As I mentioned in my last post, I’ve been taking 10% of my income from my online ventures and splitting it between my Lending Club account and my Sharebuilder account.  It’s been a bit of an experiment.  Nothing scientific, but a test to see if I drop the same amount of money into each account, what the returns and stability would look like.  My returns on Lending Club have been very good, and the stability has been good so far.  Let’s take a look at the Sharebuilder account.

So far, I’ve got about $264 put into the account.  (Yep, I’m a heavy hitter. )  So far, I’ve got six investments that I’ve split the money between.  There’s also about $50 that is in cash at the moment.  I’ll explain why that is in a bit.

• ARCC
• CIM
• LTC
• MAIN
• NRGY
• TICC

If you’re like me, you’ve likely never heard of any of those.  You’re probably more familiar with symbols like WMT, MSFT, APPL, or C.  One thing they have in common, is that they’re all dividend paying stocks.  I like that.  As time goes on, I’ll be balancing out these lesser known stocks with some other, more familiar dividend paying stocks. For now, that’s what the portfolio looks like.  They’re all pretty evenly split as far as portion of portfolio invested.  So far, the only one that is in the green is MAIN, and just barely.

Currently, my Sharebuilder account is showing a -13.30% return.

The Sharebuilder account is getting a bit of a bad rap here.  Part of the reason that the return is so abysmal is that I’ve got a $260 portfolio split up into 6 stocks. Each purchase comes with a $4 fee.  So, right away, the investments have to overcome a $24 loss.  Take that $24 out of the equation, and the account is only down a few bucks, and the return, while still negative, is far less so.  That also brings us to the cash that’s sitting in the account.  Previously, I would make a purchase when the balance got over $34, so that, once the $4 fee was taken, I was still buying $30 worth of the stock.  After seeing what that was doing to the results, I’ve changed that, and will likely start making purchases in $50-$60 lots.  It will take longer to build the portfolio, but the impact of the fee will be lessened.

Overall, there really isn’t much comparison of the returns between the Lending Club and Sharebuilder accounts.  Taken on their face, Lending Club wins hands down.  I have to add, however, that the investments available in the two are very different.  For the most part, you won’t lose an investment in Sharebuilder.  Unless you invest in the next Enron, that is.  With Lending Club, the risk is higher, because a borrower could default on the loan and you could lose all of that money if they do.  But, there’s an obvious trade-off here.  For the higher returns of Lending Club, you have higher risk.  Less risk, with Sharebuilder, gets you less returns.  Simple as that.  I’ll likely continue doing both, for a while and see what the 1 year comparison looks like in July.

Have you ever used Sharebuilder?  Where do you put your investments?  Do you have a “fun” account like my Sharebuilder account?

As I mentioned before, I’ve been taking the normal 10% contribution amount that most would be putting into their retirement accounts and splitting it between my lending club account, and a sharebuilder account.  It’s been a bit of an experiment.  I happen to think that lending club is a relatively safe investment option for a portion of your portfolio.  I’ve still got my 401(k) from my old job, so the investments that I’ve made at lending club and in the sharebuilder account don’t even really make up 5% of my total investments.  In short, I can afford to get a bit risky with the money.  So far, it’s been anything but risky, however.  I’ll update on the sharebuilder account in another post.  Let’s take a look at what my lending club account has done.

To date, my investments look a little like this:

• Total loans invested in: 24
• Total loans paid off:5
• Total loans defaulted: 0

With only 24 loans, it could be that I’ve just been lucky thus far.  I’ve had a couple of the loans go past due by 10-15 days, but nothing that hasn’t been caught up and made current.  And no defaults.  As I continue, I expect that I’ll see one or two.  With all the doom and gloom about the economy recently, I fully expected to see one already.

To date, I’ve deposited $257.20 into the account.  That includes money from before this experiment started, so it’s not all recent.  With that 257.20, I’ve invested in $511.36 in loans.  The math savvy of you will notice that the invested amount is quite a bit more than the deposited amount.  That just means that the money has turned over almost 100% since being invested.  The more recent money, which accounts for about 50% of the account hasn’t had a chance to turn over yet, or that number might be higher.  My total income, minus fees, is $36.26.

