Thinking ahead – I can’t afford it

Posted By on April 30, 2017

Most people say they cannot afford to put anything aside for investment but that’s rarely the truth. When we talk about investments we immediately think in terms of thousands of dollars. That may have been true decades ago but times have changed; there are investments that cost far less but still give a good return. Think outside the square. Forget the banks and big investment houses. They have huge managements and expensive buildings to fund and guess where that funding comes from?

You and your investments! Whats left after they extract their huge salaries and bonuses, is what they give you – the person who scrimped and saved to get that money together, in the first place. Each of the heads of the major banks actually earn more than the Prime Minister!

An emerging trend in finance today, is to use the public to source funds, rather than investment houses (which include banks) with their huge overheads. Everyone puts in a small amount to create a large pool of money to lend. They each get a small share of the returns, as interest, plus their investment amount, back at the end of the investment term. This can be in one of two forms:

  1. Crowd sourcing or crowd funding, where someone has an idea and a plan then advertises for investors, who become shareholders until the enterprise funds are sufficient to buy back the shares.
  2. P2P lending – someone needs funds for some purpose and rather than go to a bank, they go through a P2P lender who breaks the loan down into notes and advertises for small investors, who each buy one or more notes. These investors effectively become shareholders in the loan. Depending on the P2P Lender, these notes can be as low as $25 each. Unlike a bank or finance house offering an interest return anywhere between 1.5% up to 5%, the P2P Lender can offer returns starting as low as 9% up to 39% per year on a five year loan.

Honestly, if we really tried, could we not scrabble $25.00 together over a month or two?
That’s how you get started in investment. You don’t need thousands to begin.
That $25 invested at $9.9% over a 5 years loan will return you $40.93 and that’s the lowest rate.
At the highest rate of 39.9%, your $25 will return you a whopping $177.94. Try getting that from a bank!
Of course the risk is reflected in the interest return. At 9% return, you are funding a borrower with a good credit history. At 39% your borrower is likely to be a young person with few assets and new to borrowing.  Dodgy borrowers get rejected in the same way they do with any other investment house lending program.

Lets imagine you were planning to save $1,000 to fund an investment and it would take two years to save that amount. To get the best interest rate from the bank you’ll need to lock it away for 5 years. In other words we are looking at the return after 7 years (2 to save and 5 to invest).
That’s around $42 a month you need to save or $125 every three months, the equivalent to 5 P2P lending notes.

If we assume you invested in P2P lending instead, as you saved the same amount of money, at the lowest P2P interest rate of 9.9% per year. In the first 3 months of year one you have 5 notes to invest at 9.9% each ($40.93 x 5 = $204.65) giving a return of $204.65
That’s in 5 years time (not 7 years) like the bank.

In the second 3 months of year one you have another batch of 5 notes and another $204.65 in 5 years.  By the end of the first year, you have four lots of 5 notes invested, which will return $818.60 in 5 years. You are only 181.40 short of your $1,000 goal and it’s only year one of your two years!

Unlike a bank, the interest returns along with the repayment of your $25 invested, are deposited into your bank account and can be reinvested in new notes, along the way. This means that by the end of year one, you could easily have achieved your $1,000 goal. Using the same two year time frame, you could have another $1,000 return coming back in the next 5 years (or six years for the lot – year one and year two’s investments each to mature in 5 years time).

The whole lot will mature a year sooner than our original plan with the bank, but it gets better!

The bank was at a maximum of 5%, whereas P2P investment was at 9.9%. Your $1000 invested there, for 5 years, with the bank, would give you a total of  $1,190.94 if invested at 3.5% or $1,283.36 if invested at 5%. That’s after saving up for 2 years, so we are talking about a total time of 7 years.

By contrast, the same $1,000 investment with P2P lending at the lowest rate for 5 years would return you $1637.17 after only 6 years. That’s a higher return in a year less. But wait! Using the same savings plan over the two years, with P2P lending, we saved and invested an extra $1,000 in year two. That’s a total of $3274. 34. In other words, using the same savings plan to invest in P2P lending versus a bank you can almost get three times the amount ($1283.36 versus $3274.34) back for the same outlay!

To summarise: Times have changed and anyone can afford to invest now. You can get a much higher return if you look outside the box and steer clear of the finance houses with their pet investment advisors, taking juicy salaries, bonuses and commissions from your investments.

If I was a bank today, I’d be very worried because this could spell the end of banks as a lending institution. Startup enterprises and highly profitable small lenders, are vanishing – two of the banks important income streams are drying up. While the banks have been pandering to the big investors, they have forgotten about the little guys and we’ve gone elsewhere.


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