop, when my current one works OK.  Sometimes it’s simply not enough to be frugal to stay on track for an early retirement – and in those cases you need a commitment to sustainability to help you through.

When I think about driving to the store, I think about the Great Law of the Iroquois.  And I think, will burning up more oil (something that will most likely be gone in 7 generations) be good or bad for my children, and their children, and so on?  Or would it be better for me to save that limited energy for them, while also improving my health?

Will it be better for my childrens’ childrens’ children if I patch this bicycle tube, or should I pull more resources out of the ground to manufacture a new one?

It’s amazing how in-line frugality, self-sufficiency and sustainability are once you start putting these things together.  This tight connection is why you see a few common themes on books and websites like mine (ERE, MMM, etc).

• Biking instead of driving
• Learning to cook healthy and simple foods from scratch (beans, rice, etc), rather than processed foods
• Fixing things instead of buying new things

All three of these examples are acts of frugality, self-sufficiency, and sustainability.  (Note: they all happen to be healthier too, which is a common by-product).

Now Your Slate Is Filling Out

You’ll now notice that the pieces are starting to assemble, and that the support each other.  So far, we have three sources of happiness: An active/healthy mind, financial freedom, and a healthy conscience.  Financial freedom is directly and indirectly supported by 4 contributing principles: the rejection of lifestyle inflation, frugality, self-sufficiency, and a sustainable lifestyle.

Part 1 – Rejecting Lifestyle Inflation

College life is a simple life.  Living in a single small room with a roommate. Biking to class.  Getting books from the library.  Cutting costs wherever you can to save up for beer money (which never amounted to much since there were no good paying jobs available).  Sounds rough, right?

Except that it wasn’t rough.  It was a great time.  Every day was a day spent with friends.  The simple things like a free concert, a sunny afternoon playing ultimate Frisbee, and a cheap keg of Bud Light were all you needed for a perfect day.

Then you graduated and decided you needed new clothes, a nice car, and a loan for a house because that’s what people do.  You bought an iPad to go with your Macbook and iPhone because mobility is key.  You got a gym membership to stay healthy, and you always schedule some nights out at a good restaurants to stay social.

This is called lifestyle inflation.  It starts when you graduate and get your first good job, and it continues when you get your first raise.  Eventually you get promoted so you decide you should move out to a nicer neighborhood farther from work, but that’s OK because now you have a pool and 3189 square feet of space for all your stuff.

But now you don’t have enough stuff, so you have to go to pottery barn and get more stuff.

You get where I’m going with this?

But the thing is, this is all avoidable.  These are all choices you get to make for yourself.  Just remember principle #1: question everything.

If you’ve already succumbed to lifestyle inflation: that’s OK.  I did too.  It’s not a life sentence to working a job you hate for things you don’t want.  The entire description above was me, literally (including the 3189 sq ft house with pool in a fancy neighborhood).  But then I found a way out.  I created my own lifestyle deflation.  I downsized my house, moved close to work, sold my car, got rid of the money-sucking pool, and much more.  And life got better.  Way better.  Now that I’ve seen the inflated life and the simple life, I know that there’s no going back.

Part 2 – Sometimes it’s not easy

This is more of a warning than anything else.  Sometimes rejecting lifestyle inflation is hard.  Sometimes it’s not fun to stand out as the guy who ride’s his bike to work, doesn’t go out to eat for lunch regularly, and lives in a small house near work rather than in the nicer neighborhoods 15 miles north.

And if it were all about frugality and rejecting lifestyle inflation, it would be nearly impossible to do this – and definitely not worth it.

This is when you have to remember that the core principles are ingredients in a recipe for what I like to call the brave new life.  They will complement each other and support each other, and when placed together they will make a wonderful dish.

Rejecting one of the core principles puts the dish at risk.  Taking one principle and saying “this one is too hard,” or “this one’s not for me” is like baking a cake and saying “sugar is bad for me, so I’m not going to use it in my cake.”  That would not be a very good cake!

The Blank Slate

The blank slate is beginning to fill in.  It still has a long way to go over the next 6 core principles, but we will watch the slate be filled in with principles and goals that support each other harmoniously. (click to enlarge)

Part 1 – Accept that you’ve been brainwashed

That’s right!  You’ve been brainwashed.  And it gets worse, you’re still being brainwashed.  Every day, more brainwashing.

