Saving and investing go together like milk and cookies, sweet and sour, and Elvis and banana peanut butter sandwiches, right? Right. Well, almost right. It’s easy for us to say that saving and investing are important parts of a personal finance plan. It’s easy for us to say that and then move on. After all, we just said they’re important, right? Not so fast.
Saving and Investing ARE important
They just aren’t equally important. Heck, it’s another whole post, but even the different types of investing aren’t equal. Just as important as saving and investing together is the concept of when to use which, and how much. The mix of liquid savings in the form of cash accounts and CDs with the amount of your money that’s invested can be one of the most important parts of your overall personal finance plan.
Traditional advice tells us that cash accounts and CDs are the super safe way to keep your money with you, and investing, in it’s varying forms is all kinds of risky. Investing in stocks? Risky. Investing in pork bellies? Risky. (unless you really like bacon. Just kidding, still risky.) But, is the amount of risk involved in investing more or less risky than leaving too much of your money in the bank to rot away at current interest rates? How about you ask the people of Cyprus if they still feel safe having their money in the bank?
Success is risky.
Few who accomplish success do so without some element of risk. In fact, the easier the path to success is perceived, the less chance there is of truly obtaining it. I don’t say that to seem philosophical. I want to make a point, however. You’ve got to have a little risk, if you want to succeed. You’ve got to have Investments if you want to succeed financially. And, I think the ratio of investments to savings should probably be much higher than most would suggest.
Investing for Financial Independence
One of the key tenets in a financial independence plan is that you need to replace your income in order to free yourself up to be independent of a job. Not independent of work, but of a job. There are, obviously, many ways that you can go about replacing that income. Decreasing your expenses is usually a part of most plans. But, most people’s expenses will only decrease so far. Sure, you can go extreme, and get them lower, but for many that isn’t what financial independence is about. Even with your expenses decreased as low as you’re willing to take them, you’ve still got to replace the income to pay those expenses. Investing can be a very good way to get started towards replacing your income.
Investing for Income
In order to replace income with investing, you’ve got to invest for income. You probably try and do that by becoming a super successful day trader and making up the income in profits from all the great deals you made. First, find yourself a few super successful day traders who have done that. Come back when you’ve given up. If you’re going to invest for income, it’s got to be reliable. It can’t rely on your ability to find a good bargain and then sell it at a massive profit a few days later. There are traders who are still waiting on Facebook to make a comeback so they can even get their money back. Reliable income is the key. For this, we need investments that are steady, don’t require the continued increase in value of the stock, and also don’t require us to sell like a fiend in order to create the income. What are these mysterious investments, you ask? Dividend stocks.
Dividend stocks are stocks that pay a dividend on each share of the stock that is held. The amount of the dividend can vary, but there are many that you will find that pay dividends in the range of 2-4%. Depending on the policy of the company, they usually pay quarterly, but there are some that pay monthly and yearly.
Dividend stocks aren’t the only way to invest for income, however. Investing in peer-to-peer lending in a program like Lending Club is one. Rental real estate is another. A business can even be a way to invest for income. Each has varying levels of passivity, or the amount of direct interaction on your part to earn the income. A business that you run can mean well over 40 hours a week of direct interaction to create the income. Something like Lending Club or rental real estate can be brought down to a level that borders on passive income entirely.
Savings vs. Investing
With any investing tool, whether it be dividend stocks, lending, real estate, or some other instrument, there will be risk. With risk usually comes reward. I’ve been earning over 8% return on my Lending Club portfolio. Dividend stocks can lose value, or even stop paying dividends. The real estate market can dry up, and you can have problems finding renters. Risk is inherent. Unless you want to directly trade your time for money (call it a job), you’ve got to take on a little risk and begin setting yourself free.
Savings shouldn’t be shunned completely. I still believe that an emergency fund is an important tool. I still covet a debt free lifestyle. But, once my debt is paid off, and my emergency fund is full, you can bet the rest will go towards investing for income, and building my wealth towards financial independence.
How about you? What is the role of savings in your personal finance journey?
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
It’s been a little while since I last wrote one of these updates. January of 2015 to be exact. Needless to say, there have been a few changes in my peer-to-peer investing in the last year and a half. One of the biggest changes, I’ll talk about below. First, let’s see where my peer-to-peer investing was when we last looked at it. (You can read the full post here, or just read the recap below.)
Peer-to-Peer at EOY 2014 (Recap)
The biggest change in my Lending Club account at the end of 2014 was the NAR (which is an adjusted rate of return) had dropped from a little over 13% in 2013 down to 9.61% at the end of 2014. Despite the drop, I felt like that was a pretty good rate of return, and reason enough to continue to invest in peer-to-peer lending.
Two other factors that I looked at were default loans and interest received. In 2014, there were 4 loans that had gone into default. There had been only one in 2013, but with an increase in investing on my part, the rise was somewhat expected. The total principle written off in 2014 was $41.87. Total interest minus fees for 2014 was $115.69. Take out the written off principle and you still get income on 2014 of $73.82. Again, not a bad little bit of semi-passive income.
