Late on Prosper

So right now I have 8 active loans on Prosper.com, for $50 each. Up until this month, each borrower has paid on time, which had me starting to believe in the power and potential of PSP lending.

Then, one of my borrowers went late. She's still less than 15 days late, so it hasn't even got to a collection agency yet, but I'm a little worried.

The good news is that I made $25 in a Prosper referral and between that and the interest I'm making on the other loans (as long as they don't default too, knock on wood) means that I'll end up making back the $50. But that kind of defeats the purpose of investing, if I end up barely back where I started.

Maybe this listing just had too many warning signs. The woman had to relist 3 times in order to get her listing funded. The debt-to-income ratio was way too high for the measly 13% interest rate it got funded at.

well, I'll remain hopeful that this woman is just having a bad month and she'll pay me back. But I've learned my Prosper lesson - only lend to people who are employed (students are not good investments, even if you want to help them study abroad!) -- The people who really should be getting funded on prosper are those who have full time jobs, make more than they spend, and are trying to pay off high-interest credit cards. Then you're really both helping each other out right now.

Care to Prosper? P2P Lending Update

I'm rather risk adverse when it comes to my finances, but the idea of person-to-person lending has enough reward behind the risk for me to take some chance on the newly-minted credit market.

My Prosper plan is to handpick one listing per month to fund. I transfer $50 from my paycheck to Prosper and decide on a listing that I think is worthy. Most often I chose folks in the A or AA category (though I recently went as low as C) and I pick people who are trying to get a lower rate on their credit debt or who need smaller amounts of money for important things like house repairs, doctors bills, etc. I try to stay away from business loans.

Here's an update on how my Prosper accounts are doing (none have defaulted yet, knock on wood.)

Total Account Value: $357.43
Amount Invested: $350

Average Interest Rate: 14.76%

[[6 loans out, $50 each]]

Loan Title	$	Interest Rate	Credit Grade	Principal balance
Paying off/ Consolidating Credit Cards	$50.00	16.00%	C	$0.00	Current
Let me pay you instead	$50.00	17.00%	B	$1.06	Current
Termites have destroyed my home, †	$50.00	15.55%	A	$2.21	Current
Paying off Adoption Credit Debt	$50.00	19.33%	B	$2.11	Current
Help Me Study Abroad ** Relist #2** †	$50.00	13.00%	B	$4.66	Current
Emergency Home Repairs - Winter †	$50.00	7.00%	AA	$5.06	Current

Almost maxed out my Roth IRA, now where do I put my savings?

By now, I've read plenty to scare me into investing as much as possible for retirement as soon as possible. Last year I maxed out my Roth at $4000 (put some of my savings into that, since my income didn't allow pulling from that) and this year I'm already up to $3300 of my $5000 limit. I'm trying to put in $300 a month, which will get me to my limit in a few months.

Ok, so the question is, after I max out my Roth IRA, where do I put my money?

*I am a freelancer so I don't have access to a 401(k).

I'm diversifying my investments away from my Roth right now as the case may be, but I'm not sure if that's the ideal situation. I've got about $1300 in my Sharebuilder (non roth) account which kind of seems foolish. What seems more foolish is my heavy investment in the GLD (gold) ETF, since, despite it making nice gains, is a terrible play for long term. Ok, so I should have researched this before investing in it, but I recently found out that GLD, because it's investing in gold bullion and not the gold mining companies, actually counts as a collectible after a year, which means it gets taxed at 28 percent instead of 15 percent if you hold it long term.

Well, at this point Sharebuilder is starting to seem like a huge rip off. I do like the idea of dollar cost averaging, and I am using up all of my six "free" investments each month, putting $300 a month into my sharebuilder account as well.

My question is... while I could max out my Roth IRA sooner by skipping over my Sharebuilder account altogether, I'm definitely on track to max out my roth one way or another (yeay) and then... what should I do with the rest of my savings? What's the smartest place to put it for growth and tax purposes?

Here are some options I've recently discovered and am considering. Let me know if any sound like a brilliant idea because at this point I'm completely confused.


1) 529 Plan
Part of me wants to go to grad school one day down the line, although I'm not sure of this, and putting savings into a tax advantaged 529 plan would make sense if this were the case. Worst scenerio, one day I probably have kids and they get to take advantage of my 529 plan that never got used, since it can be transferred within the family. Not a bad idea, I guess. Worst, worst case scenerio, I never have kids and someone else in my family gets the money. But this won't help me save for a house/condo, which is really want I want to be saving for right now, as grad school is a maybe and house is a definite sometime in the next 10 years.

2) HSA
I still need to open my HSA account, as my health insurance IS HSA eligible. While I can't withdraw that money until retirement (so it's less flexible than a Roth) I can use it to invest. And there are some tax advantages (that I don't entirely understand) available for the HSA as well.

3) Prosper
I've had great success with Propser in the few months I've been using it thus far. I've only put in $200 and lent to 4 people ($50 each), but the first three at least are paying on time and I'm getting my 8% return, for now anyway. Of course I'll have to pay tax on all that, but it's still a nice return. I just worry about my borrowers defaulting, since one default will take out a huge chunk of the money I'm lending. With $200 in loans, it's not that scary. If I start lending out lots of money, it could get scary.