And it’s coming from everywhere.  It starts with marketing.  The evil, vicious world of marketing. They brainwashed you into “needing” a GI Joe action set when you were a kid.  They brainwashed you into paying $100,000 for a college degree in sociology where, if you use your degree, will spend decades trying to pay back (and if you don’t use your degree, then what was the point?).  They brainwash you into believing and celebrating (and buying things) for holidays like Valentine’s Day, and into buying an engagement ring worth 2 months salary (well done, De Beers!).

Marketing firms hire psychoanalysts to study human minds and learn to cater to a group’s irrational thought.  In the first half of the 20th century, marketing firms convince men that a personal car was an expression of male sexuality.  Now these companies could sell to the common man and not just the rich..  Later, cigarette companies realized there was an untapped market because in America it was taboo for women to smoke.  So they put together a strategy to convince women that smoking cigarettes was a bold statement for women’s suffrage and equality (they called them “torches of liberty”).  This is brainwashing.  And it works, until you start to question it.

For an eye-opener, check this out.

But it’s not just profit-seeking corporations, it’s also your school teachers.  They brainwashed you into thinking that your grades mattered as much as the content itself,  and that college is a requirement (and sure path) to a happy and successful life.

Your bosses have brainwashed you into working hard for the company, even at the expense of your mental health and family life.  There are real techniques for this.  I took the classes when I temporarily got into management!

The corporate owned media has brainwashed us into believing that there is this real cultural divide between liberals and conservatives.  Then they cater to our emotions and identity by hiring political pundits to yell at each other on TV.  They do this because it’s easier to draw an emotional audience than it is to sell a real discussion on policy.

All of this, of course, is hogwash.

And you could get mad at all of them for brainwashing you – except that you shouldn’t, because they were all brainwashed too.  There’s no one at fault, it’s the nature of civilization.  We’re all just doing what we have done since the day we were born – trying to control things.  What matters is that you recognize it, and reject it.  And this leads to part 2 – Question Everything.

Part 2 – Question Everything

My daughter is about to turn two, and she recently started asking “Why?” Every time she does, my eyes light up with excitement!  I love seeing her starting to question my authority and questioning how things work.

She’ll ask me why she shouldn’t touch my coffee (because it’s hot) and why that’s bad (because it will burn her and hurt) and she’s learning so much, so fast.  In my coffee example, she just learned two important lessons.

Unfortunately, if you’re an adult, you’ve probably already stopped asking these questions.  As a child, your parents might have answered your question of “why?” with “because I said so,” or “I don’t know, that’s just how it works.”  At school, your teachers may have told you to save your questions for the end of the lecture, never to return to the question.  At your job when you ask “why?”, you’re probably told “because that’s how things work around here,” or “that’s just how we’ve always done it, ” or once again, “because I said so.”  So eventually, and slowly, you stopped asking.

Asking “why” is the key to leading a deliberate life, because it answers how or why things are the way they are. Once you know this, you can make your own  educated decision on how you want to proceed.  The courage to keep asking “why?” is critical to a continued education, to being open to change, and to making smart decisions.

The sad truth is that if you don’t get good at questioning everything, you won’t be mentally prepared for an early retirement.  With no ability to continue your education and to explore, you’ll simply grow bored and return to work because it’s better than nothing.  Or you might develop some unhealthy vice, which most likely is even worse.

So question everything and don’t stop there.  Encourage your kids, your family, your friends, your employees and your employers to do the same.  Some people will hate you for it, others will love you. But I assure you that it will make you a happier, wiser, and more interesting person.

Question why you should or shouldn’t do something.  Question why you believe something to be true. Question whether you are spending your time wisely reading this site, or other sites.

An Empty Cup

“My friend, drop all your preconceived and fixed ideas and be neutral. Do you know why this cup is useful? Because it is empty.” – Bruce Lee

Your mind is a cup of water, and it’s filled with preconceived ideas.  Unfortunately, too many of these ideas are not your own.  And you can’t fill the glass with new ideas until you empty it of the old.

But once you accept that you have been brainwashed and conditioned from outside entities, and once you commit to questioning everything – you will have an empty cup, a blank slate.  And then it will be ready to be filled with the things truly important to you.  You’ll then be ready for the remaining 7 principles.

Below is a visualization of the blank slate.  In the next 7 principles we’ll begin filling it out, and updating this visual to show how each principle complements and supports the others.

Over the past 6 months, this blog has kind of moved towards a reputation of early retirement.  And that’s cool, it’s the shiny object that draws people in.

But a brave new life is more than that. It’s a life that values family, friends, and leisure over hard work and money.  It’s a life that values sustainability and self-sufficiency over bigger and better stuff.  And it’s one that values understanding of things, rather than acceptance.  Early retirement is both a step towards this life, as well as a benefit of it.  The ultimate goal, however is not early retirement.  The ultimate goal is a positive, joyful, and tranquil life.

