Stash Review: Is It Legit, Safe, and What Are the Best Investments?

In this Stash Review, we’ll cover the pros and cons of the Stash Invest app and help you decide if this tool deserves a spot in your investment plan.

Almost everyone knows that they should be investing in their future. The problem is that many people have trouble finding extra money to sock away. Even the people that do have the cash to spare aren’t sure how to invest their money or are scared that their investments could lose value.

While it’s true that all investing is subject to risk, you’re taking a risk by not investing, too. Money in your savings account loses value thanks to inflation, so doing your best to invest and earn a return on your money is essential to making sure you have enough money in the future.

Stash is an app that aims to make investing easier, less scary, and more fun. You can get started with just a little bit of money and add to your balance over time. You can also choose to invest in just the industries that you’re interested in, giving you more incentive to keep up on your investments.

What is Stash?

Stash is one of many investment apps available for modern smartphones. It gives you quick and easy access to your investment portfolio from your phone.

Stash Banking: Coming Soon

The app originally launched in October of 2015 and it has grown quickly in the past few years. Since its launch, Stash has amassed more than 2 million users and added support for retirement and custodial accounts. In the near future, Stash banking will be offered to provide online banking services such as checking and savings accounts.

Stash keeps things as simple as it possibly can for its users. You can link your bank account or debit card to the Stash app and transfer money to your investment accounts on demand. You can also set up automatic investment plans to save more without having to manually make transfers.

Stash Review: How It Works

Stash is an easy-to-use investment app perfect for beginners. Here’s what you need to know before setting up your account.

To get started with Stash, the first thing that you have to do is download the Stash app. Stash also offers its services through its website, but the app is the primary way that you’ll interact with your account.

Stash Login

When you open the app for the first time, you’ll be prompted to make an account. Provide an e-mail address and password as well as a few personal details in order for Stash to confirm your identity. You’ll also be prompted to enter information for the account you’ll use to fund your investments. Save your Stash login information in a safe place.

Once you’ve handled the administrative bits, answer some questions to set up your investment account. The Stash questionnaire displays a variety of the investment options available through Stash as well as information about them, their potential benefits, and their risks. It also asks questions to help assess your goals and risk tolerance.

Best Investments On Stash

Based on your answers, Stash will show you a list of investment options. These options are broken down into three broad categories: conservative, moderate, and aggressive. Choose the best investment on Stash that matches your future goals.

The categories correspond to the expected risk-reward ratio of each investment and are designated as your risk profile. Once you select the style of investment you want, you can choose from a number of themes that focus on specific sectors, such as technology, clean energy, or other business divisions that you’re passionate about.

Investing with Stash

After you’ve set up your account and chosen your investments, the only thing left to do is to actually add money to your account. Deposit at least $5 to get started. After that, you can add money at any time.

Stash makes saving fun with a variety of goals and milestones to work toward. If you start by putting $5 in your account, Stash might challenge you to get your balance to $50 or $100. When you meet that goal, Stash will come up with a new one.

Stash also places a major emphasis on education. When you view your current balance and your goals, Stash will show how your money might grow over the next 5 or 10 years and how changing your savings patterns will influence your earnings.

Stash also allows automatic investment. Set up a weekly or monthly transfer to add more money to your investment account and grow your balance even faster.

Related: How to Start Investing with $100

Retirement Accounts

Investing is a waiting game. The old adage that time in the market trumps timing the market still holds true. If you’re thinking about the long-term, you might want to take advantage of Stash Retirement. This feature offers the same investment services that the standard Stash Invest service does, but with retirement accounts.

You can open either a Traditional or Roth IRA through Stash and use them to save for the future. Just remember the restrictions for each account. Once you deposit money, you can’t take it out until you turn 59½ without incurring a penalty. Roth IRA contributions, but not earnings, can be withdrawn penalty-free at any time.

Paying Fees

Nothing in life is free, which means that you don’t get all of the benefits of Stash without a cost.

The Stash app has three subscription plan options, with each plan offering its own unique features. All options are available to all customers, regardless of account balance.

Here’s a quick glance at Stash’s fee structure.

Stash Pricing
Stash Pricing

*Clients may incur ancillary fees charged by Stash and/or its custodian

Keep in mind that the fees charged directly by Stash aren’t the only fees you’ll pay. Stash invests your money in Exchange Traded Funds, which hold a variety of stocks and bonds. ETFs also charge management fees, which can range from .05% to 1% or more of your balance per year.

The ETFs Stash offers charge fees between .20% and .40%, so you could wind up paying .5% or more of your balance each year to use the service.

Related: Qapital Review: Is Automating Your Savings a Good Idea?

Stash App FAQ

Investing is complicated, so it’s no wonder that an app designed to help people invest would be a little complicated itself. Here are some common questions about Stash and its services.

Is investing with Stash a good idea?

Many companies and advisors require that you commit thousands of dollars or more before you’re allowed to invest. Stash lets you get started with $5 by giving you ownership of a fractional share of a stock or ETF.

Consider this example: ABC Company costs $100 per share. You and 19 other people sign up for Stash and you each invest $5 in ABC Company. Stash pools your money to buy one share, and then assigns ownership of 1/20th of the share to each person. In this way, you can own less than a full share.

How does Stash make money?

Stash makes money by charging a monthly fee (regardless of account balance) for its services. You pay either $1 per month (STASH Beginner), $3 per month (STASH Growth), or $9 per month (STASH+) to use Stash.

Is Stash safe?

Yes, Stash is safe to use. Even if Stash goes bankrupt, your investments will be safe and will still belong to you.

Stash works with a company called Apex Clearing Corporation to hold the investments it purchases for its customers. The investments are held in a federally regulated broker-dealer (Apex), and this company acts as a custodian for Stash.

Apex is a member of the Securities Investor Protection Corporation (SIPC). Under SIPC, cash is returned up to $250,000 and up to $500,000 for non-cash investments.

This protection only applies if the companies holding investments on your behalf close. That said, don’t expect to be reimbursed if your investments lose value. Remember, investing involves risk.

Who Should Use Stash?

Stash was designed with beginner investors in mind, and it shows. While it’s a great way for people to get started, and it offers valuable educational tools, its fee structure and inability to take full control of your investments make it a poor choice for people with more money to commit or a desire to be more hands on.

Stash vs Acorns

Stash and Acorns both provide a decent opportunity for brand new investors to build a portfolio.

Read our full Acorns review to choose which investment app is best for you.

Stash Review at a Glance

Pros

  • Start investing with as little as $5
  • Choose from 150+ investment themes and single stocks
  • Support for taxable and tax-advantaged accounts
  • Full access to educational content
  • Personalized investment coaching

Cons

  • Monthly pricing structure (plans starting at $1/month) to keep your money invested
  • Can only purchase securities from a set list of ETFs and stocks.
  • Missing features, like tax-loss harvesting, offered by robo-advisors

Best for: Stash is a good choice for young people who just want to get their feet wet with investing. More serious investors who want a hands-on experience or someone who has more money to commit to a full-fledged robo-advisor can get a better deal elsewhere.

Stash
Stash

How Stash stands out:

Stash is a simple investing app that makes it easy to start putting money to work, even if you’re only looking to invest a small amount of money. Stash allows you to invest money online by letting you choose from 150+ stocks or investment “themes”; pick from the best options for your goals, interests, and beliefs. Each theme includes a group of companies to invest in rather than just one.

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Stash Review Summary

Overall, Stash is an adequate service that does a good job of helping new investors. It falls short of being a great app for everyone as more advanced investors will want to take a hands-on approach that simply isn’t possible with the services that Stash provides.

However, as we wrap up our Stash review, a major bonus is that you can start investing with Stash with just $5.

*DollarSprout is a paid Affiliate/partner of Stash. Investment advisory services offered by Stash Investments LLC, an SEC-registered investment adviser. This material has been distributed for informational and educational purposes only and is not intended as investment, legal, accounting, or

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M1 Finance Review: Is Investing Your Money on Autopilot Best for You?

In this review of M1 Finance, you’ll learn how the automatic investment service works, how it builds and manages your portfolio, and whether it is the right tool for you.

Though essential, investing for the future is a difficult part of everyone’s life.

Finding extra money to set aside is hard. Knowing what to do with that money is harder yet, and actually executing your plans makes saving and investing the most difficult of all.

M1 Finance is a brokerage company that aims to make it easy for you to invest your money by doing the decision making for you.

All you have to do is deposit money into your account and M1 Finance will invest it in a diversified portfolio on your behalf.

Table of Contents

What is M1 Finance and How Does it Work?

M1 Finance is a robo-advisor company that aims to make investing easier for people who want help with choosing and managing their investments.

Unlike human financial advisors, robo-advisors are programs that automatically invest your money for you. You provide the program with information about yourself, such as your age, financial situation, goals, and risk tolerance.

The software takes your information and uses a series of algorithms to design a portfolio that will meet your needs. It then purchases the investments required to build that portfolio. As you add or remove money from your account, the M1 Finance robo-advisor automatically keeps your portfolio balanced.

M1 Finance describes itself as “the ultimate financial tool,” which helps you save time, earn more, feel confident, and join the excitement of investing.

Getting Started

M1 Finance Review
M1 Finance Review

It’s easy to get started with M1 Finance. There are no minimum balance requirements to meet or account opening fees to pay. Simply download the app to your phone or visit the company’s website to sign up for a free account. You can create your account in minutes.

Starting a free account requires some basic information about yourself. M1 Finance will use this information to verify your identity. You’ll also need to link a bank account. This account will be used for making deposits into your M1 Finance account. Additionally, any money withdrawn from M1 Finance will be sent to this linked bank account.

Once your account has been created, you’re ready to start investing.

The Investing Pie

Traditional brokerages let you invest in a variety of assets, including stocks, bonds, real estate, and cash. You can determine what percentage of your money you’d like to invest in each asset, but it’s up to you to maintain those percentages.

With M1 Finance, the program does everything for you. When you decide which investments to make, M1 Finance asks you to create your “Pie.” This is your set of chosen investments, which can include individual stocks or bonds, Exchange Traded Funds, and more.

Your Pie is visualized as a pie chart. It shows the breakdown of the investments that you’ve chosen. You’ll be asked to set the target percentage for each slice (investment) of your Pie.

Upon creating your Pie, all you have to do is deposit funds into your M1 Finance account. The software will automatically distribute your money to your chosen investments as specified by your Pie.

As time passes, each slice will grow or shrink based on the recorded returns. When you make additional deposits, M1 Finance will allocate your money with the goal of bringing each Slice back to its target.

If you need some help designing your Pie, you can choose from a list of curated Expert Pies.

M1 Finance Review
M1 Finance Review

These Pies have been put together by investment professionals and are aimed at different goals, risk tolerances, and industries. You can use one of these Expert Pies as an easy way to target your goals or to get exposure to specific companies in an industry.

Account Types

There are a wide variety of account types that you might want to open when you invest. If you’re investing for the medium term, you might want a taxable brokerage account. Saving for retirement lets you use special retirement accounts that offer tax benefits. If you have a partner, a joint investment account gives you both access to the money.