Peer-to-Peer in 2015 and the first half of 2016
So, it’s been a year and a half since I last shared one of these updates. First, let me do a bit of a quick overview of where the account sits now, and then I’ll share some changes that have had some effect.
Peer-to-Peer income
Is Peer-to-Peer Investing Worth Your Time?
I like talking about the income (and resulting rate) first. Why? Because that’s the meaty money part of it. 🙂 And I like money. At the end of 2014, my NAR was 9.61%. Here we are in August of 2016, and my NAR is currently showing at 9.89%. It’s gone up! I love when that happens! There’s a couple of factors that likely have helped with that. The first is that there haven’t been any defaults since 2014. Right now, there are 3 loans that are threatening. 1 that’s in that nasty 31-120 days past due category. Typically, if they get that far, they’re as good as defaulted. We’ll see, but I fully expect that loan to go into default in the coming months. The other 2 are split between the Grace Period and 16-30 day categories. More often than not, those loans tend to come back to the current status. Having them default could eat into the income for 2016, but that’s one of the risks we take in investing for higher returns.
Peer-to-Peer Income 2015
2015 was a bit of an odd year. I didn’t pay nearly as much attention to the Lending Club account as I should have, and so, often when I would log in, I would have quite a bit of my portfolio sitting around doing nothing in the cash account. At one point, I had about 40% of the entire account sitting in cash because I hadn’t done anything with it in a while. That doesn’t equate to good income. For 2015, the interest minus fees only totaled up to $103.07. Down from 2014, but purely reflective of my inactivity in reinvesting the cash. The upside to 2015 was the lack of defaults. Because there weren’t any defaults, the income minus written off loans was still 103.07. That’s better than 2014, so even though my inactivity caused a reduction in gross income, it also may have sheltered me from defaults and thus preserved more of the income.
I’ve been a bit more active in 2016, and my income reflects it so far. As of the end of July, interest received minus fees was at $72.04. If that trend continues, 2016 will be slightly better than 2014. One of my goals when beginning this account was to achieve $10 per month in income. At this point, I’ve done that. I just have to remain active in reinvesting the funds in order to maintain that level. Next goal, $20 per month!
Peer-to-Peer Changes
One of the things that I wrote about in my “How I Invest” article was how I wasn’t eligible to directly invest or borrow because of the state that I lived in. Probably the most significant change since the end of 2014 is that my state is now eligible for both. I haven’t toyed with the borrowing side, but I have touched the direct investment side. My experience there is mixed. One of the things I like about it is that you aren’t paying any fees or premiums on the investments that you’re buying. That means you make more money over the life of the loan. That’s good. The downside, to me, is the delay in investment.
Direct Investing vs. Trading Platform
If you’re unfamiliar with how the direct side works, you basically go in and choose which loans to invest in. You’ve got some ability to filter, but not all the same ones that you have on the FolioFN site. Once you select some loans, you press the invest button. Here’s where the delay comes in. The loan only gets investing if it gets fully funded. So, if you invest in a loan early in the process, you could be waiting a while before there’s enough investor commitment to fully fund the loan. Once the loan is fully funded, it goes through a vesting process. The folks at Lending Club look it over, make sure everything is what it is supposed to be, and then the loan finally gets funded. And then you wait until the next pay date. All told, you’re money could be sitting in a committed status for a week or more waiting on all of those steps. Or, you could pay a small premium (you can filter based on the premium) on the FolioFN trading site and have your investment in your portfolio the next day.
After playing with the direct side, I can see myself using it occasionally, but really keep going back to the FolioFN trading site to do my investing. My thought is that the sooner my money is working for me, the sooner I’m making money with it.
Institutional Investors
I don’t know that this really qualifies as a change, but it’s something that’s been a topic of conversation a lot over the last year. And that’s the idea that there are institutions who are investing in peer-to-peer investments. One of the biggest issues that many seem to have with this is that it’s meant to be peer-to-peer (it’s right in the name!) not institution-to-individual. That’s how the traditional loan process works, not peer-to-peer!
Ok. I get that, but I think there’s also an argument that as the peer-to-peer movement grows, there’s going to be an increasing scale of demand for the loans. And if the individual investing side doesn’t grow as quickly, there will be a lot of loans that won’t get funded. It’ll look bad for business, plus it will drive away potential borrowers. I think as investors, we need to recognize that if borrowers are being driven away because of a low funding rate, it means less opportunity to invest. What we need to hope for at this point, is that the institutional investors are held at bay, and used for filling those funding gaps rather than let run amok and run the individual investors off.
My Peer-to-Peer Investing Going Forward
Much like many of my other updates, which you can read on my Lending Club page which has links to those and other related articles, I just don’t see any good reason to stop or even scale back my investment in peer-to-peer investing. The return remains excellent, and defaults remain low. As I’ve mentioned in other updates, I believe some of that is just plain luck, and some of it is due to scale. I’m only working with a little over $1000 in the account, so it’s pretty easy to be a bit picky when selecting loans to invest in. If I were working with a lot more money in my account, I couldn’t be as picky, and would likely see my rate drop some and my defaults rise.