In order to pull all this off, I believe there are 8 core principles that must be understood and embraced.  Some might seem obvious, some might not be.  Some might be easy to accept, while others will not.  But each complements an supports the other into a balance that in my experience is peaceful to the soul.

Over the next 2 weeks, I’ll be publishing these core principles, with a detailed description of each, and how they fit into the brave new life.

• Core Principle #1 – Question Everything
• Core Principle #2 – Reject Lifestyle Inflation
• Core Principle #3 – Frugality, Self-Sufficiency, and Sustainability
• Core Principle #4 – Nurture Your Relationships

“Why?”
- Stella, my daughter

My daughter is about to turn two, and she recently started asking “Why?” Every time she does, my eyes light up in excitement!

You see, “Why?” is a game kids play starting around age two, and they’ll continue to play until their parents, teachers, TV shows, and government convince them to stop.

Here’s an example conversation:

Me: Let’s go outside
Stella: Why?
Me: Because it’s a beautiful day
Stella: Why?
Me: Because it’s 70 degrees outside and the sun is shining
Stella: Why?
Me: Because there are no clouds in the sky
Stella: Why?
Me: Because I love you. Now let’s go!

Side note: I usually end the why conversations with “I love you.” rather than going into the basics of physics or meteorology with my 2 year old.  I can’t wait until the day I can say “I don’t know, let’s go look it up on the computer!”

If you think this is a silly conversation, you couldn’t be more wrong.

Rather than responding to the first “why?” with “because I said so” I’ve taught my daughter several important lessons.  First, that she should spend time outside on beautiful days.  Second, that a warm sunny day is a thing of beauty.  Third, that the sun shines on days without clouds. And finally, that I love her.  These are all good things for her to know.

Saying “Because I said so” is the worst thing you can ever say to a kid.  ”Why?” you ask?  Because eventually this will teach them to stop asking, and that’s the biggest disservice you can do to someone.

Asking “why?” is how kids learn the way things are. It’s how they learn science, art, music, math, culture and everything else. Watching a 2-year old ask this question over and over is proof that humans were born to seek understanding, not to memorize facts and follow the leader.  Discouraging the question leads to a hatred and apathy for education.  It leads to unhappy kids with straight A’s but no real knowledge.

“Why?” is the most important question in existence.  And here’s the good news: it’s not just for kids, it’s for you too!

Asking “why” is the key to leading a deliberate life, because you must first understand why things are the way they are. After this, you can make an educated decision on how you want to proceed.

Here are a few “why’s?” to start with:

1. Why should I go to college?  Is it because most smart people do, or because the thing I want to do the rest of my life requires it?
2. Why should I have 2 cars in my family household, even though I can easily bike to 90% of my destinations?
3. Why should stay at this job that I hate?
4. Why should I buy a larger house?
5. Why should I dress a certain way for my job, when it has no impact the the quality of my work?

Obviously these questions are all biased towards the lifestyle I’ve chosen for myself and choose to promote on this site. But that’s not the point.  You should equally be asking:

As with all investment articles on this site, I’ll just warn that I’m not an investment professional, and this should not be taken as advice.  

In my recent monthly status I mentioned that I’ve begun a new experiment in my ever growing portfolio of alternative investments.  Before I go into the details, let me explain how I got here.

Several months ago, I began a partnership with a local real estate investor who was seeking money to purchase a distressed house.  I invest the money, she does the work, we split the profits.  An distressed house is now a livable one, and a family gets a beautiful new home right next to the elementary school.  Everybody wins.

I like this idea, but there are reasons why I may not want to increase my investments in it.  For example, on this project we estimated that renovation expenses would be $33K.  It was closer to $40K.  We assumed 4-6 months to sell the house around $140K, but we don’t know what will really happen (currently we’re listed at $145K after 2 months).  Also, it’s in my partners best interest to hold out for full price, while I would gladly take a smaller profit since it’s my money that’s tied up (her ROC is infinity, whether it sells today or it sells 5 years from now).  Don’t get me wrong, I’m still happy with our partnership so far, but as I look to scale my investments I may want a better situation.

