The Carnival of Personal Finance is up

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Prosper.com Strategies (Part I)

Since I started loaning money on Prosper, I have been coming up with my own heuristics for who, how and when to lend money. I still only have $1000 deposited and only a handful of funded loans so far (it takes a while!). Anyway, here are some of my initial learnings and habits to make the process of loaning on Prosper less risky and less time consuming. Some of these are (hopefully) insightful and others, just common sense:

1. Spotting good borrowers. To maximize the rate of return for any particular loan, you want loans that effectively balance between someone likely to default and someone who will pay off early. People on the downward spiral of multiple delinquencies (both current and over the past 7 years) need to be avoided. On the other side, anyone who willingly writes in their description that they don't really need the money or that they intend to pay it off early is probably not what you want either. It takes a while to get a loan funded so having someone turn around and pay it off early is frustrating. Balancing these two extremes takes some research, but once you get the hang of it, you will be able to spot them quickly going forward.

2. State interest rate caps. Some lenders claim that they cannot offer interest rates to lenders above a certain amount due to their home state's regulations. These rate caps do exist, and generally people from states with low rates are people you want to skip. This is especially true for people who have really bad credit and can only offer a nominal lender rate (i.e., Kentucky has an 8.25% cap!!). These people are not going to get loans on prosper, as most lenders are going to wait for loans in states where the cap is higher or non-existent before committing to a lot of risk in low-cap states. This will ultimately limit the prosper marketplace size.

3. Verified homes/accounts. I personally feel more secure lending to people with verified homes and verified bank accounts. In my mind, this lowers the risk, even with a D rating.

4. Loan search criteria. When looking for new loans, I generally exclude credit grades of E and below, ignore group affiliations (see below), although group ratings can sometimes be helpful. Again, these are my habits, yours may vary.

5. Tracking loans. When I find loans that I want to track, I put them on my Outlook calendar with a reminder for a few hours before they end. Given the chaos and tendency for lenders to aggressively bid down the lender rate, I don't waste time putting in my lowest bid and hoping I don't get outbid -- it just takes too much time to manage. I want to track the loan only just before it closes. (sorry MapGirl, but I may have been one of the snipers you encountered. :) Once the chaos in the marketplace settles down a bit and more borrowers can sop up the lending demand, I may be able to use bidding system more reliably.

6. Follow the herd. I hate to say it, but following the proverbial "herd mentality" seems to have some benefit on Prosper (i.e., using the wisdom of the crowd may be a way to minimize risk, while getting a reasonable return.) If there are lots of bids for a particular loan, there is probably good reason, if not: again, there is good reason. Loans that become fully funded early are a good sign, although the lender rate can plummet near to when it closes. The other side of the spectrum are loans that have anywhere from a handful of bids to no bids at all. Trust me, the lender community is VERY active on prosper, so odds are that you aren't the first one coming across a great undiscovered gem of a loan. A little checking on the borrower background (within the Prosper site) is usually enough to tell you to stay away. I don't mean to make light of anyone here, but here is an example of bad stuff lurking beneath the surface. (hint: look at the credit information detail after logging in)

7. Loan descriptions. The more detail in the description the better, but no matter what it says, the credit information numbers should be how you make your primary decision to loan. There are a lot of descriptions out there intended to tug at the emotions, or descriptions that provide merely a sentence or two on why someone should loan them $10,000. Remember, this is an investment, not a charity lending board. Here is an example of a good description. Here is a bad one. (I don't know how long these loan requests will be live, so check 'em while you can.)

Some things I'm not quite sure about yet:

• Automatic Funding. This option is used by borrowers who want the money fast and don't care as much about the interest rate. Sounds risky to include these folks to me. See #1 above -- they may be able to pay it off early, denying you full interest payments.
• What is better with all other things being equal: a positive debt to income ratio or a better credit grade?
• Groups: I know they are supposed to give lenders confidence, but the fact that they are taking a cut means there is a conflict of interest. I am not sure what to think about groups and I currently pretty much ignore them. I am sure there is money to be made by joining one, but again, seems like there is a real conflict there.

Disclaimer: This list of learnings is not an endorsement, nor is it a recommendation on how you should invest in loans on Prosper.com. This information is provided as-is and I make no warrantees as to it's accuracy or applicability to your dealings on Prosper.com. Simply put: do your own research and draw your own conclusions. :)

The new 2007 401(k) limits...

