Prosper: You Be the Banker

Personal finance has always been a passion of mine.  In another life, I'd be an accountant.

One investment service I really enjoy is Prosper.  Assuming you're first out of debt and already saving for retirement, you probably want to start making whatever money you have left work for you.  The stock market can be complicated and confusing, especially for small investors like myself.  Prosper fills a niche for people like me by letting me make informed investments cheaply. 

Prosper is peer-to-peer funding, essentially replacing banks with everyday people.  You can browse loan applications, and choose to fund loans for as much or as little as you like.  So someone taking out a $7,000 loan might have hundreds of people chipping into fund it.

Prosper gives you a nice financial snapshot of the people attempting to take out the loan.  You can see their credit history, their stated income, whether they have any accounts in default, etc.  Just like in the banking industry, some loans are riskier than others, but the rate of interest they pay is much higher.  For example:

Candidate A has good credit and is likely to repay the loan.  You can fund his loan at 8%.

Candidate B has terrible credit and there is nothing in his credit history to make you believe he will pay you back.  You can fund his loan at 30%.  High risk, high reward.

I've done really well with the website over the years, returning over 11%.  I've funded well over 75 loans.  While some have gone into default, most have been repaid.

My rules are simple:

1.)  Never invest more than $50 in one loan.  My standard investment is $25.  If I really like the application, I will invest $50.

2.)  Know who your're investing in and never fund someone who doesn't fill completely fill out the financial profile.  There is an option for loan candidates to state why they are a good candidate for the loan.  Many people answer this thoughtfully and thoroughly.  Some just skip it.  Most of my defaults fall into the later category.  If they didn't take the time or effort to share their story when asking for your money, then they aren't worth funding. 

3.)  To ensure you follow rule number two, skip the autoinvest option. 

Best of all, the customer service is very easy to work with.  They have a laid back West Coast vibe.  Today I needed to update my bank info.  I called in, pressed the option I needed, and was immediately connected with a guy who sounded like he drinks Chai tea and rides his bike to work.  He took my info and got my bank account linked in about a minute, and I was able to make a transfer as soon as I got off the phone.  Easy peasy.

Every Dollar Is An Investment

Before I start, credit where credit is due. Treating every dollar as an investment is the third step in the Motley Fool's 13 Steps to Investing Foolishly.

I read that article awhile ago, leaving the idea percolating in my head.  

In your life, you will only get so much money. That amount can be higher or lower based on a number of things in and out of your control.  But the amount is limited.  As your momma said, "Money doesn't go on trees."

While you might not think twice about buying $3.40 latte (for example), the implications of doing so loom large.  Especially when multiplied hundreds or thousands of time. That $3.40 can never again be spent on anything else.  Is it really worth it?

Another way of looking at it:  Each time you spend a dollar, you value the object purchased more than the dollar.  You also value the object purchased more than anything else you could potentially buy with that dollar.  And some things I'd rather spend money on other than lattes.  For example:

• Travelling around the world.
• Supporting an awesome cause.
• Growing my little garden.
• Doing anything with my friends.

A whole other category of ways to spend that $3.40 exists.  Ways that make my money make more money (reread that part carefully), also known as investing.  For example:

• Saving towards the down payment for a housem where I can build equity.  
• Paying off credit card debt, instead of owing the bank 14% or more.
• Funding my retirement account or otherwise investing in the stock market.

The first options are good and the second superior.  Investing wisely now means more money later to do the things I want. 

Back to the coffee.  Never buy a latte?  Not at all.  At times a latte has been the best money I've ever spent.  Do treat each dollar as an investment.  Consider and value each purchase.  In doing so, you will stretch your money much farther.  Some tips:

1. Make a Budget and Track Your Expenses:
   Know where your money goes. I estimated $250 a month for food on my first budget.  The reality? $400-$500!  Those Subway stops, Starbucks run, and nights out added up, without me knowing.
   
2. Find the Low Hanging Fruit: Once you know where your money goes, you can find ways to save.  Some are easy.  Pack a lunch to work instead of eating out.  Brew your own coffee instead of a daily latte.  The savings add up quick.  Consider the math:
   
   Home brewed coffee = $.25.  Latte = $3.40.  Weekly Savings = $16.75.
   
   Ask yourself what's really important to you and what's not.  Are you investing too much money in your car every month?  Sell it and buy a cheaper one.  Can you get by with just using Hulu?  Then cancel TV.
   
3. With Your Extra Money Pay Off Debt, Save, and Invest!
1. First of all, Debt is Dumb. If you have any that's not your home mortgage, pay it off! I've been debt free for about a year now, and the freedom feels great.    
   
2. Once that's done, sock money away.  Choose an amount and save it every month.  Once you see your accounts grow, you'll get addicted.  Seriously, it's fun!
   
3. Invest.  Make your money work for you.  Fully fund your retirement.  Open an IRA.  Check out a site like Prosper.  Build wealth!
   
   Read Dave Ramsey for the full scoop.  His baby step plan is great, and I did not do it justice here.
   
4. Spend Your Money on What Really Matters To You (In Cash):  
   Use some of your savings to do what you love.  I love travel, but not on Visa's dime.  Gardening and bike riding are also hobbies of mine.  I pay for them in cash.
   
   Get those season tickets you want.  Go to the ballet.  Buy that motorcycle.  Spend your money on the things that matter to you.  Find a cause you're passionate about and give.  

You work hard for your money.  Use it to live the kind of life you want, without going into debt, while building wealth.  It might sound impossible, but when you think about where your money goes, you'll be amazed at how far your money goes.