When you open your M1 Finance account, you’ll need to choose the type of investment account(s) that you’d like to open. The company offers individual, joint, trust, and retirement accounts.

If you want the robo-advisor to work as well as possible, you should try to keep as much of your money with M1 Finance as possible. A wide variety of account types is important for diversification.

Automatic and Rebalancing

There are two essential elements of long-term investing success: investing regularly and rebalancing your portfolio.

M1 Finance offers a variety of automation tools to make it easy for you to invest without having to think about it. You can set up automatic deposits from your bank to your M1 Finance account.

The robo-advisor will handle everything for you, from taking the money out of your account to purchasing the investments. You can schedule the deposits to be weekly, monthly, or on any other schedule that works for you.

Rebalancing is the process of keeping your asset allocation on target. If you want to have a portfolio that is 80% stocks and 20% bonds, it takes some effort to maintain that ratio. If the stock market falls, you might wind up with a portfolio that is 60% stocks and 40% bonds simply because the value of your stocks fell. The Rebalancing process entails selling high and buying low.

M1 Finance provides automatic dynamic rebalancing using the money that you deposit, saving you from the effort of calculating how you should allocate new money.

Lending

When you invest, your money is tied up in the market. You don’t want to sell your investments because you’ll incur taxes and you might miss out on gains. Still, you want some way to use your money if you need it.

M1 Finance offers lending services, allowing you to borrow up to 35% of your investment portfolio’s value.

Upon signing up for M1 Finance, you get access to its lending service instantly. There is no extra paperwork to do, no credit check, no loan officer to speak to, and no denials.

There are also very few restrictions on what you can use the money for. You can use the loan to make a down payment on a house, fund a wedding, or buy a new car. Many people use the loan to refinance existing debt at a lower interest rate. If you prefer, you can even borrow money to invest in your M1 Finance Pie, adding leverage to your portfolio.

The interest rate on M1 Finance’s loans is very low, making it an attractive choice for people who keep their money at M1 Finance. It’s even lower than typical loan sources, such as personal lenders or credit cards.

M1 Finance FAQ

Here are some of the most common questions people have about M1 Finance.

How Does M1 Finance Make Money?

M1 Finance makes money by charging interest on the loans it offers to its account holders. It also lends the securities that its customers purchase to other investors, earning money from those loans. The company does not make money from account fees charged to customers.

Does M1 Finance Allow Fractional Shares?

If you do not deposit enough money to buy a full share in a company’s stock, M1 Finance will purchase a fractional share of the stock for your account.

Is There a Minimum Amount You Can Invest in a Stock?

You can open an M1 Finance account without meeting a minimum balance requirement. Once you open an account and build your Pie, you can invest in any number of securities. While you can’t buy securities for less than a penny, M1 is able to invest your money without other minimums.

Who Should Use M1 Finance?

M1 Finance offers a lot of attractive features. Most robo-advisors charge fees that have a noticeable impact on your returns, so the chance to get free robo-advisory services can be tempting.

The people who will get the most use out of M1 Finance are those who don’t want to spend much time thinking about their investments and who don’t want to pay for more advanced advisory services. As a great “set it and forget it” solution, M1 Finances appeals to many people who prefer a simple investing solution.

M1 Finance Review Summary

Every company has its pros and cons, and M1 Finance is no exception. As a free robo-advisor that makes investing easy, M1 Finance is worth your consideration.

Pros:

  • No minimum investment
  • Multiple account types – taxable, IRA, trust, etc.
  • No fees

Cons:

  • No tax-loss harvesting service
  • Trades execute once per day

Best for: M1 Finance is a good choice of robo-advisor for most new investors. Its lack of fees and minimum investment mean that anyone can easily start using the service. Where it falls behind is in more premium features, such as tax loss harvesting, which other robo-advisors claim can make up for the fees they charge.

M1 Finance summary
M1 Finance summary

If you’re looking for a hands-off investment solution, sign up to put your investments on autopilot.

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M1 Finance Review: Is Investing Your Money on Autopilot Best for You?
M1 Finance Review

Betterment Review: Are Robo-Advisors a Safe Way to Invest in 2020

In this Betterment review, we’re going to show you the details of how Betterment works, what services it offers for investors, and whether investing with Betterment is the best choice for you.

Once upon a time, having your investments managed by a professional was reserved for the rich. Hiring a portfolio manager was expensive and often required a minimum net worth that no one but the 1% could afford.

Betterment, and companies like it, aim to change that.

By using sophisticated technology, robo-advisors can make high quality investing available to everyone. Even if you are new to investing and only have a small amount of money to start with,  robo-advisors make it possible to easily get started.

Betterment gives you an individualized, professional portfolio. All you have to do is tell them a bit about yourself, then fund your account.

We’ve researched all there is to know about this company and spill it all right here in our complete Betterment review.

Table of Contents

Betterment Review At a Glance

Best for: New investors and investors primarily with tax-advantaged accounts that want hands-off investing at a low cost.

The Bottom Line: Betterment is the largest robo-advisor on the market and is a high-quality investment option for anyone who doesn’t want to get their hands dirty optimizing their own account.

What is Betterment?

Betterment is an online service that will invest your money for you, and keep it invested in a way that is aligned with your goals using tested algorithms. Companies like Betterment are commonly referred to as robo-advisors.

Founded in 2008, Betterment is the largest robo-advisor on the market with $13.5 billion in assets under management. In 2017, it became the first online financial advisor to exceed $10 billion in assets.

For a low management fee of 0.25% and a $0 minimum investment, you can open traditional investment accounts, retirement accounts, or trusts with Betterment to help you save for a variety of goals.

Besides its standard portfolio, Betterment offers three portfolio options from which to choose. Then Betterment will manage your assets based on your goals, risk tolerance, and personal financial situation.

Betterment App

While you won’t have access to a certified financial advisor in-person or on the phone, you can ask questions at any time in Betterment’s app. All inquiries will be answered by a Certified Financial Planner (CFP). The Betterment app is certainly handy to have on your smartphone for this reason alone.

Betterment Premium

If you want a little more hand-holding, you can get unlimited phone access to CFPs for personalized advice. This service has a higher management fee of 0.40% and a minimum investment size of $100,000.

Betterment Facts & Figures

Feature Description
Founded 2008
Assets Under Management (March 2018) $13.5 billion
Account Minimum $0 for Betterment Digital $100,000 for Betterment Premium
Account Management Fee 0.25% for Betterment Digital 0.40% for Betterment Premium
Investment Expense Ratios ETF expense ratios average 0.13% for Betterment portfolios. Slightly higher for Socially Responsible, Blackrock Income and Goldman Sachs Smart Beta options
Other Account Fees None
Account Types Offered Individual and joint taxable accounts Roth, Traditional, SEP and Rollover IRAs  Trusts
Professional Support All customers can reach Certified Financial Planners (CFPs) via in-app messaging. Premium customers get unlimited access to advisors via phone.

How Does Betterment Work?

Like most robo-advisors, Betterment uses modern portfolio theory to determine asset allocation. It then invests across 12 asset classes in its standard portfolio. This portfolio automatically rebalances to keep your risk profile in-line with your goals and personal financial situation.

By using ETFs, Betterment keeps underlying investment costs low, which keeps costs from eating away at your wealth over time. The company’s platform also lets you track different financial goals, and lets you know if you’re on track each time you log in.

How Much Does It Cost to Invest With Betterment?

Betterment charges a flat management fee of 0.25%. This means a $10,000 account will pay $25 a year in management fees.

There are no trading fees, sales fees, or other fees when you invest with Betterment. However, the underlying ETFs that Betterment buys do have internal costs paid to the ETF provider, not Betterment. These fees average 0.13%.

Is there a way to lower fees?

Betterment’s promotion to lower fees for new clients isn’t much help for smaller investors. Deposits of $15,000 to $99,999 get one month free; $100,000 to $249,000 get six months free; and a deposit of over $250,000 gets one year free.

Referral program:

Betterment offers a referral program. For each friend you refer to Betterment, you get 30 days of free management, and they get three months free. To qualify, your friend needs to open and fund a new account. But refer three friends, and you get an extra free year.

Ultra-high net worth investor:

Investors with over $2 million invested will Betterment won’t be charged fees over that amount. You’ve got that hidden in the couch cushions, right?

Betterment Investment Options

The vast majority of Betterment’s assets are invested with its proprietary Betterment Portfolio. But the company recently added a few new options. All four investment strategies provided by Betterment rebalance as needed.

The Betterment Portfolio

Betterment Review

This portfolio is built with up to 12 asset classes, depending on your goals and risk tolerance. It includes domestic and international stocks and government bonds and U.S. corporate bonds.

No REITS or Commodities to Increase Betterment Returns

One knock on Betterment by professionals is that its portfolio does not include REITs or commodities. Betterment states that, based on testing, these securities can add cost but don’t benefit returns. However, both of these asset classes can provide more stability to a portfolio than one just made up of stocks and bonds.

Betterment has 3 additional portfolio strategies:

Betterment Review

Socially Responsible Portfolio

Socially responsible investing (SRI) involves investing more dollars in companies whose business practices benefit different social causes. It is a rapidly growing area in the investment world. For heart-focused investors, Betterment offers such a fund.

Betterment’s Socially Responsible Portfolio substitutes three ETFs in the standard portfolio with three SRI ETFs. These ETFs exclude companies with poor records on specific issues, while allocating more to companies with excellent records.

However, the majority of the ETFs in this portfolio are the same as the standard portfolio. Betterment is working on adding more SRI ETFs but is balancing social benefit with cost. This is a new investment arena, so options are still coming on the market. As low-cost alternatives become available, Betterment plans to switch more of the standard ETFs to SRIs.

BlackRock Target Income Portfolio

Built by BlackRock, this is a 100% bond portfolio focused on generating income from interest payments. For investors living off their assets, this can insulate you from some of the ups and downs of the stock market.

Keep in mind; the BlackRock Target Income Portfolio is only meant to be a piece of your investment strategy. Having no stock exposure limits your returns over time, which can increase the probability of running out of money in a long retirement.

Goldman Sachs Smart Beta Portfolio

Designed by Goldman Sachs Asset Management, this portfolio seeks higher returns by taking on somewhat higher risks. While this strategy still sticks to Betterment’s principles of diversification and tax optimization, it is also a little less passive.

This portfolio will select for areas of the market where greater returns are expected over time, using a distinct algorithm. It looks for areas of the market with good value, high-quality, robust momentum, and low volatility.

If you’re risk averse, this strategy isn’t for you. There will be times when this portfolio will under perform the standard Betterment Portfolio, in pursuit of higher long-term returns.

Individualized Asset Allocation

Introduced in May 2018, Betterment took a small step away from formula-based robo-advising.

In the past, investors could select their balance of stocks and bonds. But they couldn’t control how much of each of the underlying ETFs in the Betterment Portfolio they owned. That was determined by the algorithm.

The problem with this was high-net worth investors who had significant investments outside of Betterment. Betterment’s platform (and all robo-advisors at the time of this writing) can’t balance asset allocations over funds they don’t manage. If an investor already owned a significant amount of international stocks in another portfolio, she might not want to own any in her Betterment portfolio.