This desire led me to look at private hard money lending.  Hard money lending is when private investors lend money at high rates to a real estate investor looking to rehab a home.  Rates generally range from 12-15%, with some upfront points paid out (usually 2-3%) and the loans are generally good for 6-12 months.  All these variables change based on region, market, etc…  The loans will usually cover about 70% of the ARV (after repair value), so the home acts as a solid collateral.  If the loan is defaulted, you get the house at roughly a 30% discount.  This all looked good, so I did more research.  I talked to a woman I found on biggerpockets.com who has been doing this for 20 years, and has been very successful.  It was all great except for one thing: doing it right will take a lot of work.  Work that I don’t have time for right now.  I would want to meet with prospective borrowers, view their house and plans, look at comps, get references, meet with a lawyer and draft up contracts, and more.  It all sounded really fun, but also very time consuming.

Finally, this led me to the discovery of private equity companies that do hard money lending on a larger scale.  They usually charge a 2% management fee, but they cover all the work I described above.  They work with borrowers and build long-term relationships, they study the local real estate market, they work with the lawyers and have established contracts.  And above all else, they offer instant diversification that I wouldn’t be able to get as a small-time hard money lender because they pool in millions of dollars across multiple investors like me.

After some online research and asking around with a few local real estate investors, I found a private equity LLC that I decided to invest in.  Here are the business details:

The fund lends at a 14% rate.  They will lend up to 70% of ARV, and they charge 4 points up-front. The term is for a maximum of 9 months, with no early payment penalty.  The fund pays it’s investors 8% preferred dividends, the manager gets paid 2%.  The remaining money after paying all fees (lawyer fees, etc) then get paid out to the investors above and beyond the preferred dividend at 8%.

As an investor in the fund, I have to purchase a minimum of $25,000, and can reinvest in $5,000 increments.  The fund will pay me 8% APR on a monthly basis.  This is a preferred dividend, which means I get paid first, even before the fund manager. Every six months, all outstanding profits beyond the 8% (my payout) and 2% (fund manager’s pay) are given out to the investors (me).  Over the past 5 years that this LLC has existed, the total payout has hovered around 12% APR with very little volatility.  I think most people will agree that 12% with little volatility is a nice return.

As with any investment, there are benefits and risks.  Let’s explore those.

The benefits:

• High Return on Investment
• Unlike REIT’s, the fund value will not move up or down based on the Federal Reserve interest rates.  So volatility is low
• Short term loans are not heavily dependent on the local real estate market
• The loans are backed by a physical house worth more than the loan itself (70% ARV).  Leins are always in first position, so a default means the house belongs to the fund, and in many cases this actually increases profits
• The private equity fund leverages the experience of a RE investor with 20 years of experience in REI, specifically in the local market (Denver metro area)
• The fund diversifies your investment across dozens of outstanding loans, with a smaller minimum investment than you could achieve as a private money lender
• Investment is mostly liquid. If I decide I want out tomorrow, they will give me my money back in full as soon as they have the capital.  In most cases, this is immediate
• Both the investor and borrower are making money on the deal.  The neighborhood looks better, and some family gets a beautiful new home that was previously unlivable, rather than having a cheap new house built deeper into suburbia.  It’s good for my investing soul.

The risks:

• Default by borrowers – The equity fund loans very conservatively at 70% ARV, with a first lien and a deed of trust.  This reduces the likelihood and impact of a default.  However, multiple defaults could result in the fund owning several houses and reducing ROI.  A loss is unlikely.
• Reduced demand for rehab loans – If no one wants to borrow the money, then it’s earning 0% interest.  If this happens, the equity firm will hold a meeting with investors to consider lending in new markets, reducing interest rates, or returning money to investors.
• Too much demand for rehab loans – The private equity company I chose has a very high reputation in the REI market.  If they don’t have enough funds to meet the needs of borrowers, they will lose reputation.  If this happens, the company will open an additional offering and raise additional funds.  This risk, and the one above, require a good balance.
• Mismanagement – If the fund manager just sucks at what he’s doing, then he’ll give out bad loans to bad RE investors, and returns will drop.  Or, if he takes more investment money than he can keep active, then returns drop.  This is why I chose an established fund, and one that came with independent references.
• Taxes – Not really a risk, but taxes are at your marginal tax rate rather than qualified dividend rates or capital gains rates.  This would kill my profit since my income is still high, which is why I invested inside the shelter of my SDIRA

I’ve started out with an initial investment of $40,000.  This means my preferred payment will be paid out monthly at $267/month.  If the fund achieves it’s goal of paying investors 12% APR in total payout, then that will result in $400/month.  I will likely increase my total investment to $60,000 over the next few months and perhaps as high as $100,000 by the end of the year if things continue to go well.

Anyone out there involved in a similar investment?  I’m sure I’m not the only one that would like to hear about your experiences.