Achieving financial freedom means having enough investment income so that you don’t have to work for a living. When your investment income exceeds your living expenses (including taxes), you no longer need a job to pay your bills. Of course, you don’t have to quit your job once you achieve financial freedom, but you have instead the choice of whether or not you continue to work.

You will also want a margin of safety. If your living expenses are $5,000 a month and you make $5,000 of investment income a month, for example, you have little financial wiggle room if your living expenses spike or your investment income takes a hit. It’s better in such instances to have perhaps $10,000 or more of monthly investment income before submitting your resignation letter.

To achieve your Financial Freedom Day, you need to reduce your living expenses and increase your investment income until your investment income exceeds your living expenses by your desired margin of safety.

Reducing Your Living Expenses

The best way to reduce your living expenses and keep them low is to live well below your means. There are many good suggestions in the Personal Finance Education section of this blog. The idea is to maintain your quality of life while living it in a more frugal manner.

Borrowing money for consumption is considered “bad debt” because it costs you money. Bad debt takes money out of your checking account every month when you make the payments. To get rid of bad debt more quickly, consider a Prosper consolidation loan. By refinancing your debt at a lower interest rate, you will save interest expense. These savings can be used to help buy the income-producing assets you need to increase your investment income.

Increasing Your Investment Income

You investment income must come from a portfolio of income-producing assets. If you need $5,000 of investment income per month (or $60,000 a year), for example, you should work towards building a portfolio worth $1.5 million in order to be able to draw income at a 4% safe withdrawal rate.

If your investment management costs are 1% of your portfolio’s value and inflation is 3% a year, your portfolio needs to earn at least 8% (4% + 1% +3%) a year on average in order to be able to generate the same purchasing power of income on an inflation-adjusted basis.

Diversifying with non-correlated asset classes is important. Although the stock market averages 10% a year over the very long term, its returns also swing wildly on a year-to-year basis. Prosper loans, on the other hand, are correlated with the job market rather than the stock market. Hence, making loans to your fellow Americans is a way to help diversify your portfolio of income-producing assets. But since unsecured loans to people are also risky, it’s important to keep your Prosper portfolio to a small percentage (e.g., less than 5%) of your overall investment portfolio.

The only constant is change. Investment returns change. The inflation rate changes. The economy changes. You need to monitor the financial environment and make adjustments to your investment choices and living conditions as the world changes. This is an area where you need to take full responsibility for the results you get. No one else is going to do it for you.

Borrowing money to buy income-producing assets is considered “good debt” because doing so puts money into your checking account on a regular basis (so long as your investment return is greater than the interest rate on your debt). When you find the right opportunities, consider taking out a business loan on Prosper to be able to take advantage of them. With your good credit and your excellent track record of on-time Prosper loan payments, lenders will want to loan you money and you will find Prosper to be an ongoing source of inexpensive money to fund your wealth-building programs.

Making It Happen

The first decision you need to make is to decide you want to achieve financial freedom. Then commit to making it happen, whether it takes you years or decades to achieve your dream. With your decision and commitment, you will start looking for ways to increase your income, live below your means, and invest the difference. Set up a capital account and add to it the money you save by consolidating your debts with a Prosper loan (along with the many other ways you will discover to save money).

When you are tempted to buy a non-essential luxury item you just have to have, decide what you want more — the luxury item or financial freedom. Buying the luxury item will push your Financial Freedom Day further out in time; avoiding the purchase of the luxury item and putting the money into your capital account instead will pull your Financial Freedom Day in closer to the present. There is no right or wrong answer here. Rather, it’s what you decide to do with your money and your financial future.

The conceptual framework provided in this blog post will get you started on the road to financial freedom. All you have to do is reduce your living expenses and increase your investment income in a steady fashion until your investment income exceeds your living expenses by your desired margin of safety. Prosper is here to help when you need it. Enjoy your journey and may it be a profitable one.

Roger Steciak achieved early semi-retirement in 2006 and became a Prosper lender to diversify further his portfolio of income-producing assets. His book Happy About People-to-People Lending With Prosper.com, How to Lend Money to Friends You’ve Never Met was published in 2007.

I guess that today has been two years since I joined Prosper. They sent me a nice note telling me so. What an interesting ride it’s been so far. Euphoric when the first loan I bid on became active and depressing when I followed it to Default. There have been lots of emotion between those too.