So, Betterment handed over control to clients with more than $100,000 in assets invested at the company. The standard formula will still manage portfolio composition for most investors. But if you choose, you can alter how much your portfolio owns of the 12 different underlying asset classes.

This is for more advanced investors who want to set the rules for how their money is invested.

Tax-Loss Harvesting

No one wants to send more money to Uncle Sam than they have to. Robo-advisors like Betterment use strategies to reduce your tax burden from investment gains.

How do they do it?

Well, when you sell an asset that has increased in value you have a taxable realized gain. But when you sell an investment at a loss, that loss offsets any potential gains. So, robo-advisors like Betterment balance selling investments with losses and assets with realized gains to reduce taxable amounts.

This means that when you go to withdraw money or rebalance, Betterment is always taking tax implications into account automatically.

Betterment vs Wealthfront

Unfortunately, Betterment’s tax handling is one area where it falls short of its main competitor – Wealthfront. Wealthfront uses what is called “direct indexing” for portfolios with over $100,000 in investments. This means instead of buying an ETF; it buys all the tiny pieces that make up the ETF directly. Why? Well, it gives them far more options when looking for small offsetting losses than Betterment’s 12 ETFs. Which makes its tax-loss harvesting strategy more effective.

Betterment has added some features to be more competitive, but if your primary investments are in taxable accounts, you would still likely be better off with Wealthfront.

Tax-Coordinated Portfolios

If you have both taxable and tax-advantaged accounts, you can choose to have your asset allocation balanced across all your Betterment accounts. This allows Betterment to take advantage of asset location. Placing funds that generate a high amount of taxable returns in tax-advantaged accounts. And funds that are tax-efficient in taxable accounts.

Based on research, Betterment expects Tax-Coordinated Portfolios to provide an additional annual return from tax savings of 0.10% to 0.82%, depending on assumptions.

Spousal Tax Loss Harvesting

If you are married and file taxes jointly, Betterment can manage taxable gains for the family. Similar to tax-coordinated portfolios, this makes it easier for Betterment to reduce the total tax burden.

Betterment RetireGuide

Want to know whether you are on track for retirement? Link all your investment accounts to Betterment and give them some details about your goals.

Enter simple facts like your age, when you plan to retire, and how much you are currently saving a year. Then Betterment will let you know how much you need to set aside and whether you’re on track for success.

Betterment’s RetireGuide will also calculate your current asset allocation across all your portfolios, to help give you a full picture of your investments.

Betterment Review

Other Betterment Features

Beyond investing, we want to share in our Betterment reviews the other offers and many other benefits that Betterment provides to investors. Here are a few of their perks.

Personalized Financial Advice

Betterment’s app connects all users with Certified Financial Planners (CFPs). Get answers about your financial situation, whether or not it specifically has to do with your Betterment portfolio.

If you have complex issues or want a more personal relationship, it may make sense to upgrade to Betterment Premium or seek out a fee-based CFP. But written contact through the app can help you tackle the little things that come up.

Smart Dividend Reinvestment

When your portfolio earns dividends or interest, Betterment doesn’t automatically reinvest it in the ETF the payment came from. Instead, it uses the funds to buy whichever ETF best rebalances your portfolio.

This method results in less buying and selling, reducing your tax burden and managing your risk more efficiently over time.

Fractional Shares

Let’s say an ETF costs $50 a share and you’ve only got $40 to invest. Instead of buying one share while $10 sits in cash in your account, Betterment allows you to buy 1.25 shares. This way all of your money is always invested and working for you.

SmartDeposit

With investing, research shows the sooner you can get your money in the market, the better. But sometimes, you’re just sitting on too much cash.

Betterment helps you avoid sitting on the sidelines with its SmartDeposit tool. Let Betterment know how much you need in your checking account at any given time, and it will periodically scoop extra cash out of your checking account and invest it.

Don’t worry about cash moving without your knowledge. You will be notified before each transfer and can cancel it before it happens.

Goal-based saving

Betterment allows you to set up different accounts within your main Betterment account to save for multiple goals. Saving for a house requires a different investment strategy than preparing for retirement. The system understands that and will manage your risk. And let you know whether you’re on track.

My one issue with Betterment’s goal-based savings is its safety net goal. This is meant to be an emergency fund but recommends investing for this goal with 40% stocks and 60% bonds. In general, you don’t want your emergency fund to be invested at all. Investing is a long-term game. And you might need your emergency fund in the short-term. I would recommend a high-interest savings account like CIT Bank or Discover instead of Betterment for this particular goal.

Charitable Giving Options

Many people know that donating to charity is a tax deduction. But did you know it can save you from capital gains taxes too?

Many charitable organizations allow you to donate shares instead of cash. By gifting the shares, instead of selling it into cash first, you don’t pay capital gains tax. Plus, the full value of the shares become a tax deduction.

Betterment allows you to donate shares from taxable accounts to charities. It will even recommend the best shares to optimize your tax savings while making a positive impact.

Who Should Invest with Betterment?

If nothing else, we hope you understand from our Betterment review that this company is the largest robo-advisor on the market for a reason. Its flat, low investment fee of 0.25% with no investment minimum makes it an excellent choice for most hands-off investors.

The platform is powerful and easy to use. With continual rebalancing, tax-loss harvesting, and fractional shares Betterment makes sure your investments are always working for you. All while encouraging you towards their goals with regular progress updates. Finally, by giving more flexibility to advanced investors, it creates a middle ground for those who want a say but don’t want to be completely DIY.

However, for high-net-worth investors with significant taxable investments, the tax-loss harvesting strategy at Wealthfront is more efficient for the same fees.

Betterment Review Summary

Betterment has low fees, automatic rebalancing, and high-quality investment options. This is a top choice for hands-off investors that are planning for retirement or other significant goals.

Since Betterment has no minimum investment, you can open an account with no commitment today. Take the time to test out their tools before funding your account. You can discover if you are on track for retirement and discover how Betterment can help you get there!

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Acorns Review 2020: Pros, Cons, and How it Stacks Up to Other Apps

In this Acorns review, we’re going to show you how Acorns works, what the potential savings and risks are, and help you determine whether Acorns is a smart investment tool for you.

Remember your piggy bank or loose change jar you had as a kid? How you would drop all your nickels, dimes, and quarters in there until it was packed full?

If you’re like me, every time you brought that change in the bank it added up to more cash than you thought.

Acorns wants to take this “out of sight, out of mind” savings strategy to the next level. They round-up your expenses to the nearest dollar, then invest your nickels and dimes for future goals.

Recently, the company added retirement accounts, a debit card account, and a $10 sign-up bonus.

But can this micro-investing strategy really grow your wealth?

Let’s take a look.

What is Acorns?

What is Acorns?

Acorns is part spare change jar, part robo-advisor. This app rounds up your purchases on linked credit or debit cards — now with the option to boost those round-ups by 2x, 5x, or even 10x — and invests that money for you.

Acorns offers three levels of service:

What is Acorns?
What is Acorns?

Invest: $1/month

Summary: Round purchases up to the nearest dollar and invest the difference in a taxable account. Add cash to your investments regularly and get kickbacks to boost your investments from purchases at partner retailers.

For $1 per month, this is Acorns’ lowest cost option. To sign-up, you connect your bank account and link any credit and debit cards where you want round-up investments to occur.

Then you select the amount of money you want to contribute to your Acorns investment to get started. There is no minimum, but the app won’t actually begin investing for you until your Round-Up balance equals $5 or more.

Finally, you’ll answer some questions about your financial situation, goals, and risk tolerance. Acorns will use this to recommend one of its five ETF-based investment portfolios. You can override their selection if you want more or less risk in your portfolio.

In addition to your Round-Up investments, you can set recurring investments that occur daily, weekly or monthly. Acorns Found Money service is also partnered with over 200 brands that give you cash back, automatically invested, for purchases.

Note: This account level used to be free for college students for up to 4 years, but Acorns no longer offers this perk.

Invest + Later: $2/month

Summary: Original Acorns plus the ability to invest in an Individual Retirement Account (IRA).

In 2018, Acorns added retirement investments to their platform. Now you can invest in a Roth, Traditional, or SEP IRA with Acorns. Investments into your Acorns Later account occur the same way as with the original Acorns service.

Invest + Later + Spend: $3/month

Summary: Acorns online checking account with full bank services, FDIC insurance, and the ability to boost your Acorns + Acorns later investments with instant Round-Up and cash back from local retailers.

The most recent addition to the Acorns platform is a digital checking account. Acorns Spend is a full-service checking account allowing digital direct deposit, mobile check deposit and payment, and unlimited fee-reimbursed ATM withdrawals.

Acorns Spend allows for real-time Round-Ups, custom spending strategies to boost your savings, and increased Found Money cash-back with up to 10% invested from local places you regularly visit.

How Does Acorns Work?

Acorns’ investing service, like most robo-advisors, is based on Modern Portfolio Theory created by Dr. Harry Markowitz. It has five optimized portfolios to choose from and automatically rebalances your portfolio and reinvests all dividend payments regularly.

Each Acorns portfolio is made up of ETFs, or Exchange Traded Funds, with exposure across multiple asset classes. These ETFs have internal expenses that equal about 0.10% of your investment over time.

Here is how Acorns portfolios are broken down today:

Conservative:

Short Term Government Bonds 40%
Ultra Short Term Corporate Bonds 40%
Ultra Short Term Government Bonds 20%

Moderately Conservative:

Large Company Stocks – 24%
Small Company Stocks – 4%
Real Estate Stocks – 4%
Government Bonds – 30%
Corporate Bonds – 30%
International Large Company Stocks – 8%

Moderate:

Large Company Stocks – 29%
Small Company Stocks – 10%
Emerging Market Stocks – 3%
Real Estate Stocks – 6%
Government Bonds – 20%
Corporate Bonds – 20%
International Large Company Stocks – 12%

Moderately Aggressive:

Large Company Stocks – 38%
Small Company Stocks – 14%
Emerging Market Stocks – 4%
Real Estate Stocks – 8%
Government Bonds – 10%
Corporate Bonds – 10%
International Large Co. Stocks – 16%

Aggressive:

Large Company Stocks – 40%
Small Company Stocks – 20%
Emerging Market Stocks – 10%
Real Estate Stocks – 10%
International Large Company Stocks – 20%

As you add money to your account through Round-Ups or scheduled deposits, Acorns will invest that money for you based on your risk-profile. If you are using the basic Acorns account, this will occur in a taxable investment account.

You can withdraw your money from Acorns at any time, but investment withdrawals can take 5 to 7 business days. And the reality is, you don’t want to use your Acorns savings as a regular source of cash.

Investing is a long-term game. By pulling money from this account for day-to-day expenses and goals, you’ll increase the chance of losing money in the market.

Acorns Review: Frequently Asked Questions

With so many options out there, investors have questions. Here are the top queries we’ve seen around the web that we’d like to cover in our Acorns review.

Are small Round-Up investments enough to matter?

When it comes to saving for your future, every little bit helps.

At the same time, should Round-Up investments be the core part of your investing strategy? No.

