$2000 . . . savings or other ideas?

[krayziebone33]

I have about $2,000 dollars right now that is sitting in an ED savings account gaining 5.15% APY. Though I like the thought of my money is already working for me, I was wondering if there was a way that I could use a portion of the money or even all of it to gain a higher return? I've heard people talk about Vanguard and stock investments, but I usually only hear about that kind of stuff in relation to much bigger amounts of money. What do you all suggest? Should I just let my money sit in the ED account or is there something that I can do with it to earn more than 5.15%?

the most common rule of thumb I hear is that if you will need that money for anything in less than 5 years, don't put it in stocks.

beyond that it really does depend on what you think it might be used for.

if you don't already have an emergency fund cushion, it would be a great start for that and is already in the right place.

likewise, I assume you aren't carrying any debt loads with interest rates above what you are making on the money, if that's the case, use the money to reduce those debts (assuming of course, you have the safety net in place).

[disneysteve]

What is the purpose of that money? Is it your emergency fund that you need to keep safe and liquid? If so, you have it right where it belongs. Also, if it is your EF, $2,000 probably isn't enough. The general rule is 3-6 months of living expenses, so I'm guessing $2,000 doesn't meet that guideline.

And, as noted, stock market investments are for the long term since they can and do lose value over short periods but, hopefully, grow over time.

[mbhunter]

I'll assume that you can play with this $2,000, since you seem interested in generating a higher rate of return. If not, over 5% and almost completely liquid is a pretty good deal.

You can try becoming a person-to-person lender on Prosper dot com. This site has been up for several months and still might be a good deal for the lenders. I have a couple of loans that I made to AA-rated borrowers that are averaging over 10% amortized over three years.

If you were to put the $2k in there and fund loans with prudent risk, you could probably get back over $50 in payments without much problem. This is the cutoff for reinvesting; the minimum amount you can loan to somebody is $50. I'm leaving out a lot of details but you can probably achieve a rate of 7-8% without too much problem here. In any case, it might be worth checking out.

The down side to this is that your money is tied up.

[disneysteve]

Originally Posted by mbhunter

The down side to this is that your money is tied up.

How exactly does prosper.com work? What guarantee do you have that the borrower will repay you? And what recourse do you have if he doesn't? If you are just taking your chances, then that is really gambling, not investing.

There are plenty of safe ways to earn more than 5% through traditional means. Kiplinger has an article on closed-end bond funds this month with yields as high as 8.1%. And there are certainly well-rated bonds paying 6-8%.

[slimcustomer]

Originally Posted by krayziebone33

Should I just let my money sit in the ED account or is there something that I can do with it to earn more than 5.15%?

Check local credit unions that you may be able to join. Some run specials where you can get 7-10% apy on a cd. Many of the recent 8-10% specials that I've seen have maximum deposits limits above what you are looking to invest. You might just get lucky and find that a credit union near you has what you are looking for.

[Ima saver]

I think you should probably leave it where it is and consider it your emergeny fund.

[mbhunter]

Originally Posted by disneysteve

How exactly does prosper.com work? What guarantee do you have that the borrower will repay you?

Someone will go to Prosper.com and borrow, say, $10k to conolidate debt. Prosper.com does a credit check and posts the borrower's credit rating for any interested lenders to see. Borrower sets up the listing, explaining what the money is to be used for. Lenders bid on the loan, bidding the interest rate down until the "auction" ends. Lenders must "bid" at least $50 of the person's loan. Then when the listing is over the highest rate bid is the rate for the loan if the loan is fully funded by auction end.

As with any loan, there is no guarantee that it will be repaid. A double-A credit risk (the ones I have) typically has a 0.2% default rate. You can bid on a high credit risk loan and get 22% but the rate of default is 20%. Prosper.com lets you set up collection agencies to handle collection on your behalf, for a fee.

Actually Prosper is the one who extends the loan, and Prosper then pays you out of what it collects.

In any case, I guess you choose your poison.

[disneysteve]

Originally Posted by mbhunter

A double-A credit risk (the ones I have) typically has a 0.2% default rate.

Wouldn't these people qualify for traditional loans if their credit is so good?

[Ima saver]

Yes, that is a good question. It seems a bit risky, but only loaning $50 isn't.

[disneysteve]

Originally Posted by Ima saver

Yes, that is a good question. It seems a bit risky, but only loaning $50 isn't.

I agree. Though there also isn't much to gain from only lending $50. If you really want to make any money, you'd need to lend a few thousand dollars. Of course, you can reduce your risk by lending small amounts to multiple people.

I looked into prosper.com a couple of months ago after someone mentioned it on another thread but this is the first time I've seen someone who actually has served as a lender talk about it. So mbhunter, I'm not trying to shoot it down. I'm genuinely curious how it works. Maybe I'll start a new thread about it to get input from others.

[mbhunter]

Originally Posted by disneysteve

Wouldn't these people qualify for traditional loans if their credit is so good?

They could, but presumably they don't want to deal with banks and are willing to pay a couple percent more not to deal with them. Especially if it's real estate. The banks will want appraisals, insurance, etc., all to protect their collateral. That and it can take a while. A loan on Prosper is either funded or not in 10 days.

[mbhunter]

Originally Posted by disneysteve

I agree. Though there also isn't much to gain from only lending $50. If you really want to make any money, you'd need to lend a few thousand dollars. Of course, you can reduce your risk by lending small amounts to multiple people.

I looked into prosper.com a couple of months ago after someone mentioned it on another thread but this is the first time I've seen someone who actually has served as a lender talk about it ...

I haven't really done much lending (only $100) but just enough to get my feet wet.

[krayziebone33]

Originally Posted by disneysteve

What is the purpose of that money? Is it your emergency fund that you need to keep safe and liquid? If so, you have it right where it belongs. Also, if it is your EF, $2,000 probably isn't enough. The general rule is 3-6 months of living expenses, so I'm guessing $2,000 doesn't meet that guideline.

And, as noted, stock market investments are for the long term since they can and do lose value over short periods but, hopefully, grow over time.

I guess you answered the question. The purpose of the money is to have an emergency fund and I know its not nearly enough. I just got really serious about money a few months ago and rapidly saved the $2,000 that I have thus far. I guess I got a little ahead of myself wanting a bigger return so soon.