My portfolio breaks down like this:

• 39% of the loans are D grade
• 25% of the loans are B grade
• 15% of the loans are C grade
• 9% of the loans are F grade
• 7% of the loans are E grade
• 4% of the loans are A grade

As you can see, I’ve gone a bit riskier and weighted the portfolio towards the higher grades, but is still heavily centered around the C/C+ grade.  (Read this to see how I select loans)That keeps my return a bit higher, while also keeping the risk a bit lower.  Speaking of return, what is mine?

According to lending club, my net annualized return is 12.82%.

I like that.  It’s far better than any bank or credit union is going to pay me for my money.  To get that, I give up the liquidity of the money (I’d have to sell my notes to get the cash), and I give up some of the stability of the money (it’s riskier than a savings account or CD).  Because this isn’t my emergency fund, or normal savings, I’m ok with giving up both of those things, in exchange for an above average return.

Do you invest with peer-to-peer lending?  Do you use Prosper? Lending Club? Both?  How’s your return?

Passive Income is a bit of a myth.  Not so much in that it doesn’t exist (it does), but in what it really is, and why we should all be striving to attain as much passive income as possible.  I’ve written before about what passive income is.  But, in that article, I only wrote a short paragraph on why we should want passive income.

What is Passive Income

You should read the original post on what passive income is, but I’ll recap here as well.  In a nutshell, passive income is income that you earn with little ongoing effort (work).

Why Passive Income

The why of passive income is really the motivating factor for most people.  Many of you know the allure of free money, or easy money.  And many of you will mistakenly think that passive income fits one or both of those categories.  It doesn’t.  The difference, and the reason you will still want passive income, is in the ongoing work part.  With a traditional job, like the one I recently quit, you get paid per unit of work.  If you work one hour, you get paid $x.  If you work one year, you get paid $xx,xxx.  If you build one widget, you get paid $xx.  Your earning potential is directly tied to the amount of work you do.  More work = more money.  It’s a finite system.  You can only work so many hours in a day, so you can only make so much money.

You’ll still work for your passive income, but, if it’s a true passive income source, you’ll be able to work less for the money as time goes on.  The income is no longer tied to the amount of work you put in, except in the beginning.  Please don’t think that passive income is easy, or that it requires no work.  It does.  In fact, you might work harder than you have before initiating it.  But, once it’s initiated, the work can decrease if you want it to.

Passive Income Examples

One of the most common examples of passive income is rental income.  You rent out a property, using a property management service, and all you have to do is sit back and let the rent checks roll in.  Sounds easy, right?  It is.  But, you have to get there first.  You’ve got to do the work necessary to have the ability to purchase that rental property.  You’ve got to do the work to make sure that it meets codes so that it can be rented out.  You’ve got to do the work necessary to find a property management service that fits your needs.  And, even though it then becomes almost entirely passive, meaning you do no work to attain it, there might still be some occasional work that needs to be done, like deciding whether a repair should be done, and by whom.  As you can see, there’s a huge outlay of work to set up the passive income stream.

Another popular example of passive income is dividend paying stocks.  You own some shares of some companies that pay dividends to their shareholders, and let the dividend checks roll in.  Sounds easy, right?  It is.  Again, you’ve got to get there first.  You’ve got to do the work necessary to have the ability (money) to purchase those shares.

Passive Income isn’t Free Money

Passive income isn’t free money. I can’t repeat that enough. And it isn’t easy money.  You’ve got to put some work in to set up the passive income streams first.  But, once you’ve set them up, each day, week, and year, makes your work cost to attain those funds diminish.  Until, at some point, your work cost per unit of income is fractional to what it would be in a traditional job.  If a traditional job requires 1 unit of work for each unit of pay, over time, passive income might require 1/100th unit of work for each unit of pay.  And, that, is why we should all want passive income.

