This weekend, I went to Foxwoods Resort & Casino in CT for a good friend’s birthday party.  We went for two nights and had an awesome time going to the bars/clubs at night, relaxing by the pool during the day, doing a little gambling, and my favorite, gorging at the buffets.  This fun trip was not too expensive, but did require spending some discretionary income, which was well worth it for me since I had such a fun time.

As I said, we did some gambling during the trip as that is one of the major forms of entertainment at Foxwoods.  I am not a big gambler at all, but I do enjoy playing the games every once in a while.  It is obvious that the games are all created to favor the house (casino).  Every game has different odds and can be very fun.  I think there are some important points to understand before gambling:

1. Be prepared to lose – When you start playing any game at a casino, the odds are stacked against you.  If you want to make money by gambling, you are better off  not playing.  Unless you are an absolute professional poker player or can count cards in blackjack, you will never have the advantage.  The idea here, is that you are paying for entertainment.

2. Have a set amount you play with – It is so easy to play with more money than you should at the casino.  This is the problem many people run into which results in the loss of excessive amounts of money.  Go in with a set amount of money that you are comfortable with losing.  Once it is gone, you are finished.  It might even help to leave your ATM card at home. For me, $100-$200 is the limit.  I think to myself, I am willing to pay up to $200 for the entertainment.  Once I lose that, I am finished and not particularly unhappy (I hate to lose so it can still be upsetting) since I already determined that I was willing to lose that amount of money.

3. It is an incredibly low chance that you will win big – You always hear about how someone you know won a hundreds of dollars or even thousands at the casino.  What you don’t hear about are the 10 other times that person lost a lot of money at the casino.  People prefer to tell stories of when they win.  This gives us a false idea of how good our chances are of winning a lot at the casino.  Just keep in mind, the odds of every game are stacked against you.  The longer you play, the more likely you will lose money.

4. Be careful of being too risky – I wrote in a previous entry about the psychology of investing.  The psychology of gambling can be very similar.  People have a propensity to be more risk adverse when they are in the domain of gains.  That means when you are winning at the casino, you would probably want to take less risks because you don’t want to lose your winnings.  However, once you see those winning diminish and when you lose it all, you feel the need to play more to “win it back.”  When in the realm of losses, people are more open to risk.  This is where the casino will get you.  Since over time, the odds are in the casino’s favor, you are likely to lose all your winnings.  This will result in you wanting to play more to recover your losses.

Ok, maybe the lottery is not completely evil since state governments use the proceeds from lottery sales for funding some good things.  Still, the lottery is a horrible game for your wallet.  I’m sure everyone knows how incredibly unlikely it would be to win the lottery. To me, it is just like throwing money away.  Jim Wang of Bargaineering, describes very well how much money you could save instead of playing the lottery in one of his posts.  He also points out that the majority of people who win the lottery end up in a lot of financial trouble because they become reckless with the money.  This girl is a typical example. Perhaps these things happen when they don’t think about what to do with the money or don’t stick to a game plan.

I was talking to a friend who decided to buy lottery tickets for the MegaMillions, which had a jackpot above $300M.  She was very excited and was thinking of all the ways she would use the money.  Thinking about what you would do with a large cash windfall is actually a healthy thing to do.  Depending on the amount of money, I think I would save enough of it in cash so that I could live off of the interest alone.  This would ensure that if I blew the rest of it, I could still live off the interest on the cash in my savings.  I think I would then pay off my debt and my family members’ debt and then put a good portion of it into investments such as real estate, the stock market, and my businesses that I started recently.  If there were anything left after that, it could go to some splurging.  I think it would be most important to make sure that I can continue to generate money with the windfall above all else.

What would you do with such a windfall?

So I have a friend, let’s call him by the initials of his nickname – TM. He recently received a job offer – congrats to him for sticking to the job hunt and being persistent – that he is really happy with. The job pays well and has great benefits. TM has yet to start working, and is a recent graduate from grad school. During the time that he was a student he was essentially broke and really did his best to live frugally and not spend his money unnecessarily. Over the next month, before he starts working full-time, he expects to incur some expenses that are necessary for his career path. In order to pay for these expenses, he borrowed the money he needed and a little extra for living expenses to hold him over until he is paid from his new job.

This all seems fine, and you might wonder why I am bothering to tell you this story. The problem with this story is when TM began to spend the money that he borrowed along with his small personal savings. Although he knew that he should not be spending money that he did not have, he believed that it would not be a problem because he now had a job to pay for the new expenses. I have no problem with a little increase in spending if you have an increase in income. However, TM has yet to even begin his job. He is spending money that he does not have and even worse, he is assuming that he will always have that job. You can never predict the future and for all you know, your income stream could end tomorrow. Never spend money that you do not have. Those who spend their bonuses or paychecks before they even get them are just asking to be put in a difficult financial position.

TM’s story not only shows that you should be careful of excessive spending before you have the money, but also that emergency funds are important. Everyone should have an emergency fund that can be used for living expenses in the event that you lose your job or are no longer able to perform your job.

This poses the question of how large an emergency fund should be. There is no correct answer to this, but I believe it should be at least equal to 6 months of your salary. I actually think it is better to have this number tied to the level of unemployment. For each percentage of unemployment, you should have one month’s worth of salary in the your emergency fund. For example, the current rate of unemployment is close to 10% so I would suggest 10 month’s worth of your salary in this fund. This might seem like a lot, but if you think about how hard it could be to find a job in this economy, it makes more sense.

A few month’s ago, I signed up for Lending Club. If you have never heard of it, it is essentially a peer to peer lending platform. With the credit markets tightened up, some people who need to borrow money have chosen to borrow from other people through peer to peer lending companies such as Lending Club. Other’s see an opportunity to invest through providing money to fund loans with Lending Club.

I really like the idea of Lending Club. You can choose the different levels of risk associated with different loans in your portfolio. The higher the risk, the greater the interest rate and return. Of course, there is the risk of some loans defaulting, but if you diversify your loan portfolio, you can earn a decent return.

I actually have yet to invest any of my own money in Lending Club. I took advantage of an offer to try Lending Club out in which the company gave me a free $25 to start my account. I did it four months ago and invested the $25 into a loan with moderate risk and 12.53% interest. So far, the borrower has not missed a payment. Obviously, I do not intend to make any real money with this $25, but I am really just testing out the platform. So far so good.

If you want to try it out as well, you can also get $25 into your account for free (I also get a bonus for referring you). Here is how:

1. Click on this link to Lending Club
2. Sign up for an account and enter this promotion code: blee0408

You will need to input your social security number and some other personal information. Don’t be concerned, this is to verify your identity and etc. Give it a try and please let me know what you think of it by commenting below!