But even investing $30 a month at a 7% market return adds up to over $4,900 in 10 years. Put that same amount in an online savings or money market account, and you’re only looking at just under $3,900. And the gap between investing and saving only increases over time. That’s the power of compound growth.

How much does Acorns cost?

Acorns offers three plans:

  • Invest, $1 per month
  • Invest + Later, $2 per month
  • Invest + Later + Spend,  $3 per month

For small accounts, the $1 monthly fee is very high and offsets any reasonable potential gain from the investments.

Let’s assume you had 50 Round-Up transactions a month, at an average round up value of $0.40. The Acorns app would invest $20 for you each month but would take 5% of those savings in Acorns fees.

As your account value increased, that percentage would decline. But you would need to have $5,000 invested before Acorns’ fees were as low as Betterment at 0.25%. And Betterment offers those fees with no minimum investment threshold and with access to a retirement account. You would need $10,000 invested in an Acorns IRA to match Betterment’s fees.

What a $1/mo Fee Means for a Taxable Account:

Account Balance Annual Fee
$250 4.80%
$500 2.40%
$750 1.60%
$2,000 0.60%
$5,000 0.24%

Are there risks with investing with Acorns?

As with any investment, performance isn’t guaranteed. Investing has risks which means the value of your portfolio can trend up and down over time. While the S&P 500 has consistently provided returns around 8% annually, year-to-year variations could mean your account loses substantial value — sometimes in excess of 10% or more.

The biggest risk for Acorns users is deciding to stop contributing to your account and keeping it small. Remember, the smaller your account balance remains, the more impact the monthly fee has on your overall account balance.

If you have plans for your money in the next three to five years, opt for a high-interest savings account instead. Some online banks, like Chime Bank, offer free checking accounts with automatic savings that don’t auto invest.

Is it okay to invest large sums of money with Acorns?

For hands-off investors with large sums to work with, the flat-rate fee may look attractive. For example: If you have over $10,000 to invest in the Invest + Later membership level and your fees drop to below the levels of top robo-advisor competitors like Betterment and Wealthfront, Acorns appears to be a cost effective option.

However, I would still not recommend investing large amounts with Acorns. Their investment options aren’t as robust as the bigger players. Portfolios include less diversification across asset types and no ability to customize asset allocation outside the five key portfolios.

In addition, if you are primarily investing in a taxable account (the basic Acorns level), you don’t get tax-loss harvesting to improve long-term returns offered by many competitors.

Finally, you don’t get access to professional financial support with Acorns. Larger robo-advisors provide some access to Certified Financial Planners (CFPs) to answer your burning questions. You might not have any today, but as your portfolio grows or we hit a downturn in the market, it can be a comforting option.

Who is Acorns best for?

Acorns is best for new investors who are looking for a hands-off solution to growing their savings.

Acorns App Review Summary

When it comes to round-up investing apps, Acorns is among the best in the business. It’s easy to use, has an excellent education platform for new investors, and simple, straightforward fees.

However, whether the $1-3 monthly fee is a benefit or a detriment really depends on your account balance. If you’re only adding a few dollars a month to your Acorns account, that $1 a month will hinder your investment growth.

$10 Bonus

$0 Account minimum You’ll need $5 to start investing.

$1-$3/mo Monthly Fees

DollarSprout Rating

How Acorns stands out:

The Acorns app is very easy to use, which is perfect for new investors who are learning the ropes. Users’ everyday purchases are rounded up and the change is invested, which makes investing a daily habit.

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How to Invest: A Beginner’s Guide to Investing in the Stock Market

This ‘Investing for Beginners’ Guide will walk you through, step by step, how to start investing without feeling completely overwhelmed.

Do you want your money to earn you more money?

Well, it can’t do its work hiding in a bank account.

Whether you want to save for your child’s college or prepare for retirement, you’ll reach your goal faster by investing.

Here’s everything you need to know to get started today.

What is Investing?

When you invest, you purchase something with the expectation of profiting off of it in the future.

In the 1990s, some people thought they were making smart “investments” in Beanie Babies and McDonald’s toys. But traditional investments include things like ownership in a business, real estate assets, or lending money to a person or company in exchange for interest payments.

Why Should I Invest?

Merely saving money isn’t enough to build wealth. A bank will keep your money safe. But, each year, inflation makes every dollar you’ve tucked away slightly less valuable. So, a dollar you put in the bank today is worth just a little less tomorrow.

Comparatively, when you invest, your dollars are working to earn you more dollars. And those new dollars work to earn you even more dollars. Which then work to earn you even more. The snowballing force of growth is known as compound growth.

Over the long term, investing allows your assets to grow over and above the rate of inflation. You past savings build on themselves, instead of declining in value as the years pass. This makes it significantly easier to save for long-term goals like retirement.

When Should I Start Investing?

Yesterday. But if you haven’t started yet, today is a great second choice.

In general, you want to start investing as soon as you have a solid financial base in place. This includes having no high-interest debt, an emergency fund in place, and a goal for your investments in mind. Doing so allows you to leave your money invested for the long-term – key for maximum growth – and be confident in your investment choices through the natural ups and downs of the market.

Benefits of Starting Young

Compound growth requires time. The earlier you start investing, the more wealth you can create with fewer dollars.

When it comes to investing, time is your most powerful tool. The longer your money is invested, the longer it has to work to create more money and take advantage of compound growth. It also makes it far less likely that one harsh market downturn will negatively impact your wealth as you’ll have time to leave the money invested and recover its value.

Let’s look at an example:

Since 1928, the average return of the S&P 500 (a set of 500 of the largest public companies in the U.S. that is often used to approximate the stock market) is about 10%.

So, let’s say you’re 25 and put $5,000 in the S&P 500. You see a 10% increase in value each year, letting your money continue to grow. When you turn 65, you open your account to find you have over $226,000. An excellent retirement gift to yourself!

However, if you waited until you were 35 to start investing, your value at 65 would only be $87,000. Still impressive. But less than half of what you would have had if you started a decade earlier.

Pay Off High-Interest Debt First

View paying down high-interest debt as investing until you no longer have those debts. Every dollar towards principal earns you an instant return by eliminating future interest cost.

If you still have high-interest debt, such as credit cards or personal loans, you should hold off on investing. Your money works harder for you by eliminating that pesky interest expense than it does in the market. This is because paying off $1 of debt balance saves you 12%, 14%, or more in future interest expense. More than traditional investments can be expected to return.

Focus on getting out of debt as fast as you can, then dive into investing.

Have an Emergency Fund in Place

To reduce the risk of having to pull money out of your investments early, have an emergency fund to protect from life’s unexpected twists and turns.

Remember how we said time is the most powerful tool? To start investing, you have to be set up to let that money stay invested. Otherwise, you limit your time horizon and could force yourself to withdraw your money at the wrong time.

To protect yourself from unexpected expenses or job layoffs, save a sufficient emergency fund for your needs. Do not plan for your investment accounts to be a regular source of cash.

Starting Small is Okay

Sometimes people think they can’t start investing until they have a significant amount of money. But this means many people give up years of compound growth waiting until they feel rich enough. No matter how small, get your money working for you as soon as possible.

Consider our previous example of the $5,000 invested at 25- or 35-years-old. Pretend for a moment the 35-year-old didn’t have $5,000 to invest at age 25. But she did have $500. And she thought, maybe, she could scrape together $50 a month to add to her $500 investment.

If she invested $500 at age 25, and then $50 a month until she had put away a total of $5,000, she would have almost $174,000 at retirement age. Double what she would have had if she waited until she had $5,000 at age 35.

Starting small makes a significant difference, especially if it means you get in the market sooner.

Investing 101: Basic Investing Terms

The number one thing that scares off new investors is the jargon. The investment market has a ton of jargon. So, we’re going to give you the inside scoop to make it less intimidating.

What is a Stock?

A stock, also known as a “share,” is a tiny ownership stake in a business. Public companies allow anyone to buy or sell ownership shares of their business on exchanges.

If you own a stock, you are actually a part owner of the company. Go you! While owning a share of Walmart won’t give you the power to fire the slow cashier at your local store, you do have some rights. You can, for instance, vote on members of the Board of Directors.

What is a Bond?

A bond is debt of a corporation, municipality, or country.

By purchasing a bond, you are loaning money to one of these entities. For companies, bonds are typically segmented into $1,000 increments that pay interest every six months, with the full value paid back at “maturity,” i.e., the date the debt is due. Government bonds are typically known as “treasuries.”

What is a Portfolio?

How to Invest portfolio

A portfolio is a collection of all your investments held by a particular broker or investment provider. You may own some individual stocks, bonds, or ETFs. Everything in your account would be your portfolio.

However, your portfolio can also mean all your investments across all account types, as this gives a better picture of your entire exposure.

What Does Diversification Mean?

Just like you wouldn’t invest all your money in your friend’s idea for a pumpkin-spiced toothpaste business, you don’t want to only invest in one stock or bond. Diversification means owning a variety of different investments, so your success or failure isn’t dependent on just one thing.

To be properly diversified, you want to make sure your investments actually have variety. Owning three different clothing companies still means you’re facing all the same risks. An import tax on cotton products, for example, could crush the value of all three companies at once.

What is Asset Allocation?

There are three main asset classes for most investors: stocks, bonds, and cash. Asset allocation is how you split your investments across those three buckets.

Stocks offer greater long-term returns, but significantly greater swings in value. These swings, sometimes north of 20% up or down in a given year, can be a lot to stomach. Bonds are safer but provide lower returns in exchange for that security.

You determine your asset allocation by considering the length of time until you need your money, your risk tolerance, and goals.

What are ETFs?

ETFs, or exchange-traded funds, allow you to buy small pieces of many investments in one security.

An ETF is a fund that holds numerous stocks, bonds, or commodities. The fund is then divided into shares which are sold to investors in the public market.

ETFs are an attractive investment option because they offer low fees, instant diversification, and have the liquidity of a stock (they are easy to buy and sell fast). Buying a stock or bond ETF gives you access to numerous investments, all held within that ETF.

Stock Funds

A stock ETF often tracks an index, such as the S&P 500. When you buy a stock ETF, you are purchasing a full portfolio of tiny pieces of all the stocks in the index, weighted for their size in that index.

For instance, if you purchased an S&P 500 ETF, you are only buying one “thing”. However, that ETF owns stock of all 500 companies in the S&P, meaning you effectively own small pieces of all 500 companies. Your investment would grow, or decline, with the S&P, and you would earn dividends based on your share of the dividend payouts from all 500 companies.

Bond Funds

A bond ETF owns a basket of bonds, often tracking an index, just like the stock ETFs.

These funds could own a mixture of government bonds, high-rated corporate bonds, and foreign bonds. The most significant difference between holding an individual bond and a bond ETF is when you are paid interest. Bonds only make interest payments every six months. But bond ETFs make payments every month, as all the bonds the fund owns may pay interest at different times of the year.

Types of Investment Accounts

If you’re ready to buy stocks, bonds, or ETFs, you may be wondering where these types of investments are held.

There are a few different types of accounts in which you can hold investments. But they can’t live in your standard bank account. Here are your options.

