As you begin investing, you will probably be putting a lot of money in one type of investment---index funds, or stocks, bonds, CDs, and of course P2P loans. However, as your investments grow, you will need to consider how you will allocate your assets.

Asset allocation is the process of choosing where your investments will go based on your personal risk tolerance and your investment goals. Depending on your situation, you may want to take on more risk than other people. For example, if you are a student with very little debt and no spouse or children to worry about, your capability to tolerate risk is much higher than someone who is older and married with children. This means that you can afford to invest in riskier assets, such as certain stocks or higher-interest loans on Lending Club.

Why not just invest in one specific stock? Because of the benefits of diversification. Having a diversified portfolio will allow you to stomach fluctuations in the market, because even if one sector of the economy (and your portfolio) tanks, the rest of your investments will help keep you steady. For example, imagine if you only invested in tech stocks during the boom in 2000---after the stock market crash, your portfolio would have lost a huge percentage of its value. However, if you had balanced that investment with other sectors, as well as index funds and international stocks, your portfolio could have continued to do pretty well.

So how do you determine the best asset allocation? Well, there is no easy answer. A good way is to use some of the excellent asset allocation calculators on the web. My favorite is located here. The calculator takes into account several variables about you, such as your age and your tolerance for risk. Based on your information, it gives you a good idea of how to spread your investments. For example, for me--a young, very risk-tolerant individual-- the calculator recommends I invest most of my money in funds and stocks, and just a tiny portion in bonds and cash. This is the same plan that I essentially created for myself.

On Lending Club, you can control your asset allocation in one of two ways. When you let the LendingMatch™ algorithm build a portfolio for you, you specify your risk tolerance on a scale of 1-5, from conservative to aggressive. Your chosen risk level will then be used to create a diversified portfolio of many different loans. If you choose to build a portfolio from scratch instead, you will be able to set your own mix of loan grades and spread your funding across as many loans as you want - from only 1 all the way up to the total number of loans in inventory.

Having a good plan for how you will allocate your assets is very important for building a successful portfolio. Here are some other great resources that you can read to learn more about how to allocate your assets.

Money 101
Asset Allocation
Asset Analysis

In her recent article, Associated Press writer Eileen Alt Powell outlined a portion of the IRS’s National Research Program that will lead to 13,000 special audits of American taxpayers this year.

The goal of these special audits is to determine ways to rein in the tax gap, which is the shortfall of tax payments that are made relative to what should be paid. IRS research from 2001 showed that even after tracking down shortfalls and assessing penalties for that year, the tax gap was still nearly $300 billion.

While the number of special audits pale in comparison to the total number of audits (1.2 million last year), they will be used to influence audit selection criteria for future years. By closely examining the small sample of taxpayers, the IRS hopes to finds trends and common occurrences that can be used to identify others with a similar likelihood of having errors on their tax returns.

Ideally, having better audit selection criteria should make the IRS more efficient in selecting which returns to audit. This should be good news for the average citizens who properly pay their taxes, as their probability of being selected for audit should decrease. The special audits may lead to changes in the tax code as well, if the source of common errors can be identified.

If you are one of those selected for special audit, you shouldn’t be as concerned as if you were selected for a normal audit. Since the special audit participants are selected randomly, you can blame bad luck for your selection rather than something suspicious in your return.

If you are selected, you may not feel much of an impact. Some special audit returns will be verified using documents that the IRS already receives from your employer, banks, etc. For example, Lending Club sends each lender a 1099 form detailing the lender’s P2P loan interest income; a copy of each form is also sent to the IRS. If the IRS’ documents match what you report, then you may not have to do anything as a special audit participant. In other cases, you may need to provide the IRS with backup documentation or even go through a more thorough review.

As with any audit, proper filing will make the process go much more smoothly. While any audit can be a stressful experience, being selected for a special audit shouldn’t be cause for concern in most cases. If you are one of those unlucky 13,000 this year, at least you’ll know what these special audits are all about.

Over at Zen Habits, there is a great post with 50 tips on how to live cheaply and frugally. Are you looking for ways to reduce your spending? Head over to the post.

A lot of these tips are incredibly excellent---so much so that I've begun incorporating them into my daily life.