The whole idea of this experiment (it’s really gone beyond an experiment now) was to let the account organically grow. Invest a bit of seed and reinvest the principle payments and interest so that it’s all working to make more money. In short, I’m letting the miracle of compounding interest work for me. And so far, it’s working quite well.
What are your experiences with Peer-to-Peer investing? Is it working for you? Do you have questions before you dip your toes in? Let me know in the comments!
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
If you’ve been reading here for very long, you’ll know that I’ve been posting and discussing my Lending Club returns since the end of 2011. For the first year or so, I updated with quarterly updates. I didn’t do that in 2014. Part of the reason for that was that it was a busy year for me, and the time to put together a full post on that every quarter just wasn’t always there. The rest of the reason was that it was beginning to feel redundant to me, so I slowed them down a bit. Now, I’ll be doing the updates on a yearly basis (twice a year at most) to hopefully avoid that feeling of repeating myself in each one. On to the Lending Club Returns 2014 update.
If you don’t know what Lending Club is, the simple answer is that it’s a peer-to-peer lending network where people like you and me can both borrow and lend to people like you and me. Want a little better explanation? Head over to my Lending Club page to read more.
Lending Club Adjusted NAR
When we left 2013 behind, my NAR on my Lending Club account was sitting at 13.16%. A full year of lending has passed, and, as I’ll explain in just a bit, there’s been some changes to the account. At the end of 2014, my NAR is now showing at 9.61%. Down from 2013’s EOY number, but still a very healthy return on my investment. For comparison’s sake, the S&P 500 returned about 11% for 2014. So, ultimately, I could be getting more of a return on my money in an S&P 500 index fund. The biggest difference for me is that each of the loans I’ve invested in on Lending Club has a set rate of return. The only thing that changes that rate of return is a default. I’ll talk about defaults in a minute, but the rate of default is pretty low. Try and get a set rate of return on an index fund. Your brokerage will laugh you out of the office.
Lending Club Defaults and Late Notes
As of the time of this writing, there are no late notes listed on my account. In 2014, three notes went into a default status. At the end of 2013, only one had gone into default. It’s a little bit higher rate, obviously, than it had been previously. But, as my portfolio on Lending Club has grown, the odds of a default here and there also has grown. The full picture looks pretty good still. Since I began investing in Lending Club, I’ve invested in 118 loans. Only 4 of those have gone into default. That’s a default rate of about 3.4%. Flip that around, and if the trend holds, 96.6% of the loans I invest in will not default. 96.6% is a pretty good success rate if I do say so myself.
The 4 loans that have gone into default meant a total of $52.17 in written off principle. Of that $52.17 that was written off, $10.74 has been recovered through collections for a total loss of principle of $41.43. I’ll go into further detail in the next section, but the interest I make on the non-default loans more than makes up for that lost principle.
Lending Club Income
The biggest reason that I invest in Lending Club is for the higher rates of return and the income that it provides to continue building my portfolio. I bank the interest payments and then reinvest them into new loans when I’ve passed $25 in available funds. Those interest payments, after fees, totaled $115.69 for 2014. That’s up from $109.88 in 2013. Less of an increase than I expected, honestly, but still $115.69 that I didn’t have before. And it still leaves me with about $75 in income on the account after you account for the lost principle that was written off. And that’s $75 that I’ve reinvested into principle and am now earning interest on. Given my current rate of return, I can expect that to increase by about $12 next year.
[Tweet “I invest in Lending Club for the higher rates of return and the income.”]
Another of the metrics that I like to look at is the average amount of interest earned each month. I reached point where the payments (principle+interest) each month exceeded $25, and I could make reinvestments each month, but the next benchmark I’d like to reach is to make $25 in interest each month to reinvest. That’s one new loan to invest in each month. The average for 2014 was $9.64, so I still have a way to go, but it’s increasing year over year. It was $9.16 in 2013, $5.94 in 2012, and $1.91 in 2011.
I think the thing that I like the most about Lending Club is the income potential and the growth I’ve managed with my portfolio. I haven’t deposited any new money into the account since November of 2012. Through active investing and reinvesting, my portfolio has increased by almost $200. I think that’s pretty good on deposits of just a hair over $700.
The Future of my Lending Club Portfolio
In the past, I’ve talked about changes I planned on making to my investing strategy in this section. I’m pretty happy with my returns, and with the numbers that I’ve just shown you, and so there won’t be any immediate large changes. If the default rate jumps by a lot, there’s a good chance that I might begin investing a bit more conservatively. But, if it holds steady, I see no real reason to do so. My portfolio is pretty heavily weighted towards the B and C grade loans in any case. And I don’t know that moving to A grade loans would give me the return I’m looking for. So, short term, there won’t be any changes to my investing strategy. I’ll just continue to reinvest the payments and see what kind of growth I get in 2015.
Do you have any questions I can answer about my experience with Lending Club? Other things related to peer-to-peer lending that you want to know? Let me know in the comments below, or through the contact form linked in the bar on the left.
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
