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Top Ten Personal Finance Start-Ups

This article was written by Flexo in Consumer. 11 comments.

The financial industry has been mostly static for centuries, with companies doing business and offering services not much different from how the companies operated for earlier generations of consumers. When there is innovation in the industry, it generally comes from smaller companies and entrepreneurs looking to fill a need that isn’t covered by larger, less flexible entities.

While today’s start-up companies are changing how customers interact with their money, most of these small business owners have the ultimate goal of selling their businesses to larger, more established companies who will then incorporate these new services if the start-up companies cannot become industry leaders without help. In the mean time, start-ups compete for funding from a growing community of investors in the industry.

Here are ten customer-facing personal finance start-up companies that could help change the way consumers interact with money. Some have already been thriving for a few years, while others are new to the industry. These are not in any particular order.

BrightScope

BrightScope 401(k) plans are tough to evaluate from the plan descriptions and prospectuses offered by plan administrators to employees. Employees can’t always choose the best investment options for them due to limitations by plan administrators. Additionally, plan administrators often change available investment options and automatically transfer employees’ money from one fund to another without sufficient notification to the investors.

BrightScope lets employees evaluate their company’s 401(k) plan. If, for example, you have two job offers and you’re comparing compensation, you can take the quality of the 401(k) plan into account by researching these companies. Each company receives an overall rating as well as scores in important categories including total plan cost, company generosity, and participation rate. You can directly compare each company with its industry peers.

BrightScope

The above image shows the overall rating for MetLife. For comparison with other companies in its industry, MetLife’s score of 73 is below Morgan Stanley’s 83.8.

LendingClub and Prosper

LendingClub Logo As technology advances, it brings manufacturers and customers closer together, often eliminating the need for companies that stand in between, adding to the cost of products and services. In some ways, the financial industry is a “middle man.” Banks take deposits in the form of savings and checking accounts, and turn that money around and lend it to individuals and businesses in need of capital. Peer-to-peer lending companies like LendingClub and Prosper take deposits out of the process; lenders can choose borrowers and lend money directly or invest in a group of loans packaged as an investment product with measured risk.

State regulations prevent peer-to-peer lending from being available to all United States citizens, and the primary concern is that customers who may not be able to take advantage of loans from a bank turn to these options where they can be charged nearly-usurious rates. For many people, however, peer-to-peer lending has provided a solution that banks have been unable to fill, whether for borrowers or investors.

Jemstep

For your investments that are not locked in a 401(k) with limited options, like your personal IRA or your taxable investment account, the variety of mutual funds and ETFs available is staggering. And unless you work with an unbiased financial planner, it can be difficult to choose the investments that will give you the best chance of making the most of every dollar you invest.

Jemstep is like an unbiased investment adviser with an immense set of data available to help you make investing decisions. You can create a profile for yourself that reflects your attitudes about investing. Most online investment recommendation engines stop at risk and time profiles, but Jemstep goes much further. You can decide how important fees are, whether you’re looking for actively managed funds or index funds, and whether potential tax plays a role in your investing decisions.

After calibrating your profile, Jemstep can evaluate your current portfolio and offer investment suggestions that are better suited to you.

Today, Jemstep announced it completed its Series A round of financing. Start-up companies look for funding from outside sources to grow their businesses before the business generates enough revenue on its own to finance its own operations. In total, Jemstep has raised $10.5 million from early investors in order to fund product development and hire employees.

HelloWallet

HelloWallet There’s a need for consumers to better manage their own personal finances. Over the last decade, this has been the realm of software like Quicken and Microsoft Money, but the latter has disappeared from the market and the former is increasingly seen as an outdated piece of software. In recent years, a number of companies had been developing personal finance management software for a new generation, incorporating mobile options and focusing on reporting and trending rather than reconciliation, though the depth offered could not compete with Quicken. Many of these companies have disappeared, and the apparent winner, Mint.com, was purchased by Intuit, the makers of Quicken.

HelloWallet has emerged as a new competitor for Mint.com, but while Mint.com is now free, HelloWallet charges users a fee of $8.95 per month. For the fee, you can be sure that the recommendations you receive are unbiased — companies and products do not pay HelloWallet for advertising placement within the service. The goal of HelloWallet is focused more on overall financial advice than tracking. Mint.com has moved in this direction, as well, however.