#6 - Eat Out Less - My office offers a fully stocked kitchen, so why do I need to go get fast food every day? I have since completely quit eating at fast-food restaurants. In the long term, my wallet will benefit--not just from the cost of eating out, but also the medical savings of eating healthier.

#16 - Frugal Exercise - I have begun running a few miles every day. Additionally, I have a pair of dumbbells waiting for me to pick up from my parents' house. I noticed that when I go to the gym, I only use the dumbbells and free weights, so why pay for a membership when I can get the same workout at home?

A lot of these tips are easy to incorporate into your daily life. By making the effort, you can find a lot of easy and fun ways to save money. I started biking to work once or twice a week just for the fun of it, but I noticed my gas bill getting smaller and my legs getting stronger. Making small, frugal changes such as these can totally improve the quality of your life. And with the money you save, you can invest in some P2P loans on Lending Club!

Which tips do you like the best?

Like any other addiction, compulsive spending can present itself in many forms with varying degrees of severity. A recent article on spending addictions describes the problem, discusses some of the causes, and offers some help to those who suffer from the condition.

The article cites research which puts the percentage of Americans with compulsive spending habits between 2-8%. The numbers vary so widely because of the many definitions of compulsive spending. Perhaps the more shocking number is the level of debt that these compulsive spenders are accumulating. We’ve previously reported that the average American household with at least one credit card is $9,200 in debt. As high as that number is, compulsive spenders are much worse off, with an average debt of $23,000, not including their mortgage.

Part of the problem is attributed to the consumption-driven society in which we live. It does seem as though we are constantly presented with new and exciting have-to-have items on a regular basis. If such temptations, along with the desire to keep up appearances with others in our social circles, are too much for us to bear, then spending may seem to provide relief regardless of the consequences. Whatever the cause, many people addicted to spending find comfort and gratification in the act of spending. The act itself creates the euphoria as opposed to the enjoyment of the actual item purchased. The danger here is that fleeting happiness from a purchase may not last long, even though the debt may take a long time to pay off.

The article cited above includes a list of 10 tips for breaking free from compulsive spending. Of the 10, there were two that seem applicable for nearly all consumers: Taking Control of Your Situation and Writing Things Down. These two tips go hand in hand and are discussed often here on the Lending Club Blog. Taking control of your situation means just that: you have to be an active participant in your finances if you want to be in charge of them. Writing things down is the foundation of successful budgeting. A budget is only as good as the information you use to create it, so having accurate income and expense numbers is critical, along with an understanding your credit cards and loans and their respective rates.

Even if your love of shopping doesn’t rise to the level of a compulsive spending habit, it may still be a drain on your finances. Avoiding elevated levels of debt is a difficult proposition for some people, but one that is a necessity for a healthy financial outlook. Having a clear understanding of your motivation and tendencies towards spending may help to identify holes in your financial plan that are preventing you from reaching your long-term goals.

The average return on all loan portfolios created by Lending Club lenders since the opening of our public Beta on Facebook on May 24 has been steadily moving up. As you can see from our home page, the average portfolio yield is currently 12.10%. What is the reason for the steady increase?

We believe that this trend reflects good news for everyone in the Lending Club community. Our interest rates are driven by credit grade. Credit grade is driven by multiple factors including credit score and loan amount. Interest rates vary with the size of the requested loan, which is done to reflect the difference in risk between a small payment and a larger one (assuming an equal pre-loan Debt-to-Income ratio)

Lending Club's average loan size has steadily increased - from under $5,000 in June to about $6,000 now, which has moved many loans into slightly higher interest rate ranges based on the loan amount modifiers. This is good for borrowers because they are getting larger loan amounts approved (and fulfilled). Over 90% of our loan listings are funded and issued. For lenders, the yield on new portfolios is moving higher.

Long term, where is this going to go? It remains to be seen where the average return will end up. Our interest rates will move over time with the market and we are making adjustments to the rate modifiers as we get more data in. We expect that post-fee, post-default yields on portfolios will remain above 11%, making an investment in person-to-person loans on Lending Club a very compelling alternative to putting money into bonds and stocks.