In June, last year, I stumbled upon this interesting concept named peer-to-peer lending. Or crowdlending. Marketplace lending. Debt crowdfunding. Depending on the context, it has different names.
Up until then, I was just a normal guy with some savings in my bank account, a decent stocks and bonds portfolio and some losses caused by the bitcoin fever. I was just looking for a European platform similar to Robinhood. Since Google knows best, it gave me instead Revolut and Crowdcube. And p2p lending.
I would never lend 10.000 EUR to another person or company. But to chip in just 10 EUR, along with 1000 other people, to fund that loan, and then let another entity to handle the legal terms and guarantees, that seemed interesting enough to try it out. This is how I joined Mintos and invested my first 10 EUR. And then 100 EUR. Meanwhile, I had to read a lot. About how p2p lending works, why people or businesses don’t just go to banks to get a loan. How Mintos works. What the heck is a loan originator. How do loan guarantees work.In August, I joined EstateGuru and Fast Invest. In November, Envestio (really bad choice) and Neo Finance. Come December, Grupeer, Viventor, Crowdestate, Crowdestor, Bulkestate, PeerBerry. I wanted to try them out. All of them. And then decide for myself which one I like or not.
By this time I also started this blog. I needed a way to centralize my knowledge and this seemed like a good way to do it. I always wanted to start a blog, write short stories or poetry and maybe become good at it. Instead, I started a blog about investments. The blog was a good landmark for me, helping me to challenge my assumptions and motivate me to learn more.
Since June last year, my p2p lending portfolio grew from 10 EUR to 20.000 EUR. I didn’t intend to grow it this fast, but accidents happen. I couldn’t learn about a platform by reading what others were saying, so I had to try it out. Add some funds. See how payments come. See how the platform handles customer requests and other issues. After I got comfortable with one platform, I couldn’t just withdraw the funds. The returns were too good to leave them there.
This got me wondering if I could live off my p2p investments earnings. And how much time it would take until I’d be able to do so. And I started tinkering with numbers.
How much time do I need before I can live off my p2p investments?
Based on my current investing pattern, I can start with these premises:
- My current p2p lending portfolio value is at around 20.000 EUR
- I deposit monthly around 500 EUR into my p2p investments accounts
- My current annual return is at around 12%
- Tax rate in Romania is at 10%
I would also need to pay around 500 EUR for health insurance if my yearly earnings are higher than around 5000 EUR (annual gross minimum wage in Romania). Since I’m not there yet, I can ignore it.
Scenario 1 – 11% annual return, 500 EUR monthly deposits
Including the 10% tax rate, I can reasonably expect an 11% annual return from my p2p investments.
Given a 20 years investment horizon, my portfolio value should reach 611.519 EUR. In all this time, with 500 EUR monthly deposits and an initial 20.000 EUR value, I would invest a total of 140.000 EUR.
600.000 EUR is close to what I would actually earn from my salary in 20 years. Given my current spending rate (~30-40% of my paycheck) I could live off this amount until the end of my times. I’m planning to get married and also have children in the near future and this will affect my spending rate, but I should still be able to deposit 500 EUR each month.
If I look at my expected earnings in each year for the following 20 years, I can see something interesting.
After year 7, my p2p income would pass 10.000 EUR per year. After year 12, it passes 20.000 EUR. In 15 years, my annual income from p2p investments would be over 30.000 EUR per year.
If I don’t want to withdraw my funds, I could live off my p2p income at any of these milestones. 10.000 EUR would be hard to accommodate my current lifestyle, but I live in Romania, not in a Western European country. Life is a lot cheaper here. With 30.000 EUR per year, after 15 years, I could spend a lot more than I’m currently spending. EUR has a 0.9% inflation rate now, so even with that, I’d still have more than enough.
You might say that this is, of course, the most optimistic scenario. Things can happen in 20 years. Tax rates could get higher, and I’d have to pay a lot more than 10%. Interest rates might go down. Or I might just decide that I’m happier with lower returns and I’d invest in less risky options.
Scenario 2 – in year 6, annual return drops by 2%
How would my earnings look like if my annual returns drop by 2% in 5 years? This would give me an annual rate of around 9% starting year 6.
My portfolio would reach only 474.512 EUR in 20 years, 137.000 EUR less than in my previous scenario. I’d still earn more than 20.000 EUR per year after year 14 and more than 30.000 EUR after year 18, so I can still cover all my future expenses.
Scenario 3 – not adding any new funds after year 10
Taking this further, what happens if after 10 years I decide not to deposit any new funds into my p2p portfolio? In 10 years, my portfolio would reach 150.000 EUR. A healthy size to let it grow without any more help. In 10 years, I’ll get closer to old age and I might start thinking of investing my hard earned money into something safer.
At the end of the 20 years, my portfolio would reach 377.755 EUR. My annual return would be 32.397 EUR, enough to start living off my earnings.
Scenario 4 – withdrawing funds after year 15
Starting with year 15, my annual earnings would be over 20.000 EUR and I might just decide to start spending. Would my portfolio be ruined? Of course not. This is what happens if I decide, starting with year 15, to withdraw 1800 EUR out of my account every month. I’d be 50 years old, and I might decide I don’t like office work anymore and I’d rather start growing my own tomatoes or move into wilderness and do Bear Grylls stuff.
As long as I withdraw only 20.000 EUR per year, my net annual earnings would never drop below 21.700 EUR. That’s enough to cover my needs and also keep a small safety cushion for unexpected expenses.
Would I be able to retire using my p2p investments earnings?
Man plans, and God laughs, as the saying goes. In my happiest scenario, I would need 12 years to start living off my p2p earnings. With interest rates dropping and depositing funds just the first 10 years, I could still live off my p2p earnings after 15 years.
But these are just numbers, and many things not accounted here can influence them:
- platform or loan originator defaults – even with diversification, my returns would still drop and delay my 20.000 EUR per year milestone
- interest rates drop a lot lower than my expected 10% – this would make me reconsider if I want to keep my investments in p2p lending or divert them to other options
- changes in regulation – maybe regulators decide that retail investors like me should not be allowed to risk their savings on p2p lending
- higher taxes – Romania is not famous for fiscal stability; every year we have a new change
- high inflation – unlikely, but 20 years is a long time and many things could change
- hacking – stolen passwords, platform hacking, they can happen
Do you want to compute your earnings?
Play around with this tool a bit. Add your numbers and hit the compute button.