Dwolla

Dwolla Merchant account service is a big business rules by large companies. Each time you swipe your credit card or debit card, a number of companies get paid in addition to the retailer from which you’re buying a product or service. Small business that need to operate on tight profit margins to compete with larger businesses suffer in these situations, because a larger proportion of their revenue is dedicated to paying these fees.

PayPal entered the marketplace and attempted to shake up the industry, offering a new way for retailers to accept credit card payments and for individuals to initiate person-to-person payments without the help of a bank. Dwolla has taken this model and, rather than relying on linked credit cards, has found away to put the focus on cash. The cash focus could be more financially responsible for a large percentage of customers.

Dwolla charges lower fees and allows users to send cash from person to person or to pay for a purchase using your phone. Customers can transfer payments using e-mail, the web, or social media applications within Facebook and Twitter. By default, the $0.25 fee is paid by the store or the recipient, though the individual initiating the payment can change this option. Transactions less than $10 are free.

SecondMarket and SharesPost

SharesPost The buzz today is about Facebook’s imminent initial public offering (IPO) of stock. Soon, Facebook will be a public company, and investors will be able to trade shares of the company in a liquid stock exchange. For most people, this will be the first opportunity to invest in Facebook, a company that has grown significantly over the last few years. Of course, those who own part of the company already, like early and current employees, will see the biggest benefit after an IPO, assuming the company continues to grow.

You don’t have to be an employee to own and trade shares of Facebook, however. Two companies have specialized in creating a market between a small number of common or preferred shareholders — usually employees but also capital funds — with the wider audience of investors. I signed up with SharesPost (review here) last year to gain access to Facebook shares.

Occasionally, SharesPost holds an auction of shares held by investors who wish to liquidate their holding for the best price, and investors interested in buying can participate in the auction by naming the amount of shares they’d like to purchase and the price willing to pay. If there’s a match, SharesPost handles the transfer of shares. Surprisingly, the share price for Facebook’s Class B common stock has been stable over the past year, particularly given the volume of trading is significantly lower than it would be on an open market. The price has moved from $33 to $34 per share. It will be interesting to see how the stock performs on the open market.

SecondMarket is similar to SharesPost in that it creates a market for financial products that don’t have an accessible exchange for trading. With SecondMarket, you can trade public equity, fixed income and bankruptcy claims in addition to private shares.

Google Wallet and mFoundry

With technology changing quickly, smaller companies are able to jump on new technology. Google is not exactly a smaller company, but the company’s development operations function like a start-up. Google also has the size to buy smaller companies with innovative ideas early in their development. Google Wallet, however, was developed in-house. New technology in mobile phones makes it easier to transmit information securely in close range, and retailers are using that technology to accept payments without swiping a card. An application stores credit card information, and when a receiving device is in range and the consumer initiates the transaction, his or her device sends the information securely to the retailers.

As more mobile devices incorporate this NFC technology, contactless transactions will continue to increase. This was a hot topic in the media several months ago, and I explained why Google Wallet would not catch on as quickly as people were predicting. Today, Google Wallet is still limited to using only Citi MasterCard credit cards or Google’s own reloadable debit card.

There’s a smaller company that has seemed to penetrate this market deeper from Google. Among mobile payments, mFoundry works with banks and credit unions to develop their own applications based on the company’s technology. I’ve focused on start-up companies that face the public rather than other businesses in this article, but mFoundry does both. Mobile banking has a long road to becoming a mature and ubiquitous service, but it’s these companies that will help bring the innovative services to consumers and bigger financial institutions.

There are many other personal finance start-up companies worth mentioning, but I limited this list to ten across a broad spectrum of personal finance to keep this article interesting and not too long. If you feel I’ve missed something substantial, please feel free to share your thoughts in the discussion area below this article.

Normally, I do not allow business spokespeople to promote their companies in the comments on Consumerism Commentary, but as long as it’s relevant, I’ll allow short comments intended to note companies looking for broader exposure in the personal finance space, but I still reserve the right to edit, moderate, or delete promotional content.