For me, passive income isn’t about being able to sit on a couch and watch television while the fat checks roll in.  It’s all about being able to pay my bills while I do the things that I like to do.  This site, and others I own, help me with that (although they are far from passive, they aren’t traditional jobs for me either).  I’m working on other methods of increasing my passive income stream as well.  I’ve always wanted to be a published fiction author.  I’m participating in NaNoWriMo to that end, with hopes of being able to self publish ebooks and use the royalties from that as another passive income stream.  I like to take photos, so am going to be exploring avenues of making some income with that as well.  It will require taking more photos, which is work, but, because it’s something I do as a hobby already, it’s a variant of a passive income stream for me.

What are some of the passive income streams that you employ?  What are some of the things that you do as hobbies already, that you might be able to turn into an income stream?

photo credit: quinn.anya

Building passive income streams can be hard work.  They usually take a significant amount of work and/or money to set up before they can really become a full-fledged passive income stream.  It’s part of the argument over whether they really are “passive” or not.  Obviously, as with anything, the more work or money you put into a passive income stream, the better it will be.  But, when you’re first getting started, there are several ways you can set up some small passive income streams that will provide with different forms of passive income. Here’s a few passive income ideas.

• Blogging – As a blogger, myself, this one is one of the first ones I usually suggest.  To be sure, it’s not for everyone, but it can set up a rather nice passive income stream.  Blogging is work, but a well set up blog, with some content, could eventually be left alone to collect traffic, and Google adsense checks.  The initial work is a bit heavier, but the maintenance while setting it up can be as little as a few hours a week.
• Cash Back Cards – Some might argue that this isn’t really a passive income stream, but I think that it can be.  Using a tax free cash back card to pay for bills/things that you would normally buy anyways makes the cash back an added bonus.  The only added work is to immediately pay the balance for the things that you’ve bought, and the cash back becomes an extra stream of income that you earned by buying things you would have anyways.  I have a coworker that does this and makes $500-$600 a year.
• Peer-to-peer lending – I’ve written before about my portfolio on LendingClub, and how, with very minimal maintenance, I’m slowly building a passive income stream that earns me money.  As my portfolio grows, and I reinvest the interest, the interest income from the portfolio grows with it.  Eventually, if I keep with it, I could have a compound interest passive income machine, built with less than $20 and 20 minutes a month.

Those are just a few quick and easy ways to build passive income streams.  They don’t require a lot of work to get started and maintain, but they will provide for extra income that you can use to build them further, or to help beat broke.
photo credit: alancleaver_2000

One of the terms that is always circulating the personal finance area is the term “Passive Income”.  What is it?  Why do we keep talking about it?  How do we get it?

What

Passive Income is income that you don’t have to actively work to attain.  Residual income like royalties on a book, dividends on dividend stocks, and interest earned are all examples of different kinds of passive income.  Some would argue that the work you have to put into all of those to write the book, purchase the stocks, or earn the money to make the interest make those less than passive, but in my definition, any income you earn that is new income, even if it is earned off of old income that wasn’t passive, is passive.

Why

The reason that we all want passive income is pretty self-explanatory.  It’s additional income that you don’t output any work for.  You purchase the stocks, and the company just sends you a dividend check every quarter.  You write a book, and then the publisher sends you a check based on it’s sales.  You deposit your money, and it accrues interest.  Beyond that initial setup, you do no work to continue the income stream.

How

The how of passive income is usually where people hit the brakes.  You see, when people think passive income, they immediately think “easy money”.  But, the truth of it is that there is nothing “easy” about it.  You do have to put in the work to set it up.  Some passive income streams are easier to set up than others.  If you’ve already got the money, you can pretty easily set up a passive income interest stream.  Or a dividend stock income stream.  But, unless you’ve already written several books, you’ll still have to write the book to set up the royalty stream.

The more passive income streams you have, the less work you have to do to maintain the level of income you have.  With some hard work to set them up, you can stop thinking about side income jobs, and thinking about how you’ll spend your “passive” time building more passive income streams.  It isn’t easy, but it can be very rewarding once you’ve got the streams all set up and working for you.  And, even if you have to do a little bit of minimal maintenance once in a while, you’ll still be earning far more for your time than you would on any non-passive income stream.

photo credit: alancleaver_2000

As I mentioned in my previous post on finding a Real Rate of Return for My Lending Club Portfolio, I am unable to invest directly into the loans on Lending Club.  There’s some regulatory issue between Lending Club and my state that makes it that way.  So, I have to purchase my investments through their note trading system called foliofn.  Not a huge deal, but it makes it a bit more interesting.

