What should you start saving today?

How do you calculate how much you need and how much to save?

The bottom line: YOU Must Create Retirement Savings.

And, if you’re planning on relying on your monthly Social Security checks to get you by in retirement, you might want to rethink your plan.

According to the latest studies, the median retirement savings for American adults is $65,000 for all adults in America. In addition, another report shows that 1 in 4 Americans don’t have anything saved for retirement.

Of course Social Security will help out a little, but it definitely won’t fund the lifestyle most people are used to prior to retirement. In fact, the average monthly Social Security check in 2021 was only $1,658 per month.

What is Life in Retirement Like for Those Who Didn’t Create Retirement Savings?

What does life hold for those who haven’t saved enough for retirement?

Chris Hogan was a guest on the Money Peach Podcast and shares the heart-wrenching story of Michael; a young man visiting his sweet aunt only to discover she had been (literally) living on dog food as that was all she could afford to eat.

The story brought a catalyst of change for Michael and his wife, partly because they had a financial picture themselves which included little savings, massive debt, and no cash reserves to help out Michael’s beloved aunt.

Another story is of Jean.

Jean worked her entire life as a cashier at a grocery store. The grocery store did offer a 401k retirement plan with a match, however she never took advantage of contributing to her own retirement.

When it came to retire, Jean soon realized her social security check would only be $1,100 per month, thus putting her right at the poverty line according the Federal Government.

At nearly 80 years old, Jean is going to work an additional 3 days per week to make ends meet. Remember, she went back to work not because she wants to, but because she has to.

How Much Do You Need in Retirement?

Don’t wait until you are in a position like Jean or like Michael’s aunt to start worrying about your level of retirement savings. As you can see, it’s extremely important to start taking the necessary steps to increase retirement savings NOW – while you still have the physical and mental capabilities to do so.

But how much do you I actually need in retirement?

This answer is different for everyone and it all depends on one thing: the number (dollar amount) you will need in retirement.

To start, ask yourself how much you need to have saved when you start your retirement. To help determine how much you will need, ask yourself the following:

• Will I have any debt left in retirement?
• Will I still have a mortgage?
• What about child expenses, if any?
• What will I do with the time originally spent working and how much will that cost?

It doesn’t have to be perfect, but come up with a dollar amount you will need each year in retirement.

The 4% Rule

A quick way to determine how much you will need to have saved in retirement is to use the 4% rule.

Now, this isn’t a hard-and-fast rule but it’s a great starting point to determine roughly how much you will need at retirement. The 4% rule states that if you only draw 4% of your nest egg per year, not only will your nest egg last you throughout your entire retirement, but the value of your nest egg will remain the same (on average) throughout your entire retirement.

To calculate, simply determine the annual income you would need in retirement and then divide it by 0.04.

Example: If you want to retire with an annual income of $80,000, then you would need a $2 million nest egg in retirment using the 4% rule. If you think you need $120,000 per year, then you will need to build a $3 million nest egg.

How Much Do You Need to Start Saving?

Now that you know how much you need in retirement, let’s next determine how much you need to start saving each month. Of course there is no crystal ball that will guarantee your future nest egg amount, however you do have something you can lean on — the past performance of the stock market and retirement funds.

Going back and looking at the stock market (the S&P 500) from 1957 to 2021, the average return was 10.67%. Of course this doesn’t mean you are guaranteed a 10.67% return for your future investing, but it gives you a good starting point.

With the historical performance of 10.67%, use a range for your future savings. Maybe that range looks something like 8% – 12%, as your annual return inside an investment calculator.

This will also show you how much you will need to save each month depending on your age and the annual return you are using.

Let’s take a quick look at an example:

• Age: 30
• How much currently saved: $0
• How much invested per month: $450
• How long to invest: 37 years (age 67)
• Annual return on investment: 10%
• Estimated Retirement Savings: $2,096,923

Let’s look at another example:

• Age: 45
• How much currently saved: $65,000
• How much invested per month: $550
• How long to invest: 25 years (age 70)
• Annual return on investment: 8%
• Estimated Retirement Savings: $1,000,175

Allocate Retirement Savings from Your Monthly Budget

If you haven’t already done so, it’s time to create a budget — AKA a cash-flow plan.

A cash flow plans allows you to identify exactly what you need to save each month and where you will be saving from  in order to reach your retirement goals. 

Saving enough for a healthy retirement may require a few tough decisions, but I promise they will not kill you.

For example, you may be have to cancel your cable TV subscription, downgrade the type of car you drive, avoid spending too much time inside restaurants, or you may even want to pick up a montly side hustle.

When Chris and his wife paid off $52,000 in consumer debt in just seven months they had to make some of those tough decisions. They sold everything (including both of their newer cars), picked up extra jobs, and lived on “scorched earth lifestyle” to regain control of their life and money.