{ 11 comments }

The Budget Deficit and Debt: Is the Government Like a Household?

This article was written by Flexo in Economy. 14 comments.

Financial experts tell families to “spend less than they earn” and “don’t pay interest to borrow money.” The government does the opposite, running a budget deficit and paying billions of taxpayer dollars every year in interest payments. There is no question that deficit spending by the federal government is a problem. Or is there?

There’s a popular analogy that likens the government to a household. Deficit spending, where a budget calls for spending more than it has available, is a sure way to increase debt. For a household, debt can be most dangerous, resulting in financial disaster in the worst case. Although the analogy can be nice and neat, it’s not very accurate. Here’s what Philip Greenspun had to say recently about how the government’s deficit would look if we were talking about a household rather than the single most important part of the economy right now:

Let’s start with federal spending. The FY 2011 federal budget is approximately $3.82 trillion… We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

There’s a good point in here. If the goal of lawmakers right now is to cut the deficit, tackling the smaller numbers is just noise without overall effect, like the household canceling the cable subscription, while the larger expenditures go mostly untouched. Great job: you canceled the dollar-a-day cable service but are ignoring Johnny’s $1,000-a-day compulsion (Fabergé egg collecting, naturally).

Never mind the details; it comes down to whether the government really is like a household. Here’s why it’s not at all akin to a family spending more than it earns.

The government can at any time, at its discretion, increase revenue. It’s not popular, but raising taxes is an option. Households cannot similarly decree that their income increase. People can take certain actions to increase their income, like obtaining more education or training, but these often require even more expenditures. Income-earners can get second or third jobs to help make ends meet, and the farther that goes, it will be emotionally, mentally and emotionally straining on a family.

Households are not nearly as flexible on the revenue side as the government. Thanks goes to interim podcast producer Bryan J Busch for the reminder about this point.
The government can at any time, at its discretion, devalue its debt. Monetary policy comes into play. The Federal Reserve, working alongside the government, purchases government securities, increasing the money supply for banks and consumers. With more money available in the economy, people (but mostly businesses) can afford to pay more, and prices increase, effectively decreasing the purchasing power of a dollar. This is a great position for people who owe money to be in, because the real value of what they owe decreases.

Households, on the other hand, have no control over the money supply and therefore cannot manipulate the real value of their debt.
Deficit spending helps spur the economy. Throughout the twentieth century, the government was more frequently in a budget deficit than in a budget surplus. The ability for the government to spend freely helped this country become the rich economic powerhouse it is today. With the federal government taking up the slack by investing in the economy during periods in which businesses were gun-shy, the country continued prospering — particularly the middle class. Periods of deficit spending were followed by periods of surplus, but for the most part, deficit spending is linked to this country’s growth.

I’m not intending to defend the concept of deficit spending. Over time, it will cause problems. Interest on debt is one of the largest national expenses, and having to continually pay for expenses already incurred is not a “wise” expense. Even through the devaluation of currency, it’s unlikely this problem will ever be tackled. Unlike a household, though, government can keep postponing the consequences. The best a household can do would be to declare bankruptcy. Other nations have taken this approach to have an opportunity to restructure their debt, but it’s unlikely for this tactic to be used the United States in the near future — unless Donald Trump is elected President; he has some experience with bankruptcies.

{ 14 comments }

Lending Money to Friends and Family

This article was written by Flexo in Personal Finance. 18 comments.

I try to keep the issue of money out of my personal relationships. Many people I know outside of those I know only online — my friends and family — read Consumerism Commentary. For the most part, they’re not interested because, I assume, they’d rather keep the issue of money out of our friendships — or they’re just not interested in the topics. Money is not exactly a comfortable topic, particularly when the discussion treads on the more personal aspects, like income, bank account balances, and spending.