4) CDs
I already have $12k tied up in CDs that are ending over the next six months. I'm considering putting $5000 of that into my Roth IRA for 2009 when the time comes, but that still leaves $7000 plus whatever savings I manage to make over the year. Where do I put that? Back in a CD? CD and savings rates are so crappy right now (thanks economy!) so it seems like a bad idea for the short term.

5) Put extra savings into my ING Direct high interest savings account and put it into a Roth IRA next year, and the year after, and the year after that. Don't touch it for anything else.

That leaves me with...

6) Keep the money in Sharebuilder and grow my non roth ETF investments. Figure out what the deal is with my GLD investment taxwise and sell before it moves into the higher tax rate. Probably break even on that if it performs as well as it might. Oh boy. What a bad investment! I wanted to hold it long term, but now it seems silly given what a high rate it will be taxed when it take it out. So I plan on focusing my Sharebuilder account on emerging market ETFs. Either they're do awful and I'll lose all that money or over the years they'll do well and with a low fee percentage, I might make some money. It will be taxed when I take it out, sure, but at least it will be a way to grow my savings after my Roth is maxed out. I might sell off my three individual stocks too. I'm a bit confused on dividends, but it seems that if they're going to get taxed each year and then be reinvested and my stocks keep losing money, that's a bad situation for me, no? I don't have that much money invested in individual stocks at the moment (about $300 in three stocks, the largest holding being MCD, and all three of these stocks have gone down since I started investing in them, yet I still owe tax on the dividends).

I like investing in Sharebuilder because it gives me a chance to learn all this. Still, if I want to buy a house one day, I need to be somewhat careful. I know I'm young now and I can take changes, but there's no reason to be stupid about things.

So, faithful readers, help! What should I do with my savings after I max out my Roth IRA?

Can I Prosper... using Prosper?

When it comes to investing, I say I lean more towards the conservative end of the spectrum. I'm not much of a risk taker in general, so the thought of losing heaps of money that I worked hard to save causes enough anxiety to keep me out of the stock market beyond basic mutual funds.

That's why I'm taking it very, very slow with Prosper.com, a popular site that basically lets anyone be their own bank. Most of my readers have probably already heard about this site (they advertise on a bunch of PF blogs), but for a quick rundown of what the site is for those who haven't heard -- Prosper makes it easy to lend money and earn back a fairly high interest rate on those funds. But, of course with "high interest" there's risk involved.



Anyone can borrow money on Prosper, but the good news is that they check the credit scores of the borrowers so lenders can determine how much risk they want to take. For instance, someone with a perfect credit history would have an "AA" score, but the interest rate you'd earn on lending the money would be less (around 6 to 7 percent). Lending to people with poor credit ratings might earn you a much higher interest, but the chances of them defaulting are also much higher.

The site is kind of hard to understand when it comes to determining the exact interest rate that the lender will earn. To be honest, I'm still a little clear on the details. Basically, the Prosper folk want you to lend a large sum, but break that into $50 per person. Just like with any financial portfolio, diversification = less risk. Still, it's unclear what the actual risk with any of this is. There's a reason banks exist... they have tons of money to lend, so if a few loans default they can deal. But investing $100 or even $1000 into loans at $50 each might never provide the necessary diversification to ensure you won't lose most of your money.

While I realize I might lose some money in this experiment, I decided to try out Prosper and invest $100 in the site. First I signed up for their auto-loan deal, where you chose your level of risk and they pick someone on the site to lend your money to. So I ended up lending $50 to someone who is trying to study abroad, with a B credit score and a 13 % interest rate. I wasn't so happy with my money ending up going to someone with a B score (though admittedly, that was my fault, I chose the second highest "non risk" auto-invest plan)... so I decided to loan my other $50 to someone with a perfect credit score, in case I just lost $50.

What I do like about the site is that you can read a person's story and decide what you want to loan money for. It feels good to loan to someone who needs money for their kid, or who needs to pay off a credit card bill because their interest is ridiculously high. Ideally, they pay you back within three years and everyone is happy.

I've read a bit about other people's experiences with the site on various PF blogs, and it sounds like they have a lot of happy users for now. Sure, loans default and lenders get screwed over, but generally people seem to be getting paid. Everyone seems to recommend keeping the amount of your entire portfolio investing in Prosper low, but it's a decent investment for a few hundred dollars.

Someone owes me their first payment on Feb 11, so I'll let you know if I get it. The good thing about Prosper is that if the borrower doesn't pay, they get a collection agency to stalk them for a few months, and then their credit score ends up sucking and they're not allowed to borrow on Prosper ever again. Also, they sell off these defaulted loans (I'm not really sure how this works) but you might get, like, 1 percent of your investment back. Or you lose all your money. But that's a risk everyone takes investing in anything... whether that be a stock or property.

I'll keep you guys posted on my experiences with Prosper in the coming months. You can bet that if I lose money, you'll get to hear all about it. :)

If you're interested in signing up, click here or on the button below to get an extra $25 in your account to get started, all for free. I did this when I signed up on another PF blogger's site, and a few days later I had that $25 in my account. Sweet.