I have to say that I’ve learned a lot about credit in the past couple years. The variety of commitment to payments has been interesting too. As above the ranges are sometimes unpredictable. I’ve had good and bad borrowers in all credit brackets. Initially I felt like I could ignore some of the data and bid to help people. Boy did that hurt!

The platform has improved so much over the past couple years. The information we have now is so much better than before. I can’t believe I bid so blindly early on, but it was all we had. Quality of loans and collections seems to have gotten a lot better too. The 3rd party applications have benefited from improved information sharing and I’m amazed at how helpful they are.

I had a business trip to San Francisco in the fall and was granted the opportunity to visit the office. What a group of nice gracious people. It’s always fun to talk to someone else knowledgeable about Prosper (my wife just rolls her eyes at me.) I live in a large company in corporate America and it was fun to see this startup doing its thing.

What am I doing now? I’m bidding on loans and playing with portfolio plans. I’m far more conservative now and the results are keeping me happy – 100% current for the past 12 months, 96ish% current for the past 18 months (just don’t go back to those early loans!)

It’s been an interesting ride. I’m looking forward to the next couple years of P2P lending.

—

Mike (printans)
Support my Juvenile Diabetes Research Foundation ride in Death Valley by donating here: https://ride.jdrf.org/index.cfm?fuseaction=rideCentral.personalpage&riderID=7953

We’re all taught: when in polite company, don’t talk about money, sex, politics, or religion. I don’t know about the last three, but when it comes to money, people are decidedly tight-lipped. A cousin once confided in me (after a few drinks) that he’d racked up $50,000 in credit card debt. You could have knocked me over with a feather! Here’s a guy who went to college, has a good job, and seems to live a normal lifestyle. And he’s overspent enough to feed a quarter of a million children for a day.

How could I have not known this? I mean, he’s family, right? But people are very private with their money, and I would argue, without reason.

With the exception of having a mortgage, debt is looked down on in the United States. But according to CardRatings.com, 60% of Americans don’t pay off their credit card bill every month. So it’s not uncommon to carry a balance. What can set you apart from the crowd, though, is paying off your credit card balance in a smart way. That’s where Prosper comes in.                 

Okay, so you think Prosper is a cool idea, and you put up a listing. You’re really hoping that some of those lenders notice you with that picture of your cute dog and adorable kids. And maybe if you’ve got stellar credit, you will get some bids. But chances are you probably won’t.

There is something you can do about it. Tell someone. Seriously. Do it. It will help.

When you ask for a loan on Prosper, you’ll probably upload your picture, and you might write a long story about how much that kitchen remodel set you back. Or how you wrecked your car, but it was, like, totally not your fault.

And we Prosper lenders get that. We know you need a loan; otherwise you wouldn’t have jumped through Prosper’s hoops to ask for one. But we’re looking for a little commitment from you, too.

So tell someone, already. I did it, and I managed to get a great loan at an embarrassingly low interest rate.

Here are some other folks who are doing it right:

Blind Dog

No, we haven’t started making loans to canines. But this borrower has a $200 bid from a neighbor and fellow church-goer. Missmanhattan says “Mike is a neighbor and personal friend of mine.”

Paying off my credit cards

This borrower was referred to Prosper by someone who was an existing lender, and has already placed $650 in bids on the loan. By referring the borrower, Zorg (the lender) will also enjoy $50 when the borrower’s loan gets funded.

Need $$ for Spring Projects

He’s already got a $50 bid from a friend, and an endorsement from his kid (probably unverified because you have to be 18 or older to get verified). And with an estimated return of 24.61%…

So give it a try. I know it’s a little weird asking friends and family for money. But when you’re only asking them for $50, and their small bid can help you get your whole loan funded, it’s easier than you think. Heck, if you invite them to Prosper, you’ll each get $25.

So what’s stopping you? Leave a comment and let me know.

—

Andrew is a Product Manager at Prosper.

The following is a guest post by a Prosper member: CreditKarma…  You can use the Prosper Performance tool to estimate default risk for Prosper loans.

When I was a marketing and risk analyst with a credit card issuer, the customer’s credit score never really mattered per se. My concern was always with the default risk for any given score. For example, it was more important to know that a 720 FICO™ Score customer had a 1 in 237 probability of default. The score was meaningless to me (the lender) without the corresponding risk probability.