Retirement Accounts

Saving for retirement is most people’s biggest long-term goal. With the average person retiring at 62, either by choice or due to layoffs and health issues, most Americans face 20 years or more of retirement in which they need assets to support themselves.

To help you prepare for this massive goal, the government offers tax incentives. However, if you invest in these accounts, your access to your funds is limited until 59 ½. In some cases, there are penalties for withdrawing your money earlier.

Here are the type of accounts that offer tax savings.

Employer-Sponsored Accounts

Employer-sponsored retirement accounts such as 401(K)s, 403(B)s, 457s, and more, allow employees to save for retirement directly from their paycheck. Some employers offer contribution matches as a perk to double-down on your retirement preparation.

Typically, you put “pre-tax” money into these accounts, which means you don’t pay income tax on those dollars. Any money invested grows without tax until you ultimately withdraw it for living expenses in retirement. As you withdraw funds, you will pay income tax on the withdrawals. However, most people are in a lower tax bracket in retirement so pay lower rates.

As of 2019, you can contribute up to $19,000 in a given year to one of these accounts, not including any employer contribution. If you are 50 years or older, you can contribute up to $24,500 a year.

Traditional vs. Roth IRA

If you don’t have access to an employer-sponsored retirement account or have already maxed out your contribution, you can also open an Individual Retirement Account (IRA) to invest.

There are two types of IRAs: Traditional and Roth.

A Traditional IRA works the same way as employer-sponsored plans when it comes to taxes. Any money contributed will be treated as “pre-tax” and reduce your taxable income for that year.

A Roth IRA, on the other hand, is funded with post-tax dollars. This means you’ve already paid your income tax, so when you withdraw it in retirement, you don’t pay income or capital gains tax. The money is all yours. Roth IRAs offer excellent tax benefits but are only available to certain income levels. If you make more than $135,000 a year as a single filer or over $199,000 as a married filer, you aren’t eligible for a Roth IRA.

As of 2019, you can contribute up to $6,000 per year to an IRA. If you are 50 years or older, you can contribute up to $6,500 a year.

Related: Traditional vs. Roth IRA: Which One is Better For Me? 

529 College Savings Plans

These accounts, offered by each state, provide tax benefits for parents saving for college. Operating like a Roth IRA, contributions are made post-tax, but all withdrawals are tax-free as long as the funds are used for higher-education expenses.

Your state may offer tax benefits or contribution matches for investing in your local 529 plan, but you can utilize any state’s 529. Since each state has different fees and investment options, be sure to find the best 529 for your money.

Brokerage Accounts

Brokerage accounts offer no tax benefits for investing but operate more like a standard bank account to hold your investments. There are no limits on annual contributions to these accounts, and you can access your money at any time.

Cash or Cash Equivalents

Since investing should only be undertaken for the long-term, you may need to hold onto cash while saving for shorter-term goals. In that case, a traditional bank account might not do the trick. Checking and savings accounts offer incredibly low interest rates, if any at all, which means you are entirely at the mercy of inflation.

Luckily, there are cash accounts that pay higher interest:

A CD, or Certificate of Deposit, is a savings account that restricts access to your cash for a specified period (6 months, 12 months, 24 months, etc.). There is a small penalty if you want to withdraw your money before the term is up, but these accounts typically offer a higher interest rate in exchange for the lack of access.

High-yield online savings accounts are the middle ground between CDs and traditional savings accounts. They pay higher interest than a conventional savings account but still allow a few transactions a month so you can access your cash if you need it. Many online high yield savings accounts have no deposit minimums or fees.

Money market accounts are very similar to high yield savings accounts, but with slightly higher interest rates and higher deposit requirements. For instance, CIT Bank’s money market account offers a 1.85% interest rate but requires a $100 minimum deposit.

In any of these accounts, your cash deposited is not at risk. FDIC insurance guarantees you your money back, even if the bank that holds your account goes bankrupt.

Related: 10 Best Online Savings Accounts with High Interest Rates

Where to Focus First

When first starting to invest, it can be hard to choose between the multiple types of investment accounts. As you begin, remember to focus where you see the most value.

First, contribute enough to your employer-sponsored retirement plan to get the full value of any match the company offers. This is free money and an instant return on your investment. If you aren’t sure if your employer offers a contribution match, reach out to HR for the most up-to-date policies.

Second, max out contribution limits on your tax-advantaged accounts – if you are primarily saving for retirement or a child’s college. The tax benefits in these accounts save you money that you don’t want to turn over to Uncle Sam unnecessarily.

Finally, invest any excess capital in brokerage accounts. This will help you save for long-term goals like buying that vacation house in ten years.

Note: The above assumes that you have paid off all high-interest debt and have a solid budget in place. If you haven’t done those things yet, get them squared away before you start investing.

7 Golden Rules for Investing Money

You may be a rookie investor, but that doesn’t mean you need to make costly rookie mistakes. Follow these seven golden rules and you’ll be on the path to success.

Click here to see the whole infographic.

1. Play the Long Game

Never invest for the short-term. The market moves up and down in natural cycles that can’t be timed. Investing for less than three to five years doesn’t give you enough time to rebuild asset value if you hit a downturn at the wrong time.

2. Don’t Put All Your Eggs in One Basket

Don’t put too much of your money in any one stock or bond where one issue could destroy your wealth. Diversify with low-cost, index ETFs and avoid stock picking.

3. Make Investing a Monthly Habit

Despite headlines continually calling a market top or bottom, no one can accurately determine where we are in the cycle at any given time. The best way to guarantee that you buy at the right times is to make investing a monthly habit. Invest each and every month, regardless of headlines or market performance.

4. Invest Only What You Can Afford to Lose

Investing is risky. While the long-term trend has historically been upwards, there are also years of deep declines. If you need money in the near-term, or the thought of seeing your account balance drop 20% makes you sick to your stomach, don’t invest those funds.

5. Don’t Check Your Portfolio Everyday

Investing is the one place where a “head in the sand” strategy might be the smartest method. Set up auto deposits into your investment accounts each month and only look at your portfolio once every three to six months. This reduces the likelihood of panic selling when the market falls or piling in more money when everything seems like rainbows and butterflies.

6. Keep Your Fees Low

Mutual funds and ETFs have expense ratios. Many brokerages charge trading fees. And investment providers from financial advisors to robo-advisors charge management fees. All these fees eat away at your wealth over time.

Sticking to index funds and ETFs keeps your fees low while guaranteeing you see the performance of the market so that you can keep more money in your pocket.

7. Listen to Warren Buffet’s Investing Advice

Warren Buffett is possibly the most famous investor in history. He’s created a multi-billion-dollar net worth in just one generation. Learn from his advice to invest for your own future.

“Someone is sitting in the shade today because someone planted a tree a long time ago.”

“I never invest in anything I don’t understand.”

“If you don’t find a way to make money while you sleep, you will work until you die.”

“The stock market is a device for transferring money from the impatient to the patient.”

“It is not necessary to do extraordinary things to get extraordinary results.”

How to Start Investing Today

An easy way to start investing today from your phone or laptop is by opening an account with Acorns.

Acorns is a micro-investing app ideal for beginner investors. The basic plan, Acorns Invest, starts at just $1/month with a free $10 sign-up bonus for new users.

When you make a purchase with a linked debit or credit card, Acorns rounds up to the nearest dollar and invests your spare change. You can boost your Round-Ups by 2x, 5x, or 10x.

In addition to Round-Ups, you can set up recurring daily, weekly, or monthly investments to your Acorns portfolio. Their Found Money service will also find cashback opportunities from 200+ partners and automatically invest your savings when you make a purchase.

It only takes a few minutes to set up an account. Once you complete your profile, Acorns suggests one of their five portfolio options based on the information you provided. However, you have the option to override their suggestion if you prefer a portfolio with more or less risk.

The platform automatically rebalances your portfolio and reinvests all dividend payments to continue growing your investments.

Acorns is a smart option for hands-off investors and those just getting started. As your account grows, the $1-3 monthly fee stays the same, effectively making the service cheaper over time.

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What is a Financial Plan and How Do You Make One?

What is a Financial Plan and How Do You Make One?

Chances are you have some goals you’d like to tick off in your lifetime.

Maybe you want to visit three dozen countries, buy a house, retire by the time you’re 55, or start a family and send your children off to college.

Chances are also good that you won’t be able to achieve those goals — unless you have a plan. Specifically, a financial plan.

A financial plan is a document that allows you to map out the life you want and how to get there.

It sounds complicated, but don’t worry. We’ll break it down so you know exactly what to expect when making your own financial plan.

The Benefits of Creating a Financial Plan

A recent study by CapitalOne found that half of Americans don’t have a long-term financial plan. Not having a plan to reach your goals is like taking a road trip without a map and hoping you reach your destination.

The biggest benefit of a financial plan is that it provides actionable steps to achieve what you want out of life. It’s up to you to put in the work, but that’s easier when the steps are laid out in front of you.

Financial plans also allow you to examine where you’re at and what you can work to improve. If you don’t have enough money saved for retirement, a financial plan can identify this. Then you can take steps to address the problem before you hit retirement age.

What is a Financial Plan?

At its core, a financial plan is just a document that outlines your goals and how to eventually afford them.

“A financial plan is going to look different depending on what financial planner you work with,” said Katrina Welker, a Certified Financial Planner™ (CFP®) with Rooted Planning Group. “At one firm, we printed a 30-50 page report that was bound and presented to clients. I found this overwhelming for many people.”

As a result, Welker now uses a more streamlined online interface with clients. The interface is also interactive, so clients can see how small changes have big effects on their future goals.

What Does a Financial Plan Include?

According to Patrick Logue, a CFP® with Prudent Financial Planning and an Adjunct Professor who trains other CFP®s at Boston University, every financial plan should include some of the following.

1. Financial Health

This section should provide an overview of your current standing. It may include details like your net worth (your total assets minus your total debt), your budget, and your cash flow.

2. Risk

This section outlines the hidden dangers that could prevent you from reaching your goals, and what you can do to protect yourself against them. In other words, insurance, including life, disability, health, renters, homeowners, and any other kind of coverage you might need.

3. Investments

According to Logue, “This section would dive into portfolio performance and topics such as risk, reward, correlation, stress tests, taxation issues, investment options, risk tolerance, portfolio risk score, and risk needed to reach goals score.”

4. Retirement

Although similar to the investing section, here we take a deeper dive into your retirement planning. Are you saving enough to reach your retirement spending goals? How much do you need to retire? What are the best accounts to save in order to minimize your tax bill? Should you roll over your 401(k) to an IRA?

5. Taxes

You may not realize it, but a large chunk of your income goes towards your tax bill before any money enters your bank account. Financial planners use this section to shrink your tax burden so you have more money left over to reach your goals.

6. Estate Planning

It’s a bit morbid to think about end-of-life planning and what happens to your assets after you die, but doing so now can save a lot of heartache in the future.

“Estate planning documents must be drawn up by legal professionals,” says Logue, “but financial planners can help quarterback the process.”

7. Education Planning

Are you planning on returning to school to change careers, or do you want to send your kids to school so they graduate debt-free? If so, you’ll need to start planning now. That’s where this section comes in handy.