Here's a quick one: Does anyone else feel like contributing an extra $500 next year to your 401(k) seems like a drop in the bucket? Sure, I'm all for any increase in tax-deferred savings, but $500??? Since 2002 we've been able to add $1000 more per year, why the sudden slowdown? What am I missing here? (BTW, I saw this over on Our Money)

Screwed again!

Well, I guess I should have seen this coming. Although I regularly pay a little extra on my mortgage payment each month, the $4500 the I recently paid was mis-applied. Surprise, surprise. It happens almost every time I pay more than the usual extra principle payment. What I can't figure out this time is where the money went! On my online statement, they show a payment of $3583 and a second principle-only payment of $917. Fine. Breaking down the numbers, however, the good folks over at Abn Amro applied the $3583 as follows: $462 applied to principle, $955 in interest (yep, that hurts!), and $373 applied to escrow.

Now, I took algebra in high school, so I'm fairly confident that 462+955+373 only equals my normal mortgage payment of $1790. So why, may I ask, does the applied payment total say $3583? Where is my extra $1793 that should have been appled to my principle???

I was even more frustrated when I called them at 4pm on Friday, navigated through 5 call routing options only to find out that their customer service center was already closed. Oh well, I guess I'll get in the phone queue first thing Monday....

I love this time of year!

Not only is Fall my favorite season, but this is the time of year that I look forward to extra cashflow. You know the time... the time when you've fully funded your 401(k) for the year, the time when your employer stops taking Social security taxes out of your paycheck (for those who fall into this category), and the time when you can look forward to comparing your annual performance to your goals. For me, this also means it's time to start paying down my mortgage with the extra cashflow. Since we have already met our net worth goals for the year, it only makes sense for us to start paying down the mortgage. Again, one of my goals is to retire with a fully paid-for home, and I know this is within reach.

My current mortgage payment is around $1790/mo (20 yr fixed @ 5.85%), and I was very pleased to make a whopping $4500 payment for November yesterday. Granted, some of this money was extra checking account build up, but the other funds came from extra cashflow as I described above.
(Image courtesy of tiarescott)

I've opened a lot of topics, haven't I?

Realizing that I have introduced a number of topics that I need to follow up on, I thought that creating a list of them would help me focus my posts over the next few weeks. Yep, you guessed it, I'm a list maker... Ok here it goes:

1. Networth goals (For 2006 and overall) -- I realize that I have never spelled out my goals on this forum. I certainly have them, so I should probably spend some time talking through them and soliciting feedback.
   
2. Prosper.com -- I've started playing around with this and will do my best to keep you updated on what I do, what I think of it and ultimately whether or not I'll continue with it.
3. Career update -- I briefly discussed this, but need to follow up. Many changes have happened over the past several weeks, and all of them too quickly to really blog about.
   
4. Early Retirement Forum learnings -- I will need to collect my thoughts on this one to provide my insights. Expect something over the next few weeks.

Any other threads or ideas I've raised that you would like me to follow-up on? Let me know. ...And as always, I encourage your comments and feedback.

Update:

• Added an update on Prosper.com
• Added a career update.

Experimenting with Prosper.com

Ok after reading about Prosper.com all over the place, in order to talk about it intelligently, I had to do some homework. I've recently deposited $1000 into Prosper and have already made some bids to get a hang of it. Of course, I was outbid within 24 hrs, which leads me to believe that you need a serious strategy in order to make any serious returns.

There are a TON of people bidding for what appears to be a precious few funding spots. Unless Prosper successfully attracts enough borrowers to meet the lending demand, I fear that rates are going to plummet to an unreasonable level. Sure, there will still be some premium in the rate over and above what borrowers can get on the street through conventional means, but as a lender, the margin has to be worth the risk being taken. As rates plummet, I can forsee the margin not making up for the risk.

Time will tell. For now, I will use my play money to see what kind of return I can generate. The other thing I will be watching closely is how much time I am spending trying to generate these returns...

BTW, why don't they have RSS feeds for these things???

The Early Retirement Forum

When I read the great post back at pfstock's blog, I can't help but feel some bit of camradarie. S/he mentions a few of my favorite retirement forums that I have actively lurked around for the last few years. In particular, the Early Retirement Forum.