Discussing money is usually not a problem once people are open to it. There is more danger when it comes to entering in financial relationships with the people with whom you have personal relationships. For those of us who have an innate desire to help others, it can be difficult turning down a request for a loan, for example. Many years ago, I found an apartment and roommate on Craigslist in order to live close to my job at the time. It was a tiny railroad apartment, but it was a good deal. I was only recently beginning the reconstruction (or initial construction, more accurately) of my finances, and it was the best offer I could find. Only a few months into the arrangement, my roommate needed to borrow money for the rent. I don’t think she had family in the country, so I know she was having a difficult time. I lent her the money.

Although she repaid the loan in full only a few months later, it was after I had moved out of the apartment, and I believe she borrowed the money from someone else to pay me back.

Other people have had worse stories to share. Friends and relatives disappear when they can’t repay the loan. There is a dispute and neither party communicates with the other again.

If you’re lucky to be in a secure enough financial position to loan money to a friend or relative, would you do it? Here are some thoughts to consider.

1. Has he researched other options? Getting a personal loan from a bank or credit union could be difficult, but it’s a starting point. For those who have no luck inside the mainstream financial industry, there are outsider options, though peer-to-peer lending is hardly an outside business at this point. Prosper and Lending Club come to mind, but I know from personal experience that not everyone who needs assistance will qualify for a loan from these places. Nevertheless, research should move from banks and credit unions to peer-to-peer lending before he approaches friends and relatives.

2. Is there any other way you can help? Money may be the root cause of his need to find a loan, but there may be other ways to help him solve this issue without resorting to a financial transaction. If he’s out of work and looking for a job, maybe you can help introduce him to relevant contacts or perhaps arrange an interview. While you don’t usually want to tell your friend how to spend his money, you might want to subtly guide him on a helpful path.

3. If you lend money, will he repay? My suggestion is not to lend any money you can’t afford to lose. A loan is often just a Band-Aid, a temporary fix that won’t fix the larger issue. You may not want to extend a loan if it looks like there is little hope of him paying back. If that is the case and you still want to help, consider offering cash as a gift without the need to repay. If that idea makes you feel uneasy, you probably shouldn’t lend the money, either; without prospects, it’s unlikely he’ll repay you for a long time. If it’s clear his financial is only temporary and you believe he will be cash flow positive soon, you might feel more comfortable providing the loan.

4. If the transaction goes sour, will your relationship follow? Even the strongest relationships dissipate over money. It’s probably easier to replace money in your bank account than it is to replace a life-long friend or a supportive relative. Carefully consider whether the risk is worth the little interest you may receive from the loan.

5. Will you be offended if you don’t believe he’s using your money properly? If you lend money, resist the urge to dictate how the money should be used. I understand that a lender may want to see the money be put to good use. This money should be helping the person become financially independent, either once again or for the first time. You don’t want to see him driving by in a new car or touting the latest iPad 2 the day after you provide the money. Once you sign that check, hand over the cash, or send money through PayPal, it’s no longer yours. You’re entitled to repayments over time plus interest, but you can’t dictate how the money should be used. If you don’t feel confident that he will use the money wisely, don’t provide it.

6. Set a fair interest rate. The purpose of lending money to your friend or relative is not to earn interest on the misfortune or bad choices of others. Resist the urge to punish your friend, the borrower. It’s a good rule of thumb to charge interest at or lower than the rate you could earn in a high-yield savings account. If your money were not to be lent, it’s likely it would be sitting in a savings account anyway. The only reason to lend money to a friend is to help in a time in need, not for profit. If you feel you must charge interest, be fair. It may not be legal to set high rates for personal loans, so make sure you’re aware of the laws in your state.

7. Can you afford to lose the money? In the worst case scenario, you never hear from the borrower again. The relationship is destroyed and you never receive your money back. Aside from the risk to your emotional well-being, can you afford to lose the money? Assume you were providing this loan as a gift, with no expectation of having it paid back. Would you still provide the same amount? Only part with the amount of money you’re willing to never see again. If he does repay the loan, it will feel like a bonus.

8. Make it legal. If you still believe lending money to your friend or relative is worth the risk, draw up a contract to formalize the arrangement. For $14.99, you can buy a promissory note from Nolo, which will allow you to fill in the pertinent information and have a legal contract ready to be signed by you and the borrower. Using a contract helps to signal to the borrower that you’re serious about the arrangement and expect to be paid back, and that perhaps you’re willing to take legal action if you’re not paid. In the back of your mind, though, you might still be under the assumption that this is money you could lose. If the thought of taking legal action against a friend makes you wary of lending money, consider offering a gift or not helping financially.