Financial Plan

5 Steps for Creating a Financial Plan

Ready to get started with your own financial plan? Here’s how to do it.

1. Find a CFP®

It’s possible to DIY your financial plan, but there are advantages to hiring a professional if can afford it. A CFP® can guide you through this entire process and provide you with an objective analysis of how likely you are to reach your goals. They can also advise you in creative and technical ways a layperson might not think of.

It’s easy to forget all the little things, like having a power of attorney and designating your beneficiaries. A financial planner can help you remember. Working with a financial planner also means you’re more likely to follow through with the plan since you’ve already invested money into it. A CFP® can help hold you accountable for the duration of your financial journey.

Not sure where to begin? See how to find a financial advisor that meets your needs.

2. Gather Your Information

You’ll need a complete picture of your entire financial situation in order to create a solid plan. This includes documenting:

  • Your current monthly cash flow and budget
  • Your current retirement savings, allocations, monthly contributions, and plans available to you
  • The amounts and premiums of any insurance plans you have
  • The beneficiaries of all your accounts
  • Other relevant financial documents

You need to look at every little piece of information because these are the tools you have to work with — and the obstacles you’ll face along the way. Spend some time detailing the whole picture.

3. Decide on Your Goals

Now for the fun part. What do you want to do in your lifetime?

At what age would you like to retire? Do you plan to pay for your children’s education? What type of legacy do you want to leave for your loved ones?

Taking the time to sit and really think about which goals are most important to you is key to the process. You’re basically picking out the destination you’re heading to on a map.

4. Evaluate Your Financial Situation

Here’s the moment of truth. You have your end destination in mind, and you know what tools you have available to get there. So is it enough? If not, what will it take to get there? What changes do you need to make in order to reach your goals? Or do you need to adjust the goals themselves?

This part of the process involves a lot of number crunching. You need to take stock of, among other things, when you want to retire, how much you want to live off during your retirement years, how much money you’re currently saving, and how much you have invested to see if you’ll be able to reach your goals.

This is where having a financial planner can make all the difference. They’ll be able to crunch all the numbers with complex tools you might not have available to you. They’ll also be able to show you whether or not you’re heading in the right direction.

5. Stick to the Plan

This is where the rubber meets the road. Now that you know where you’re heading and how to get there, it’s time to actually put the plan into place.

For example, you’ll need to make sure you follow your budget. You’ll also need to make appointments with other financial professionals, such as attorneys, investment brokers, insurance brokers, and your employer’s HR department to fully implement the plan.

Financial Plan FAQs

Beyond creating your financial plan, remember to consult an expert for assistance and check in on your progress regularly.

Do I need a financial planner to make a financial plan?

There are many advantages to working with a financial planner. The only disadvantage is cost, which can be prohibitive for some people.

For the best results, find a fee-only financial planner with a CFP® designation. That way you know they’ve received the right training and aren’t working on commission, so they’re far less likely to try and sell you products you don’t need.

How often should I make a financial plan?

You may only need to “make” your financial plan once. After that, it’s a good idea to check in at regular intervals as circumstances change. For example, if you start a family, get a new job, or decide to switch up your financial goals, you’ll need to tweak your plan.

“I encourage you to look at your plan at least annually,” said Welker. “We have clients we meet with quarterly to stay on top of changing situations and to make sure we have time to look at different topics throughout the year.”

What’s the difference between a budget and a financial plan?

A budget is a plan for spending your money each month. A financial plan is more comprehensive and provides a road map to reach your financial goals.

“If someone just has income and expenses, they can probably get by using Mint or a similar software to help them with their budget,” says Logue. “But, if someone wants to really understand how the decisions they make impact the chance of reaching their financial goals, they could probably benefit from a comprehensive financial plan.”

Why a Financial Plan is a Necessity

If you don’t have any goals in life beyond waking up each morning, going to work, and coming home to sleep, you may not need a financial plan. But most of us have bigger dreams than that, like retiring, saving for a vacation home, or paying for kids to go to college. If you want to make those dreams a reality, a financial plan is the first step.

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How to Find a Financial Advisor That Meets Your Needs

I used to be skeptical of financial advisors.

I figured that as a personal finance writer and self-proclaimed money expert, I knew everything I needed to know about my investments. Everything else, I assumed, was icing on the cake.

But after some friendly chiding from a colleague, I decided to consult with an advisor to make sure I was properly diversified. After an hour in his office, I was already scheduling another appointment for the next quarter.

What I learned in that short meeting has stuck with me ever since – I may be an “expert” in some areas, but there’s a difference between a layman’s knowledge and the expertise of a Certified Financial Planner™.

My advisor was able to point out the blind spots I never knew existed, examine the areas I needed to improve on, and give me a concrete strategy for the future. Since I started working with an advisor, I’ve never been more confident in my portfolio.

If you’re in the market for a good financial advisor, don’t pull the trigger just yet. Here’s what you need to know first.

Table of Contents

  • How to Find a Financial Advisor That’s Right for You
    • 1. Know What You Need from Your Financial Planning Company
    • 2. Understand the Financial Advisor Business Model
    • 3. Hire a Certified Financial Planner™
    • 4. Make a List of Questions
    • 5. Look for a Financial Advisor
  • How to Find a Financial Advisor: Don’t Settle

How to Find a Financial Advisor That’s Right for You

Finding the right financial advisor is about more than shopping for quality service. It’s about establishing a relationship with someone you can trust.

Even if you decide to go with an automated robo advisor, you need to feel like your financial future is safe in their hands. That means knowing what you need, what to look for, and what to avoid.

1. Know What You Need from Your Financial Planning Company

Financial planning companies can help in a few different ways. You can hire a planner from the company on a monthly basis to monitor your accounts and provide feedback if anything changes. Many people go over their accounts with a planner on an annual or a quarterly basis. Think of it as financial spring cleaning.

A financial planning company can be especially helpful if your money situation changes drastically. For example, a 22-year-old who inherits $200,000 when their parent dies should see a planner to determine the best way forward.

How often you need to see a financial planner depends on how comfortable you are with investing and how complicated your financial situation is. Someone who’s interested in learning more about retirement accounts, index funds, and the difference in their IRA vs. 401(k) might not need to see a planner as often as a consumer less interested in investing.

It’s also helpful to find a financial advisor who’s familiar with your particular situation. For example, if you’re divorced, look for a financial planner who specializes in divorces and blended families. They’ll be able to point out particular blind spots that a general financial planner could miss. You might also want an advisor close to your age because they’ll understand your specific concerns in a more personal way.

2. Understand the Financial Advisor Business Model

There are three main ways that advisors get paid: commission-based, fee-based, and fee-only.

Commission-based advisors receive compensation when a client purchases a product based on their recommendation. If you buy an advisor-recommended life insurance policy, they’ll get paid from the life insurance company. Clients don’t pay commission-based advisors directly.

It’s generally best to avoid commission-based advisors because their recommendations, such as annuities and whole life insurance policies, are often costly.

Fee-based advisors can get paid directly from the client, but can also earn a commission if the client buys one of their recommendations. Be cautious of financial planners who earn money based on a commission of any kind. This model encourages planners to pick investments that make them more money, even if they aren’t right for the client.

The most unbiased pay structure for a financial planner is the fee-only model. Fee-only advisors may be paid hourly, as a flat fee, or as a percentage of assets under management (AUM), depending on their business model.

For example, if you invest $1 million with a financial planner who charges 1% AUM, you’d pay $10,000 per year. With a flat-fee financial planner, on the other hand, you may pay a one-time fee of $2,000 for a comprehensive financial plan.

A qualified fee-only planner should give you an estimate of how much they’ll charge beforehand. I’ve paid between $500 to $750 for one financial planning session, where I got specific investment recommendations based on my current accounts.

3. Hire a Certified Financial Planner™

There’s no accreditation needed to refer to yourself as a financial planner or advisor. If you don’t do your research, someone claiming to be a financial planner could swindle you or prescribe products that don’t work for your situation.

The best kind of financial planner is a Certified Financial Planner™ (CFP®). This designation means they’ve passed a complicated exam with topics ranging from insurance to budgeting to taxes. A CFP® also has a fiduciary duty, which means they have to recommend investments and other products that are in the best interest of their client, regardless of whether or not they receive compensation for doing so. This is the highest ethical obligation a financial planner can have.

4. Make a List of Questions

You should always investigate a financial planner before you hand over any money. Here are some good questions to ask:

  • Are you a Certified Financial Planner™?
  • What qualifications do you have?
  • Do you have a fiduciary duty to your clients?
  • How long have you been in business?
  • Do you have any reviews or testimonials?
  • What is your average client like (age, income, etc.)?
  • What kind of situations do you specialize in?
  • How do you charge your clients?

5. Look for a Financial Advisor

There are two main types of financial advisors to consider: robo advisors and human advisors. It’s important to consider which type of advisor is best for you before taking the plunge.

Robo Advisors

If you’re ready to learn how to start investing but not up for the commitment of paying for a full-fledged financial planner, a robo advisor could be your best option.

Robo advisors are financial companies that use tried-and-tested algorithms to provide advice based on a user’s specific financial situation. Most robo advisors charge low fees and have little or no minimum deposit requirement.

Robo advisors pick where you should invest and take care of all the nitty-gritty details. You set up a retirement account directly with a robo advisor and they handle buying the funds. They can even suggest how much you should save for retirement based on your goals, income, and age.

Some robo advisors offer access to human advisors who can answer more specific questions. This is often only available if you have a certain amount of assets invested with the company or if you pay an extra fee.

A robo advisor is a good alternative if you can’t afford a traditional financial planner but still want expert help in picking investments and deciding how much to save for retirement.

3 Robo Advisors to Consider

Blooom is a robo advisor focused on 401(k)s, 403(b)s, and other company-sponsored retirement accounts. Users sync their employer-based retirement accounts and the app suggests what you should be investing in.

Blooom will examine each fund’s fees to minimize those expenses. This robo advisor has two options – a free, simple analysis and a comprehensive plan for $120 a year. To learn more about this robo advisor, check out our Blooom review.

Betterment works with employer-sponsored accounts, IRAs, and taxable brokerage accounts. There is a .25% fee for all accounts and no minimum deposit. You can sync all your external accounts with Betterment and create a Betterment IRA or taxable account. Our Betterment review covers all the details you’ll want to know.

Wealthfront is another well-respected robo advisor. Investors can either open a Wealthfront-based account and allow the app to choose what they invest in or link all their current investment accounts to Wealthfront and allow them to make recommendations. The app chooses low-cost funds to minimize fees. Wealthfront charges a .25% advisory fee for all accounts, and there’s a $500 minimum deposit.

Human Advisors

Finding a human financial planner is easy. Finding a qualified financial planner that you can trust with your money is another story. Here are some networks you can mine to a planner that meets your needs.

XY Planning Network: This network of planners is designed for Generation X and millennials looking for affordable, professional help. All of the advisors listed are fee-only Certified Financial Planners™ who have a fiduciary responsibility to their clients. You can find an advisor based on location or specialty.

National Association of Personal Financial Advisors (NAPFA): Advisors accredited by NAPFA need to have at least three years of experience, be fiduciaries, and be approved by a peer review. NAPFA advisors specialize in areas including LGBT couples and families, professional athletes and entertainers, socially responsible investors, among others.