Using the Lending Club foliofn Search

First, I have to search for available investments.  They’ve got a decent search, but it’s missing a few key things that really would make it top notch.  Here’s what you’ve got as far as filters for the search, and, also how I usually set it up when I do a search.

I don’t like seeing anything that’s been late, or is currently late.  Late payments don’t show any intention of improving your situation, so I’m not going to take a risk on you if you don’t take it seriously enough to pay on time.  You’ll notice that I also change the remaining payments to 56.  The max is 60, but it’s hard to eliminate those who have been late if they haven’t had the chance to be late, so this makes it so that a few payments have to have been made.  Of course, there are shorter term loans available in Lending Club, so you’ve got to keep an eye out for those.  I don’t really limit the rates at all.  I’ll explain why in a moment.  Here’ s a sample of the results you’ll see when you do a search (click to see bigger).

Picking an Investment

As you can see you get a really basic overview of the available loans.  They’re all sortable.  I usually sort by Asking Price because I usually have a set amount of available funds in my account and I want to purchase investments that will come as close as possible to exhausting those funds.  There are three things that I pay very close attention to when I’m shopping for investments here.  The first is the Credit Score Change.  This is a visual indicator of whether the borrower’s credit score has gone down, up, or stayed the same since the loan was issued.  I only buy loans where the credit score has gone up.  It’s indicated by a green arrow that points up and to the right.  Again, this is a personal preference, but I want borrowers who are want to improve their situation.  It’s what this site is about, and something that I feel strongly about.  I like to think of it as ethical investing.

The second thing that I look closely at to compare the term of the loan with the remaining payments.  This goes back to the late/never late thing.  I’m able to eliminate loans that have been late through the search if the term of the loan is 60 months, but not if it’s anything shorter than that.  I’m looking for loans that have made at least 2-3 payments.  Finally, and most importantly, I look at the Yield to Maturity field.  If I could change one thing about the search on foliofn, it would be to add a way to filter by this field.  Here’s why.  Because foliofn is a secondary market for these investments, you aren’t necessarily paying the price of the remaining principle.  The seller is able to set his own price for the investment.  So, the interest rate on the loan isn’t necessarily what you will earn on the loan.  The Yield to Maturity field shows what the yield on the loan will be when it is paid off.  This field will vary. That’s also why I don’t limit the interest rate in the search, although you could if you were looking for a certain credit level of loan to invest in. If you look at the example above again, you’ll see that the investments shown would be very, very bad choices.  Where you draw the line for the yield will vary based on your personal preferences, but I usually won’t buy any of them unless they are at least 5%.

Further Thoughts and My Results

My goal is to maintain a higher interest rate than any savings account, while maintaining a medium-high risk level.  This means that my portfolio is weighted towards the C-D range loans.  I still keep it diversified amongst the different rate levels, but it’s heavier in that area.  You’ll notice that the results don’t show what range the loan is.  For that reason, it’s handy to know, generally, what the interest rate ranges are for each of the loan credit ranges.  Using the interest rate (not the yield to maturity) field, you can guess where the loan lies.

So, all that goes into it.  I look for an investment that has a upward trending credit score, that hasn’t been late and has made at least 2-3 payments, and that has a Yield to Maturity of greater than 5%.  My portfolio is still rather small, so I try to keep individual investments to a $20-$40 range.  I just don’t want to put too much of the portfolio in one loan and then get caught with my pants down if it defaults.  As the portfolio grows, I’ll likely increase the upper end of this range.  So far, I have had 4 of the investments paid off.  Two of them have been paid off early.  I have had no defaults. That’s a screen grab of my real return on the left.  Adjusted for inflation, using the formula in my previous post, it’s still above 10%.  Try and get that anywhere right now.  My 401(k) is at -0.85% YTD, and my local bank pays 0.25% on savings accounts. Sure, it’s riskier, but I feel the increased return outweighs the increased risk, and I think it will keep it’s place as part of my investment strategy.

