I have written about using the debt snowball to cut your debt and I have written about using social lending to make money like a bank. Today we are going to combine the snowball idea with social lending to show you how I have been making money and reinvesting to make money.
I started my Lending Club portfolio about three years ago with $50. While I have only added money in $25 increments a few times, the portfolio has continued to grow. Like a DRIP stock, my social lending portfolio has grown through smart investment and reinvested profits.
In the last three years, I have made $38.08 in interest payments, or a 10.01% return on my investment.
I currently have 16 outstanding loans and five that have been fully paid back. I get about 85¢ per loan per month from payments. With 16 loans, that is $13.60 per month. That means every two months I get enough cash flow from my portfolio to invest in a new loan. If you have 30 loans, you can invest in a new loan every month.
How to Build a Social Lending Snowball
Second, put in an initial investment. Remember that most loans are made in $25 increments, so a $50, $75, or $100 investment is a good starting point.
Third, pick your investments. I suggest picking low risk investments for your first 5-10 loans to prevent defaults. Remember, if the borrower stops paying, you take the loss. I would rather earn less interest while building my portfolio so one loss does not wipe out my investment earnings.
Fourth, wait. When you have been paid back $25, pick a new loan. It really is that simple. You could also setup an auto-investment that will pick a loan and remind you when it is time to reinvest.
Bonus: Steroid Growth
You know how the athletes grow muscles really fast with steroids? You can use the same logic on your portfolio. Inject $25 every month or two to increase your cash flow faster. The more loans you have, the faster you can reinvest. The more you reinvest, the faster your cash flow grows. It is an awesome cycle that can make you a lot of money.
Do you have any questions or concerns about social lending? What have your experiences been if you have tried it? Please share in the comments.
Image by ff137 / flickr