Truth be told, I have thought about writing a series of posts about what I learned on these Forums over the last several years, and I still may do so. Introducing them seems like a first good first step.

The Young Dreamers board is filled with your 20s, 30s and above folks who dream about retiring early one day. Some of the folks are just learning what early retirement means and how to get started working towards it. What is good is that some of the "been there, done that" crowd from the other boards check in here and give great advice. The support in this community is unparalleled.

The FIRE and Money board is filled with folks actively trying to hit "the" number. These guys are mostly talking about investments and the state of the market. (By the way, FIRE stands for Financially Independent, Retired Early)

Finally, the Life after FIRE board contains a number of lively discussions about folks living in early retirement. Some of these folks are in their 40s, 50s and above, but I have to admit, this board is the most interesting of the three. When reading the discussions on this board, I can't help but feel that I'm a fly on the wall listening to a conversation amongst great friends. This board has a great feel and I usually spend my time here even though I probably belong in the other two.

Anyway, for what it's worth, I hope you enjoy these boards (actively or passively) as much as I do.

September networth and mid-October update

Optimism is high -- nothing but sky up there.

Ok, I didn't exactly detail out what happened in September, so I'll spend a little time discussing it now and then move to a mid-month update for October.

September was a particularly good month for me, as it was for many others, I suspect. Net-net, my net worth was up 4.9% or +$22496.

Other highlights that helped bump up the net worth included:

1. I accelerated my 401(k) contributions to reach my $15k limit as early as possible
2. I recieved a 10% bonus and a 5% raise (yes, I am lucky to get this -- raises seem low these days). The bonus went directly into my brokerage account and will be deployed over time.
   
3. I had a block of employee stock purchase shares deposited (about $6k worth)
   
4. Overall market appreciation made up the rest.
   

I guess the message for September was: any money coming in got saved.

------------------------------

October has been quite good to me, as I suspect it has been for others as well. The market has been on fire and I'm lucky to be reaping some of the rewards. Here is a rundown of happenings to date:

1. I finally finished funding my 401(k) up to the $15k limit. From here on out, funds that would have wound up in my 401(k) will be redirected to pay down my mortgage. (I'll give the numbers at the end of the month update)
2. I never try to time the market like this, but I made a short term investment move in my 401(k) in July to buy my significantly undervalued company stock and finally sold it off this week for a near 26% return / $10k profit. I'm holding the proceeds in cash, but suffice it to say that my 401(k) performance to date with this move is hovering around 17%. I'm unbelievably happy with that.
   
3. Overall investment returns have been around 4% (+$17449) at the halfway point, which is great, but with any market pause, I'm sure I will pare those gains.

Looking forward to the end of the month -- Lets hold these gains!

SeattleSimplicity?

Anyone know what happened to SeattleSimplicity.blogspot.com?? I really loved her site and I'm wondering what happened? It almost looks like a strange redirect was put in there...

Anyone?

Craig's List Experiment Update

Ok, I have some great news on the Craigslist experiment that we've been doing. Basically, we have sold about 90% of our furniture from our old house and have been replacing it with new and used (read: antique) furniture. Our goal was to upgrade old stuff and pay a bit more, but not more than 25% above our proceeds for the new stuff.

Well, the results are positive. We sold everything from couches to chairs to tables, to area rugs and even some garden tools (ok, we probably stretched the experiment on that one, but revenue is still revenue.) All told, we netted around $5200 over the last month! That sounds like a LOT of money, but bear in mind that we sold a LOT of stuff, including a pair of expensive leather chairs that netted us nearly $3000 alone. On the purchase side, we have spent around $7010 and have replaced everything we sold, and then some. Overall, we still have a few minor things to sell and I'm sure my wife can come up with more things to buy, but I think we've done well. Relative to our goal of spending no more than 25% more than revenues, we did well. Our actual figure turned out to be 26%, but who's counting that extra 1%.

For those who haven't had good luck on craigslist, all I can say is: keep trying, don't let someone chew you down on price if you are asking a fair price and above all, be persistent. Things do sell, including expensive 3-year old Pottery Barn leather chairs that you believe are worthless. Somewhere, there is someone just like you that wants those Pottery Barn chairs, but just isn't willing to pay Pottery Barn prices to get them. Even a 25% discount off retail price is enough to yield a credible buyer.