I feel that I should make a disclaimer here.  I’m not an investing professional.  None of this should be taken as advice, but merely an amateur sharing information on my portfolio.  See an investing professional if you’re looking for advice.  Otherwise, feel free to share your stories in the comments!  And, as always, if you liked the post, please take a moment to share it using the bar on the left hand side, or at the bottom of the post.

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For the past month or so, I’ve been performing a bit of an experiment.  I’ve been taking 10% of all income from this and my other sites and splitting it between an investment account and my Lending Club portfolio.  The idea, of course, is to see which performs better.

In order to do that, I needed to find a good way to calculate what the real rate of return to me is.  Here’s the formula I settled on.

(1- (Total Deposits / ((Total Deposits + (Total Interest Received – Fees Paid))*.97)))

I should qualify the rest of this by saying that I’m not the best at math, so there may be flaws here.  Feel free to let me know in the comments.  Also, if there’s a better way to go about this, please let me know in the comments as well.

So, let’s break that down a bit.  The *.97 part is  meant to give some accounting for inflation.  It takes 3% right off the top as an inflationary cost.  Is 3% enough?  That’s debatable, but it seems like a fair average, historically.  This bit: (Total Interest Received – Fees Paid) is merely the total income on the portfolio.  I’m missing a small bit here, as the cost of the principle is not equal to the actual principle of the portfolio.  That’s because I live in a state where Lending Club doesn’t have the right permissions to allow me to directly invest in the loans.  So, I’m having to go through their foliofn note trading platform to buy my notes and there is usually a small premium on the notes.  I haven’t decided on a good way to really include that in, or if it really should be.  The next bit, (Total Deposits / ((Total Deposits + that previous bit is basically determining the % growth.  Total deposits divided by current “balance”.  The 1- part at the beginning just gives the cleaned up decimal percentage.

Let’s walk some numbers through it. We’ll use these:

Total Deposits = $1000

Total Interest Received = $25

Fees Paid = $5

So, plugging those numbers in we get: (1-(1000/((1000+(25-5))*.97)))

We’ll do this old school and solve as we go, showing our work.  Parenthesis get priority, followed by addition and subtraction.  So, we next end up with (1-(1000/(1020*.97))).  Then, we end up with (1-(1000/989.4)).  Next step, 1-1.011 = -.011.  So, we get a return of -1.1%.

Seems logical right?  In the case of my portfolio, the result comes back as 10%.  That’s a pretty good number, if you ask me.  I haven’t had any defaults yet, and I’ve had loans in my portfolio since January of 2010.  (the experiment I talked about earlier only began in July, however, but previous portfolio is included for easy of calculations)

I’m sure there’s some much more complicated formula that would take in risk of default on remaining invested principle, and a way to get the most accurate number, but really, I’m not sure that I want to take it that far.  This will never get to the point, I don’t think, of having a majority of my overall portfolio in it.  It’s not nearly safe enough for that, and my retirement accounts will remain in more traditional markets.

But, with results like 10%, and the current state of the stock market, one has to begin to wonder if the stock market is the safer of the two markets.  The stock market certainly isn’t showing returns of 10% recently.

photo credit: lumaxart

Just as Lending Club announced that they had emerged from their quiet period, Prosper announced that they will be entering one.  A SEC “quiet period” is the period of time between the filing of the SEC paperwork and when the SEC officially accepts and marks the paperwork effective.   I can’t say that I completely understand it, but you can read the same explanation I did at the SEC website.

I’ve been a user at Prosper very nearly since they opened.  I’ve been a lender at Prosper for a shorter period of time, but have been extremely happy with my results and with the user experience at Prosper.  It would appear that they are still accepting Borrowers and making loans to borrowers during the quiet period, but that the Lending side will be nearly shut down.

Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

If you’re a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process. If you’re a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.

They go on to state that a quiet period can last several months.  Lending Club entered theirs in April.  All told, it took them 6 months to come out of the quiet period.  That’s a long time if you’re a lender.  Especially if you’re an active lender.

Perhaps it’s time that I branch out a little and see what else there is to offer.  Maybe over at Lending Club?  Has anyone used Lending Club?  How do you like it?  What do you like/dislike about it?