The Garrett Planning Network: Anyone in this network has to be a Certified Financial Planner™ or working toward their CFP® license, have a fee-only payment structure, and charge on an hourly or retainer basis. You can search for local options or virtual advisors who can do phone or video consultations.

How to Find a good Financial Advisor: Don’t Settle

A financial planner is like a mechanic. Picking the right one can mean the difference between driving your car for 15 years or breaking down on the side of the highway. Don’t settle for a planner who’s condescending, too busy, or seemingly unconcerned with your needs.

If you’re not sure how to choose between a robo advisor and a financial planner, make a list of the pros and cons. You can also try out both to see which experience you prefer.

Remember, the best option is the one you’ll actually do. If you can’t stomach the cost of a financial planner, just use a robo advisor. If human interaction is a priority, pick a financial planner. The important thing is to feel comfortable, confident, and secure in your financial future.

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How Much Should I Invest and Where Should I Invest It for the Greatest Return?

How Much Should I Invest

“How much should I invest and where should I invest it?”

The question may be straightforward, but the answer isn’t quite so cut and dry. How much any person or family should invest depends on several factors, including their income, goals, and current financial stability.

However, there are some good practices for investing that you can work to implement regardless of your budget.

Should I be investing 10% of my income?

Many experts say that a good rule of thumb is to invest 10-15% of what you earn. While that’s a great starting point, personal finance is never as simple as a one-size-fits-all formula.

New investors often wonder about the balance between saving vs. investing, asking questions like “How much of my savings should I invest? Should I invest all my money, or should I split my excess income between savings and investments?”

In order to answer those questions, we first have to look at the differences between saving and investing.

Savings Account Investment Account
Typically lower return Money is liquid, meaning it can be withdrawn at any time without tax penalties or fees. Much higher potential return Less liquid. Funds in the account may not be available for immediate withdrawal, and there may be taxes or fees incurred if funds are withdrawn before a specific date.

With those differences in mind, your first course of action should be to build up an emergency fund in a traditional savings account. That way, you’ll have money available in case something happens, like your car breaks down or you have to replace the refrigerator in your home.

If you’re paying off high-interest debt, such as credit cards or private loans, then a $1,500 to $3,000 emergency fund is a good place to start. Once you’ve at least paid off your high-interest debt, aim for an emergency fund of 3 to 6 months worth of your living expenses.

How much should I invest in my 401(k)?

How Much Should I Invest

Once you have an emergency fund, the next place you should focus your investment efforts is your 401(k). Many employers offer to match employee 401(k) contributions up to a certain percent.

For example, a 2% match means that if you contribute 2% of your salary to your 401(k) account, your employer will throw in an additional 2%. However, if you continue to add to your account, your employer will not match contributions above the set limit.

Say you make $50,000 with a 2% 401(k) match. If you contribute $1,000 to your 401(k) — 2% of your annual salary — your employer will add an additional $1,000. If your current employer offers a 401(k) match, then you’re turning down free money by not contributing to your account.

However much your employer offers to match in 401(k) contributions is the minimum you should invest in that account. If it’s 1% of your salary, then you should be contributing a bare minimum of 1%. If it’s 3%, you should contribute at least 3%.

Employer matching in a 401(k) is literally free money for your future and an immediate 100% return on your investment. If you can’t afford to contribute the maximum amount your employer matches, find places to make cuts in your budget and increase your contributions.

Talk to your boss or the human resources department for details on your company’s 401(k) program.

How much should I invest in stocks and other accounts?

How Much Should I Invest

Once you have an emergency fund and you’re maxing out your employer match for your 401(k), what comes next?

This is where the hard-and-fast rules end. The next step varies depending on your situation, goals, and where you are on your financial journey. There’s no right answer for everyone.

At this point, you might want to consider opening an individual retirement account (IRA). When it comes to IRAs, there are two types to choose from.

A Traditional IRA works much like a company 401(k) in terms of taxes. In other words, you don’t pay taxes on the money you contribute today. You’ll only pay taxes once you withdraw the funds in the future.

A Roth IRA is the opposite. You pay taxes on your contributions today, but then you withdraw money tax-free in the future. This is ideal if you expect to be in a higher income tax bracket later on. Since income tends to increase with age and experience, that’s often the case.

You can open an IRA online or at your local bank in just a few short minutes. Keep in mind, there are limits to how much you can contribute to individual retirement accounts per year. Once you’ve reached this limit, you might want to consider opening a brokerage account and investing in the stock market.

While there’s no one right amount to invest, it can be helpful to set goals in terms of a percentage of your income. For example, let’s say your goal is to invest 10% of your annual salary. If you make $50,000 per year, you would aim for $5,000 towards your investment accounts.

However, you always have the option to increase this number. Once you’re comfortable investing 10% of your income, challenge yourself to invest 13%, then 15%, 20%, and so on. The more you invest now, the faster you’ll reach your financial goals.

How much should I risk with my investments?

The amount of risk you should take depends on your goals, risk tolerance, and investment timeframe.

For example, a 24-year-old who plans to retire at 60 has 36 years to invest. Since they won’t need their money for several decades, they can afford to take on more risk today. On the other hand, someone who is 55 has a much shorter investment timeframe. Therefore, they’ll want to take on less risk in order to protect their money.

Regardless of your age, one of the best ways to protect your investments is to create a diversified portfolio. In other words, you’ll want to own a variety of different types of investments. That way, your success isn’t dependent on just one thing.

For example, you wouldn’t want to invest entirely in software companies because they each face many of the same risks. A swing in the technological landscape could wipe all of your investments off the map.

How Much Should I Invest

A diversified portfolio means investing in companies across a variety of industries.

In addition to the types of investments you choose, you’ll also need to decide how much to invest in each type of asset. The three main asset classes are stocks, bonds, and cash.

Each one comes with its own set of risks and potential returns. Generally speaking, however, greater risk equals greater reward.

If you’re younger and have more time to build up your savings before retirement, you might prefer an asset allocation of 85% stocks and 15% bonds. As you get older, your allocation will likely shift to fewer stocks and more bonds to shield against drops in the market.

Is investing 10% of my income really enough?

Again, the amount you should invest depends on your current financial situation and goals.

Thanks to the snowball effect of compound interest, the earlier you start investing, the less you’ll need to save overall. Saving 10% of your income could be plenty if you start investing early enough. On the other hand, if you waited to invest and are catching up, you may need to save 15% or more in order to reach your goals.

Should I invest monthly or yearly?

Whether you invest monthly or yearly comes down to personal preference. For most people, however, monthly is the better option. That way, you can build investing into your monthly budget.

Investing monthly also gives your money more time to work for you. If you start setting money aside in January, but only invest it once yearly in December, the money you save in January, February, March, and so on won’t earn a return until after December when it’s invested.

The exception is if you plan to receive and invest a lump sum, like a holiday bonus or tax return. Even so, it’s still a good financial practice to build saving into your monthly budget.

How Much Should I Invest? That Depends on You.

Knowing exactly how much to invest can be tricky. Like everything in personal finance, it depends on your budget, goals, and financial situation. The most important takeaway is that it’s never too early to start investing. If you haven’t started already, now is the perfect time.

Even if you can only swing a few dollars a month, you can begin to build a habit that will change the rest of your life.

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ETF vs. Mutual Fund: Which One is Right for Your Portfolio?

When it comes to your investment portfolio, diversification is the best strategy.

ETF vs. Mutual Fund

Unfortunately, many people struggle when it comes to finding diversified investments that meet their financial goals. According to a Bankrate survey, 23% of Americans listed cash as the best way to invest money they wouldn’t need for a while, compared with just 17% who prefer stocks.

One of the troubles is deciding which types of investments to include for the best performance. Consider the two popular options: ETFs, or exchange-traded funds, and mutual funds.

ETF and Mutual Fund Comparison

Both ETFs and mutual funds involve pooling money and using it to buy a mix of different assets. Depending on the ETF or mutual fund you select, a single purchase could gain exposure to a broad range of various assets. When it comes to your portfolio, is an ETF or a mutual fund a better investment choice? In order to properly compare mutual funds and ETFs, it’s important to understand each investment individually.

What is an ETF?

An exchange-traded fund, or ETF, is a collection of securities bundled together in a single basket. Common assets you might see are stocks, bonds, and commodities, or some combination of the three. Grouping these different securities into a single basket makes them more attractive because it delivers an almost automatic diversification.

The redemption and creation of ETSs come in larget lots. The shares trade throughout the day directly between investors on the open market. This gives you the added value of transparency because their holdings are generally disclosed daily.

ETFs come in a wide variety, and you can use the different funds to accomplish clear investment goals. Two examples are market ETFs, which are designed around a particular index such as the S&P 500 or NASDAQ, and bond ETFs that provide exposure to bond investments like the ones you’ll find in the U.S. Treasury, corporate, international, and more.

What is a Mutual Fund?

Mutual funds are a collective pool of money used to invest in various securities like stocks and bonds. Once you buy shares, you get a claim to the profits from the investments contained in the fund. Due to the combined nature and the distribution of expenses, every shareholder in a mutual fund shares equally in the value of gains and losses.

Mutual funds aren’t bought and sold by individual investors, which is an added benefit of including them in your portfolio. Instead, a money manager who has the professional skill and time available to allocate your funds better, handles the funds.

The fund manager uses your money to buy into various securities according to your investment goals like long-term growth or fixed income. Some funds are riskier than others, but the diversity of assets in a mutual fund keeps the risk relatively low.

See Also: 15 Passive Income Ideas to Make Money While You Sleep

Pros and Cons of an ETF vs. Mutual Fund

Since both ETFs and mutual funds are made up of a mix of assets, the two are similar in structure. Though there’s no perfect fund, you need to understand the best and worst of each before deciding which is right for your portfolio.

Pros and Cons of ETFs

You can utilize ETFs for short-term trading, long-term trading, or a combination of both. Here are the advantages and disadvantages of including exchange-traded funds in your investment strategy.

ETFs

Pros and Cons of Mutual Funds

Buying a mutual fund is a relatively simple process. Banks and brokerage firms often have their own line of in-house options and include a wide range of asset classes and strategies. Here’s an overview of the pros and cons to consider with mutual funds.

ETFs

See Also: This Socially Conscious Company Helps You Invest in the Things That Matter

Differences Between ETFs vs. Mutual Funds

ETFs vs. Mutual Funds

Both ETFs and mutual funds are an easy avenue to invest in stocks and bonds. When deciding between the two, here are some of the factors you should consider before investing.

Management

Perhaps the most significant advantage of a mutual fund is that it’s more actively managed than most ETFs. With an actively managed fund, you gain access to the professional insight and skill of a professional money manager. They use their knowledge to attempt to beat the market and aim for a better return by buying and selling stocks on your behalf.

Actively managed ETFs exist, but they usually come at a much higher price. Most ETFs are passive, and they’re set up to automatically track an index such as the S&P 500 or the NASDAQ.

Trading

The best part of an ETF is the enhanced flexibility over mutual funds when it comes to trading. The investor and fund handle ETF sales directly rather than going through a professional manager.