As such, I always wondered why Fair Isaac and credit bureaus used arbitrary scores when default risk is so much more informative to all parties. If I had to speculate, I would guess the following reasons:

1. Intellectual Property Protection - It is probably much easier to patent and copyright some arbitrary score and score algorithm than it is to patent logistic regression (the math term used in developing scores) and an arbitrary score range.
2. Consumers Don’t Want to Be Labeled - Consumers may object to such an outright classification as default risk. To say one person is a 450 FICO™ is probably not as offensive as saying that person has a 1 in 3 chance of defaulting on a loan.

Today, the reason is moot as it has become ingrained in consumers. As I read the comments in various blogs and discussion forums, I am still amazed at the level of mis-information accepted as truth. People claiming there certain scores are FAKO’s* or that doing X will yield Y result in your score. I personally think the confusion stems from the number of data sources, models, default variables, and uses of scores. It took me a degree in mathematics, economics, and 10 years of industry experience just to get my arms around credit scores and credit uses.

All this brings me back to the question: why doesn’t the industry just share your default risk? Isn’t that just an easier thing to understand than some arbitrary score range. Some people may object to a probability label but as they say, “a rose by any other name…”

Editor’s Note: *FAKO or Fake-O has been around for years, but the term was popularized by Suze Orman fairly recently. Orman is, admittedly, on Fair Isaac’s payroll.

This is a guest post from Prosper Lender David Makes Cents.

I was just reading an article that I found on Stumble Upon that made me mad! Well ok not really mad because I am a pretty mellow person, but lets just say I didn’t agree with it. The name of their post is pretty much the opposite of mine it was: Why I think P2p lending is a bad idea. So in this post I will try to prove to you otherwise and tell you about my positive experience with p2p lending sites.

Quick p2p history

Ok, so if you haven’t heard of p2p lending I am going to try to catch you up real fast because this is not really the point of the post. Peer to Peer (p2p) lending is essentially people with a little extra cash helping out those who need a little extra cash by giving them better interest rates than they would other wise get from a credit card.

Why P2P lending helps borrowers.

1. Borrowers can get credit that they would not have otherwise been able to get. With the credit crunch as it is, it is becoming increasingly hard to obtain credit. Many ordinary folks with good to decent credit are no longer able to obtain credit. I know you may be saying to yourself, “Credit is bad, these people would be better off without credit.” Well I disagree. Currently the market is looking pretty rough, some people would not be able to put food on their table without credit. If enough people had credit, the economy would get a boost and then they would have jobs to be able to pay back their loans.
2. Borrowers can get lower rates than they would from credit cards. Even though the Fed has been dropping rates left and right, credit card rates have stayed high. This is due to a dry up of credit. It is getting hard for common people to get credit anymore. Prosper and other p2p lending sites’ rates have been holding steady. This is because there is still around the same supply of people lending on these sites and the popularity of p2p throughout the blogosphere.

Why P2P lending helps lenders

1. Much Better rates! Right now the stock market is way down. Most analysts predict it to be going down or making small gains for the next few years. Investors need a place to put their money. P2P lending is an excellent place to put this. If you invest in the people with decent credit scores, you will get pretty good rates of return.
2. Good diversification. With most of the major p2p lending sites like Prosper , you can invest as little as $50 per person. If you are investing a few thousand dollars, you can have your money spread out amongst 100s of people. All the major investors praise diversification.
3. Helping others. This is a big part of the reason I lend on p2p sites. I mainly bid on loans that are looking for debt consolidation. With these loans, borrowers are allowed to pay off all their credit cards and put all of their debt into one single, lower payment. The rates are always lower than they would to be to the credit card banks. I am letting them keep more of their own money.

Summary

One of the points that the author of the post I am responding to said was that the only reason people are promoting p2p lending is for referrals. Well in this post I HAVE USED NO REFERRAL LINKS. I would hate to be discredited by something as stupid as that. I have been investing in Prosper for a while now and have no defaults or late payments. Every one I have lent to has paid me back on time. I am currently putting another $1k into my account because I like it so much

The only reason I would put in the referring link is so that potential new lenders could receive the $25 dollar bonus that Prosper offers if they want to sign up. I am not going to put a link in my post but I will have a banner on my sidebar that is an affiliate link. If you read this and are interested in signing up consider finding a referral banner to sign up so that you will receive the $25 bonus.

*If you liked this post please check out this and other posts at http://www.davidmakescents.com