Guest Post from Living off Dividends (aka on Prosper WealthBuildingLessons). 

I have a blog called living off dividends where I discuss, among other things, my passion for investing and generating income that can be used to replace one’s salary. I have numerous different types of investments like rental properties, stocks, canadian income funds, CDs, foreign currency ETFs as well as owning loans on Prosper.com.

Since a lot of my net worth is in illiquid investments like real estate, the rest of my investing has to be relatively liquid. This means that it shouldn’t be locked up for 10-15 years or more and it should be relatively easy to invest in.

Building a portfolio of loans on Prosper.com is easy and while it does tie up the money for 3 years, the returns are almost three times larger than on a 3 year CD.

Bidding on loans on Prosper.com is a form of asset allocation. You can’t always predict which asset class will do well so you spread your investments over various classes as a way of lowering your risk and boosting your yield.

While bidding on loans on Prosper.com is not without risk, my overall experience (and investment returns) have been quite positive. I’ve been investing for nearly 18 months and I’m receiving over 13% annualized returns. That sure beats any 3 year CDs on the market! I love investments where I can get 5% more than I get in a savings account, and without too much risk.

As an investing buff, I’m also a big fan of compound interest. I think it was Albert Einstein who said that one of the greatest mathematical discoveries was compound interest. One of the greatest proponents of this belief are the credit card companies. They charge you 20%+ interest on your balance, but you don’t usually have to pay more than a fourth of the interest accrued every month. This results in you having to pay interest on the accrued interest from the very next month.

I like my investments to have the potential for compounded returns. The interest on your savings automatically gets compounded. But most people stop there. They don’t try to compound the returns of their other investments. By re-investing a stock dividend back into the stock, you can essentially compound your stock returns too. Even Prosper loans have the potential for compounded returns by re-bidding the interest payments back into more loans.

So far, I’m quite happy with lending on Prosper.com. It fulfills most of my investment criteria and at tax time they even streamline your accounting by providing you with a statement detailing your interest income and expenses. If you haven’t already given it a shot, now’s a great time to do so.

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Nirav is the author of Living Off Dividends, a blog about investing. He’s currently lives in San Diego, California but has lived in England and India. He is an active lender on Prosper.

My wife and I are recent newlyweds. While we tried to be responsible with the costs of a wedding, at 200 people, we knew the costs were going to add up. It only made sense to try to save as much money as possible in anticipation of those wedding bills. We found we could save a great sum of money by going out on frugal dates.

I thought I’d share five of our favorite cheap date ideas:

• Picnic in the Park - Instead of paying restaurant prices for brunch, you pay grocery store prices. Instead of paying $20 and up for wine, you look for cheaper options under $10. If you have a radio, that can certainly add to the romance.
• Tour a Factory - In Northern California we have Jelly Belly and a Budweiser factories. When we lived near Boston we had options of Sam Adams and Yankee Candle. I recommend the book Watch It Made in the USA, which should be available from your local library.
• Movie Night - Red Box and DVD Play each have the latest DVDs available for about a dollar. Add a cozy blanket, microwave popcorn, and your favorite beverage… fun.
• Camping or Hiking - My wife loves the outdoors so this is one of her favorites. I don’t mind the outdoors, I just think that every tree should be Internet-enabled. I’m building up into liking this date more and more. In a year or two, I might be there.
• Minor League Sporting Events - Here’s a slightly more expensive option. My wife and I went to a Modesto Nuts baseball game last year. Tickets are around $7-10. Food was reasonably priced and the team gave away shirts and souvenirs in between innings. Even though we didn’t know any of the players, we still had fun inventing nicknames for them. We still associate any clutch performance with Jose Chavez, a player who got a huge hit in the game.

A good general rule of thumb is to opt for outside activities. If your wallet is looking a little thin, you might want to trade in your standard Saturday night restaurant date for one of the above options.

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Lazy Man has been a lender at Prosper since February 2006. He is the author of the personal finance blog, Lazy Man and Money and the health and fitness blog, Lazy Man and Health.

The CBS Evening News featured p2p lending on Friday night: In Credit Crunch, Lending To Each Other. Here is the video:

Cash Money Life (our newest Prosper Blogger) hosted Carnival of Peer to Peer Lending #6…

Our favorite articles were…

Prosper Lending Review with Eleven perspectives on P2P Lending

ProsperousLand observes Simple Receipe For 100% Funded Prosper Loan

Moolanomy defends Peer-to-Peer (P2P) Lending and Bloggers Ethic

and RateLadder with Prime Borrowing on Prosper Hits Record Levels — February Marketplace Survey

From around the rest of the blogosphere…

WebUpon with 9 (More) Useful Websites You Should Know About, But Probably Don’t

David makes cents.com offers Why I Think P2P Lending is a Great Idea

LazyMan says Hack Your Credit Score?

brip blap cleans house with does fidelity matter?

Blogging Away Debt asks Ever Hear of Gold Parties?

GenX Finance asks Couple Living in Camper After Foreclosure - Is it the Lender’s Fault? You Decide

The Digerati Life urges readers to Rent Instead Of Buy, And I Mean Anything!

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RateLadder is a Prosper lender and has been since July, 2006.  He has a passion for p2p lending.  He owns RateLadder — My Prosper.com Journey and other P2P Lending Adventures, P2P No Bank the P2P Blog Aggregate, and ProProsper — Professional Tools for Prosper Lenders featuring SQL access to Prosper data.

