For a large part of this year, I have been regularly adding money to my Prosper account. I’ve enjoyed lending money to other people and I think I’ve done fairly well making money. I stress the “think” because it can be difficult to quantify exactly. On average, I seem to be making around 7% there. I would be doing much better if I didn’t make some poor decisions early on taking on too much risk.
So why am I stopping my contributions? I looked at my 401k contributions for this year, and though I’ve stepped it up significantly over the last month, I’m still further behind than I’d like to be. I spent a large part of the year saving for the wedding, so I have a lot of catch-up. If I’m going to meet my goal of contributing the full amount for the year, I’m going to have to make some cuts.
Along with the 401k goal, I have is to finish paying off my HELOC. I set it up nearly two years ago to pay for the ring to ask my wife to marry me. I then did something a little unorthodox and used some of the funds to temporarily allow me to live while I maxed out my 401k plan back then. I wouldn’t recommend that course of action, but I should explain why I did it. At the time, I could borrow money from the HELOC at around 6% after tax deductions. I calculate that my 401k will make 9% over the long term. That’s around a 3% gain in my pocket. Lastly, I figured this would be tremendous motivation for me to live frugally. It was very much a forced savings plan.
Today that HELOC is a burden that I want to be free of. I’m no longer able to deduct the taxes which means that I pay more in interest than I used to. I’ve made some great strides in paying it off over the last couple of months, but it’s time to double the efforts.
I’d like to invest more in Prosper. It’s still new and exciting to me. However, sometimes you have to go with the boring mainstays such as investing in a retirement plan and playing down debt. I won’t eliminate loaning on Prosper completely, I’ll continue to reinvest the payments that borrowers make into new loans. Maybe by the start of next year, I can begin again without having to worry about saving money for a wedding or a wedding ring.
I’ve got to agree with your choice to back off of money into Prosper. I’ve always thought that Prosper should be down on the list after paying off high(er) interest rate debt and funding your tax sheltered retirement accounts (401k, Roth or regular IRA).
I stopped contributing to Prosper when I got to $2000. However, it was mainly because I was having trouble finding good loans in which to invest. So now, I just dip into Prosper twice a month to reinvest loan payments.
How are you calculating your ROI???
According to http://www.lendingstats.com/memberProfile?lenderId=TechnologyGuy you’re negative. Are lendingstats site statistics for worst scenario??
Lazy Man says
I’m not sure if they are a correct scenario or not. I’ve talked with people who put more time into the math and they aren’t impressed with LendingStats. According to Eric’s CC, I’m making 7+%. Lastly, the way that makes the most sense to me, RateLadder’s IRR Game, I’m a worst case scenario of around -4% and a best case of around 16%. I like to take the average of that range. This is why it’s difficult to quantify exactly.
Jaime, that is the estimated ROI based on an assumption that 50% of late loans will default. There is a FAQ about the calculation since it can be misleading. That is not the actual ROI based on payments, but a future projection.
The Decision Strategist says
I’ve really appreciated your prosper posts. The site looks interesting to me as well, but I’m just getting out of debt now and only beginning to look at ways of investing. Its a little intimidating to invest in a new site with little knowledge of how it works.
Your posts are helping me figure out how it works. Thanks
Look into stocks with a nice dividend. BAC, WB, C (all banks) have a nice dividend that will earn you at least 5%/yr not including what you’ll earn on the stock price itself. Also, dividends are taxed differently (15%) which is typically much lower than most middle class income tax brackets.
I never got into Prosper, so I can’t say whether or not it is a good investment. But contributing more to your retirement fund as well as paying off debt are probably much better than the possible short term gains from Prosper. I think you are doing the right thing.
I just contributed another $500 after a small new money hiatus while on vacation… (Spending money on other things.) I want to get to around 10K and hold new money (another $1500 or so)… 10K is about 5% of my investments (including retirement). I don’t really want to go to a higher portion of my portfolio than that until I KNOW I am making a good return. Time will tell…
And just to be clear. You no longer adding funds, you are continuing to reinvest. ???
Lazy Man says
Yes, I’m continuing to reinvest.
By the way… for those of you that are interested in the correct way to eventually predict Prosper ROI (Eric is closer in the long run than Lending Stats in my opinion.)
I continue to update my late curves, which eventually will yield a Markov Model that can be solved.
1 Month Late Curves on Prosper. Markov Model.
Joseph Sangl says
Good points. Now maybe you can start saving to pay for a baby and the associated college, wedding, camps, cars, and other costs!
The most important point here is that you have a plan that you have thought through. If only everyone thought through their financial decisions this much …
I agree with you and the other posters. It makes sense to pay towards your 401K first.
Great PF blog. I was one of the earliest lenders in Prosper and loved the idea, at least for a while. After lending out well into the 5 figures the net result of my investing/social experiment is a whopping 8% return after 18 months. Of course that 8% is all taxable as ordinary income plus if any loans do end up defaulting then one’s taxes become exceedingly messy! It’s somewhat deceiving to compare an 8% rate earned on Prosper to an 8% tax deferred rate earned in the stock market as they do. All in all I’ve enjoyed the “experiment” but have been actively withdrawing money as my borrower’s payments are being made.