Would you lend money to a friend or relative? If you have, what have your experiences been?

{ 18 comments }

Take Control of Your Finances

This article was written by Flexo in Money Management. 5 comments.

This series explorers the concrete steps anyone can follow to take control of your finances. Many years ago, I felt like I was a victim of circumstances. Bad things, like job losses, apartment losses, and debt — even my girlfriend leaving me — were other people’s fault, a result of the world around me. I came to realize after self-reflection that I had the ability to control these outcomes. I applied the theory of control to my personal finances. I was able to dig myself out of debt, and now I’m doing quite well financially.

Here are the keys. Click on each of the links below to learn more.

Part 1-A: Become aware. Compare this to the scene in The Matrix where Neo sees the world around him for what it is. Every journey starts at an awakening.

Part 1-B: Take an inventory. You can’t determine where you are going without knowing where you’ve been and where you are.

Part 1-C: Make accurate predictions. With an inventory in hand, you only have part of the story. Your income and expenses are key to determining your future.

Part 1-D: Decide to take action. Although you can see what the future might look like, events are not fixed. You can change your path if you don’t like what you see.

Part 2: Track your money. All you need to get on the right path is a pencil and paper — but these tools will help, too. Tracking your finances closely immerses you to build a better understanding.

Part 3: Spend less than you earn. This is the basic financial principle that, if followed, will help you prosper, and if ignored, will send you into a spiral of debt.

Part 4: Use high-yield savings accounts. Everyone needs to keep some cash on hand, so why not make that cash earn as much as possible while still being available to you?

Part 5: Build a better budget. Budgeting is the third rail of money management — no one wants to touch it, but it provides the power to move you from one station to the next.

Part 6: Get out of debt. There are many methods to eliminate your debt obligations, but whatever you do, just pay it off. Debt leaves you beholden to other individuals, and everyone has the right to be free.

Part 7: Set goals. Do you have a personal mission statement? If not, then what’s the point of growing your net worth? Set long-term goals so your short-term goals make sense.

Part 8: Set savings targets. The point of accumulating money isn’t the accumulation of money, its what you want to do with it. With real goals in mind, you can make relevant and accurate short-term targets.

{ 5 comments }

Invest in Individual Stocks or Mutual Funds?

by Flexo

This is a guest article by Barbara Friedberg, editor-in-chief of Barbara Friedberg Personal Finance. Barbara holds an MBA in finance, a BS in economics, and an MS in counseling. In addition to writing, Barbara is a portfolio manager and a professor. “The business schools reward difficult complex behavior more than simple behavior, but simple behavior ... Continue reading this article…

25 comments Read the full article →

Carnival of Personal Finance #281: Halloween Candy Edition

by Flexo

Holidays are about two things: family and food. Halloween is no different. Although families celebrate some holidays with a large meal, with ingredients like turkey, ham, fish, potatoes, and pies, the central food theme of Halloween is candy. Once a year, everyone is provided an excuse to eat the stuff that parents always told them ... Continue reading this article…

27 comments Read the full article →

Start the Decade Off Right: Invest For the Future

by Flexo

With new technology becoming available to consumers every day, like 3-D high-definition televisions, it certainly feels like I’m living in the future. How did we all survive without such marvels as wireless internet, video games that react to movement, GPS, text messaging, and video on demand? In ten years, we could as easily be wondering ... Continue reading this article…

6 comments Read the full article →

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Search: prosper

Top Ten Personal Finance Start-Ups

BrightScope

LendingClub and Prosper

Jemstep

HelloWallet

Dwolla

SecondMarket and SharesPost

Google Wallet and mFoundry

The Budget Deficit and Debt: Is the Government Like a Household?

Lending Money to Friends and Family

Take Control of Your Finances

Invest in Individual Stocks or Mutual Funds?

Carnival of Personal Finance #281: Halloween Candy Edition

Start the Decade Off Right: Invest For the Future

Podcast

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