Do you know the rule of 72?  If you have an investment earning interest, if you divide 72 by that interest rate, you will know approximately how long it will take for you to double your investment.  For example, if you have an investment earning 6% interest, it will take you approximately 12 years to double your investment.  Does that mean that if you have a loan with a 24% APR, you’ll double your money when the loan is paid in three years?  Unfortunately, the answer is no.

The investment you make by lending your money with a three year fixed-term is a declining balance.  Each month as you receive a payment on a loan, a portion of the payment pays down the principal.  Your investment is decreased by the principal paid.  If you make a fixed-term fixed-rate loan of 24% for three years, you’ll earn about 41% of your initial investment.  So how can you make the rule of 72 work for you on Prosper since you’re dealing with declining balances?

You just need to make sure you are compounding the interest.  You can compound the interest by reinvesting the principal and interest you receive into new loans.  In order to be able to do this consistently, you’ll need to have enough principal loaned to receive $50 or more in principal and interest with relative frequency.  Here is a simple table to help you figure out how much principal it would take to generate $50 in principal and interest in a month:

Note that this table does not take into account late payments, defaults, and fees.  In order to use the rule of 72 for your loan portfolio, you will need to invest at higher interest rates to compensate for late payments, defaults, and fees.  The table does at least provide a good point of reference for estimating the amount of principal needed to originate one new loan a month with reinvested principal & interest.  This isn’t to say you should only compound monthly, but you will need to compound at least that often to apply the rule of 72.  If you have more money loaned out, you will be able to originate new loans more frequently and compound your investment more frequently as well.  Compounding monthly is a good start, but compounding more often is even better.

In order to calculate the principal required, I simply used the MS Excel finance function “PV” (present value).  I just entered the interest rate/12, term (36), payment ($50) and then rounded up the result to the nearest $50 increment.  For example, to calculate the principal required to receive $50 each month for a 6% interest rate, the Excel formula is =PV(6%/12, 36, 50) which returns -1,633.55.  The result is negative because it represents an outlay of cash (the positive 50 in the equation represents a receipt of cash).  You could also use the following mathematical equation:

where P = principal loaned, A = payment amount, i = periodic interest rate (be sure to divide the rate by 12), and n = the number of payment periods (in months).  So far I’ve loaned out $2,100 at an average interest rate of about 19%.  With that amount of principal loaned and average interest rate, I’m receiving about $75 a month in payments.  If I estimate 10% late payments/defaults/fees, I should receive around $67.5 or $2.25 per day.  At that rate it should take me about 22-23 days to place a new bid with the accumulated payments.  If I’m able to achieve a total adjusted return of about 9%, I should be able to double my money in about 8 years.

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WealthBoy is a new Prosper lender (WealthBoy) and writes the personal finance blog WealthBoy. He performs financial and statistical analysis in his day-to-day job. He enjoys following the financial markets and seeking out new ways to invest. He is well versed in investing in mutual funds, stocks, and options and has found peer-to-peer lending to be another good method for investing. He also loves to watch Florida Football and Florida Men’s Basketball.

In my opinion, everyone needs a credit card. I know many people have great arguments about why people don’t need credit cards, but I won’t agree with most of them. The key is using your credit card properly, which means only borrowing amounts you can afford to pay off right away. If you follow that method, you will never get into trouble by using your credit cards.

Here are some reasons you need a credit card:

Improve your credit history and credit score. Everyone needs to have some credit history and preferably a high credit score. Credit history and a good credit score is necessary to borrow money at good rates, and can help you rent a house or apartment, get better insurance rates, buy a cell phone, or even get a job. Having a credit card, charging small amounts, and paying it on time every month can help you establish your credit history and get a high credit score.

Consumer protection. If your credit card information is stolen and you promptly report it, you will only be on the hook for the first $50 of the damages - even if thousands of dollars are stolen. Some credit card companies will even waive the $50. This makes it much safer and more convenient than carrying around large amounts of cash.

Internet purchases. Everybody knows the best deals are on-line. From airline tickets, to Amazon, to Ebay, the best deals are on-line. Credit cards are the easiest and most secure method of on-line payment. Sure, you can use a debit card or an on-line payment service similar to PayPal for on-line payments to most places, but these methods do not come with the same protective measures as credit cards. If fraud is suspected, PayPal or your bank will likely tie up the disputed amount of money until the situation is resolved. This can put a serious damper on your cash flow situation!

Rental cars. Many rental companies require a credit card to rent a car. This is so they can charge any outstanding amounts to you in the event of over mileage or damage. Some companies will accept debit cards, but will likely withdraw a large deposit - often around $500 or more - until you return the vehicle and they have inspected it. It may take up to a week after you return the car for you to receive your refund. This can be devastating if you need that money for something else!

Detailed transaction history. If you budget your money (you do, right?), then using credit cards will allow you to download your transaction information in neat categories. How much did you spend on eating out? Gas? Groceries? It is very easy to find out. Just download your information and track it. Then you can make your budget accordingly, or find out where you need to cut back!

Other benefits. Credit cards can provide protection against merchant disputes, increased manufacturer warranties, cash back rewards, reward points, miles, and easy currency conversion.

Use credit cards wisely. Credit cards are a wonderful tool. As long as you treat them with respect and only charge amounts that you can afford to pay off straight away, you will never get into trouble - and you can enjoy all the benefits credit cards have to offer.

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Patrick is the author of Cash Money Life, a blog about personal finance, career management, and self-improvement. He served in the United States Air Force, has traveled to over 35 countries, and is a fantasy baseball champion. He is an active lender at Prosper.