In a previous post I wrote about Using Prosper.com as an Emergency Fund
Everybody knows you should have an emergency fund. The fund is to be tapped in times of financial stress. However, individual requirements as to liquidity and size vary on a case by case basis. Personally, without getting into details my beta is high at the moment. That is to say I expect (planning even) to need access to my fund. Very generally, as soon as a 3rd party reliant event occurs I will need access to my fund.
There is something else I would like to add that is closer to the topic of this blog. I am a risk averse gambler at heart. That is I like to gamble (poker and golf mainly), but I don’t like to lose. I never lose more than I can afford. The amount of money currently deployed is expendable. I would hate to lose approximately $3,000, but if I did I could afford it. On the other side of the coin, $3,000 is enough of a bet to ensure accurate results. Regardless of the outcome, I will know wether or not Prosper.com is a good investment. If 3-5 years into this journey my return on investment (ROI) is predictable and high (>12%) I will be a life long lender.
One of the main arguments for the Prosper.com model is diversification. Your loans collectively are low risk. But also portfolio diversification. Prosper.com is another type of investment. I would guess that it is uncorrelated to the stock market. Is it correlated to anything? What would it take for a significant portion of all loans to default near simultaneously? Natural disaster (sea water level rises by 20ft?), nuclear war, or total US financial collapse? I don’t know, but these all seem like they might even break the security of FDIC, so I am not sure other than to continue to live my life and watch the Prosper.com correlation to see what happens.
All that being said, my emergency fund will not be going into Prosper.com, but I would not rule it out as a possible future.
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2 comments ↓
I don’t think you can call prosper.com appropriate as an emergency fund. Sure, you could tap the monthly payments in a pinch, but like you point out, there’s a limit to how much you can tap. And even then, you only get that if everybody pays on time.
I consider prosper more like stocks and stock funds in that you can’t really plan to have to access your money for a while. (Stocks of course for a different reason – they could go down tomorrow and you don’t want to be forced to sell low.)
I understand what you are saying… However, on average almost everybody pays on time.
So the risk isn’t that you wont have access to money, because you will have access to something. Even if 10% fails to pay you still have 90% of what you were expecting.
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