ETF prices fluctuate throughout the day according to market demand. This is different than the cost of a mutual fund, which is set at the end of the business day when the net asset value (NAV) is determined.

Fees and Expenses

Mutual funds often come with higher fees because most are actively managed by an experienced person or group of professionals. The costs of owning an ETF are typically lower, though buying and selling can get expensive.

You can trade an ETF at any time during a trading day, and you’ll pay a commission for each trade you make. Mutual fund trading happens after the markets close, which leads to limited expenses.

Tax Efficiency

Investors have to pay taxes on capital gains and dividend income for mutual funds and ETFs since they’re both treated the same by the IRS. However, mutual funds are subject to more frequent taxable events than exchange-traded funds.

The manager of a mutual fund is continuously rebalancing the assets to distribute them properly or to accommodate shareholder redemptions. Asset sales, in this case, become a taxable event. For ETFs, the underlying securities aren’t sold because the shares are traded directly between investors. This process usually excludes the exchange as a taxable event, making them more tax efficient overall.

Investment Minimums

Many mutual funds have high investment minimums, making it a challenge to add them to your portfolio if you don’t have a lot of money saved. Even less experienced investors who are saving for specific goals through target-date mutual funds often have to meet a minimum investment of $1,000 or more.

ETFs typically don’t have a minimum investment requirement, and you can buy as little as a single share to add to your portfolio. This low barrier to entry makes it an excellent option for small investors who are looking to include ETFs in their portfolio.

Liquidity

Since the liquidity of a particular investment represents how quickly it can be converted to cash, ETFs are considered more liquid than mutual funds.

An ETF is adaptable to short-term trading, mostly due to a higher number of shares traded throughout the day and the ability to buy and sell at any time the exchange market is open. Having the option to enter and exit ETF positions quickly makes the liquidity of this type of fund higher.

Mutual funds are less flexible because the trading is done only once per day after the markets close. While this is a great option for long-term investors, this limited period to buy and sell mutual funds reduces the liquidity.

See Also: 7 Investment Strategies for 30 Year Olds and Tips to Get Started

ETF vs. Mutual Fund Performance FAQs

When considering an ETF or mutual fund, here are answers to some common questions about performance and safety you’ll ask yourself.

Do ETFs Pay Dividends?

If you own shares of an ETF, you receive dividends based on the number of shares you own relative to the number of shares in the fund. Some dividends pay interest instead, such as in fixed-income ETFs. However, most do offer a payout, and you’ll get a dividend each quarter.

Which is Safer, ETFs or Mutual Funds?

Whether an ETF or mutual fund is safer depends on your individual goals. There’s no such thing as a safe investment, but there are strategic advantages to each that you should consider.

To determine an investment’s safety, evaluate the mangament of the fund, the fees and expenses involved, the performance history and the types of underlying assets contained in the fund.

Which One is Better for Long-Term Investing?

There isn’t one clear winner when it comes to deciding if an ETF or mutual fund is better for long-term investing. ETFs are generally better for short-term investing because they can be traded multiple times during the day on an open market. Though their tax efficiencies make ETFs a good option for long-term investing, too.

Mutual funds can only be traded once per day after the market closes, making them less adaptable to short-term investing. But considering a short-term investment is one you hold for a year or less, you can easily apply this investing strategy to mutual funds.

ETF or Mutual Fund: Which Should You Choose?

When it comes to investing, there is no one-size-fits-all solution. Mutual funds and ETFs are both suitable choices to diversify your portfolio. You’ll want to consider your tax strategy, how much you can spend, and if you’re going to be more hands-on or would rather leave it to a professional money manager.

Overall, it depends on your individual investment goals. There’s more selection to choose from when it comes to buying a mutual fund, but ETFs have more flexibility because they’re traded like stocks. As you evaluate your options, you’ll see how each might impact your investment process. This will help you pick the perfect fund for your portfolio. Disney Plus

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401(k) vs. IRA: How to Choose The Best Retirement Account for You

Building a nest egg for retirement is like planting a tree.

401(k) vs. IRA

If you plant it early enough and regularly give it water, you can expect a full grown tree by the time you’re ready to retire.

But if you want that tree to grow as large as possible, you need to plant it in the right kind of soil. In other words, you need to choose the right kind of retirement plan before you start contributing. For most consumers, that means picking between a 401(k) vs. IRA.

The details of each type of retirement account may get a little complicated, but choosing the right fit is actually pretty simple. Here’s what you need to know.

Traditional 401(k) Roth 401(k) Roth IRA Traditional IRA
Limits $19,000 and an extra $6,000 for workers over 50. $19,000 and an extra $6,000 for workers over 50. $6,000 and an extra $1,000 for workers over 50. $6,000 and an extra $1,000 for workers over 50.
Key Pros Large contribution limit. Possibility of an employer match. Bigger contribution limit than IRAs. Withdrawals are tax-free in retirement. Tax-free retirement withdrawals. No RMDs in retirement. Contributions are tax-deductible.
Key Cons Fund options may be limited. No tax deduction. RMDs are required. Contributions are limited for those above a certain income. Contributions limited to $6,000 a year. Withdrawals are taxed.
Best For Employees with a company match and 100% vesting. Young workers who want to save more for retirement. Those who want to start investing but don’t have access to a 401(k). High-earners looking for more deductions or self-employed workers without access to a 401(k).

Individual Retirement Account (IRA)

An Individual Retirement Account (IRA) is a retirement account that any individual can contribute to. Any money contributed to an IRA must be earned while working a job. There are two types of IRAs, Roth and traditional.

Both types of IRA have the same maximum annual contribution limit of $6,000, and both allow an annual catch-up contribution of $1,000 for those 50 or older. IRAs are popular because customers can pick exactly what they want to invest in. They can choose between individual stocks, mutual funds or target date funds.

See Also: Roth vs. Traditional IRAs: What You Need to Know

Traditional IRA

A traditional IRA, like a traditional 401(k), allows investors to deduct contributions on their taxes. If you save the maximum $6,000 in your IRA, you can deduct $6,000 from your taxable income.

The tax deduction associated with a traditional IRA is the main advantage over a Roth IRA. Consumers with high incomes or business owners who want to decrease their taxable income will benefit the most from a traditional IRA. Because traditional IRA users get a tax break now, they have to pay income tax on their traditional IRA withdrawals in retirement.

A major drawback to traditional IRAs is their required minimum withdrawal (RMD). An RMD is how much you’re legally obligated to withdraw from your traditional IRA every year after you turn 70.5. The annual amount changes based on your total traditional IRA balance, your age, if you’re married, who your main beneficiary is, and how old your spouse is.

Let’s say you have $1,000,000 in your traditional IRA. You’re 71 years old and your spouse is also 71. According to the Vanguard RMD calculator, your RMD for 2019 would be $51,282.

Whichever investment company you use to hold your traditional IRA should be able to tell you how much your RMD is for each year. Not taking your RMD or taking less than is required will result in a penalty that’s 50% of the difference between what you withdrew and what your RMD was.

Roth IRA

A Roth IRA is a retirement account that provides tax-free withdrawals in retirement. Investors who contribute to a Roth IRA won’t receive a tax break while they contribute, but they won’t have to pay taxes on their withdrawals later on.

Roth IRAs also don’t have RMDs and are the only retirement account on this list without them. The Roth IRA is extremely popular because it allows investors to avoid taxes in retirement while they’re living on a fixed income.

Unfortunately, the IRS limits Roth IRA contributions to those who earn below a certain amount. Those filing single can contribute to a Roth IRA if they earn below $122,000 a year. Contributions start to phase out for individuals earning between $122,000 and $137,000. Anyone making $137,000 a year or more isn’t eligible to contribute to a Roth IRA.

Married couples filing jointly who make less than $193,000 a year can contribute to a Roth IRA, and contributions begin to phase out for incomes between $193,000 and $203,000. Couples making more than $203,000 are excluded from contributing to a Roth IRA.

Employer 401(k)

A 401(k) is an employer-sponsored retirement account available to employees as a company benefit, used to encourage employees to save money for retirement. Like health insurance and paid time off, individual companies have the right to decide if they want to offer a 401(k).

There are two types of 401(k)s, Roth and traditional. Like with IRAs, a traditional 401(k) has tax-deductible contributions and a Roth 401(k) has tax-free withdrawals in retirement.

The most important advantage with a 401(k) is the possibility of a company match. Some employers will contribute money to their employees’ 401(k) account. This is basically free money that an employee can use for retirement.

Matching contributions vary based on company policy. Some companies require that employees contribute a certain amount before the employer match kicks in. Others contribute to 401(k)s without an employee requirement.

Many companies have a vesting period, which dictates when employer contributions become the employee’s legal property. A five-year graded vesting schedule means an employee has to stay five years to earn 100% of the employer contributions. If they leave two years in, they’ll earn 40% of the contributions and forfeit the rest.

401(k)s come with a huge annual contribution limit. That limit is $19,000 in 2019, with those 50 or older able to contribute an extra $6,000 a year. That makes it one of the largest contribution limits available for all retirement accounts.

One disadvantage of 401(k)s is that the employer has complete control over what funds are available. Companies can offer a small handful of funds or a large variety. It’s also common for 401(k) funds to have high fees that eat away at investor profits. The only way to avoid bad fund options is to petition your HR department to offer a better variety.

Another drawback is the vesting schedule, which can keep an employee tethered to a job longer than they want.

Traditional 401(k)

A traditional 401(k) can decrease your taxable income and reduce how much you pay in taxes. That’s why people with high incomes opt for a traditional 401(k) in lieu of a Roth.

Employees will still owe taxes on withdrawals. Like traditional IRAs, individuals 70.5 or older must start taking RMDs.

Roth 401(k)

The Roth 401(k) is a relatively new product, and many employers still don’t offer them. It combines the best aspects of a Roth IRA and a 401(k) – the tax-free withdrawals in retirement offered by a Roth IRA and the higher contribution limit of a 401(k).

Unlike Roth IRAs, Roth 401(k)s do have RMDs when the retiree turns 70.5. These can be avoided by converting the Roth 401(k) into a Roth IRA. Make sure to do this before you turn 70.5.

See Also: 7 Investment Strategies for 30-Year-Olds and Tips to Get Started

Opening Both an IRA and 401(k) May Be the Best Option

Choosing between an IRA and 401(k) can seem difficult to a novice investor, but there’s no wrong decision here. There are benefits to both plans, and many investors find it useful to have an IRA and 401(k). If you’re struggling to decide between a Roth or traditional plan, you can also have one of each and contribute to both.

Some investors will contribute enough to a 401(k) to earn a company match and then open an IRA. For example, if your employer contributes 50% of what you put in, up to 6% of your salary, you can contribute that amount to get the company match. If you still have money left over, you can open an IRA and put any extra funds there.

The only truly wrong decision is to wait and delay picking a plan because you’re not sure which one is the best. When it comes to saving for retirement, the most important thing is contributing early and often.

If you’re having trouble deciding on your own, you can hire a financial planner to explain what your options are and what makes the most sense. They’ll be able to design a strategy that fits your specific situation.

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