Today they are now on the path of building substantial wealth and they will both tell you their short term sacrifice was worth the long term gain.

Where Do I Invest?

Here is the order I recommend when it comes to investing for retirement using tax-favored retirement accounts.

1. Employer Sponsored Plan

Did you know that  67% of current employers offer a 401k plan? In addition to offering a retirement savings plan, employers on average will match between 3% and 8% into your 401k on your behalf. This is truly FREE money!

Start off by contributing up to the maximum match your employer will allow. For example, if you’re employer matches up to 4% if you contribue 8%, then contribute 8%.

Note: Other options beyond a 401k are a 403b, 457, TSP, and a ROTH option for each.

2. ROTH IRA

Once you’ve taken advantage of the free match from your employer, next is to contribute to your ROTH IRA. To jog your memory, a ROTH IRA is invested with after-tax dollars, therefore giving a tax-free withdrawals in retirement. In 2022, you can contribue up to $6,000 into your ROTH IRA and then an additional $1,000 per year if you are over age 50.

I have both a ROTH IRA and a Traditional IRA at M1 Finance — M1 Finance has expert portfolios for you to choose from based on your risk level. Also, with the price of single stocks often costing over $1,000, M1 Finance allows you to invest in partial stocks so you can still get started investing no matter how much you are starting with.

3. Go Back to Employer Sponsored Plan

The maximum contribution limits to your 401k (or the like) in 2022 is $20,500 and then an additional $6,500 if you’re over age 50. After you have taken advantage of the free match from your employer and then maxed out your ROTH IRA, any additional money you have to invest can go towarsd maxing out your 401k.

Retirement Funding Example

Let’s assume you need to contribute $18,000 per year ($1,500 per month) in order to meet your retirement goals. If your current income is $100,000 per year, this is the breakdown of your investing:

1. $8,000 into 401k (to get the 4% match)
2. $6,000 into ROTH IRA
3. $4,000 more back into 401k 

Retirement Isn’t an Age, it’s a Number

The best time to start saving for retirement is today. In fact, it’s never too late to start but — the earlier you get started, the easier it is.

Whether you’re someone who is nearing retirement or you have 40 years left to work, start saving for retirment today!

Lastly, unless you are fortunate to have a pension, retirement for you is not an age, it’s a number. Ask yourself these three questions:

1. How much will you need in retirement?
2. How much do you need to have saved at retirement using the 4% rule?
3. How much do you need to start saving right now?

Now that you know what to do, it’s time to get started.

Doesn’t sound like a great plan for us, right?

And, unless you’re in the business or a financial advisor, I would say that most people today are still at the stage of investing for dummies.

Investing for Dummies

Investing for dummies can feel overwhelming at first. We all know we need to, but don’t know how too. Thankfully, it’s easier to invest than you think. Maybe you want to invest for retirement? Or, maybe you’ve started making extra money and want to invest it?

Either way, many of us know we should invest. But most of us only invest as an afterthought. I think the reason is simple: it is human nature to act on what we can see right in front of us.

Think about your electric bill. You know if you don’t pay the bill right now, your lights won’t be on much longer. However, this isn’t the same with investing. Since the cost/benefit is not directly in front of us right now, it often is pushed off until next month.

Then next year.

And then ten years later.

And then…well you get the point.

However, we are going to change that right now. In fact, after reading through this post, I am going to challenge you to take action.

I am going to challenge you to do one thing today. 

Investing for Beginners 101

The idea is for you to fully understand the basics to investing so you can literally get started today. Therefore, we aren’t going to dive into the overly-confusing topics just yet. This post is designed to give you just enough to be as shrewd as a snake and as innocent as a dove (Matthew 10:16).

Here we go…

What is a Stock?

I’m sure many of us wish we would have purchased stocks of Amazon in the late 1990s because of what Amazon is worth today.

But how does owning that stock actually earn someone money? In other words, how the heck does owning a stock actually work?

To start, a company like Amazon is going to raise money so they can grow their company. Some of the most common methods is taking a loan from the bank, issuing a bond (more on this later), or by offering shares of stock.

As a shareholder in the company, you are investing your money into a company as capital without a guaranteed return. This is the risky part.

However as a shareholder, there is also no limit on how much you can earn. This is the reward part.

Dividends and Appreciation

The first way to earn returns is through dividends. As a shareholder, you are entitled to a share in the profits based on how many shares you own. The share in these profits are called dividends.

The second way is through appreciation. To illustrate this, let’s use Amazon as an example. Back in October 1998 the price for one share of Amazon was $19. Now, if you would have held onto that stock until May 2022, the price would be $2,328 per share. In other words, $1,900 of Amazon stock in 1998 would be worth $232,800 in May 2022 due to appreciation.

Investing for Beginners with Individual Stocks

Contrary to popular belief, owning individual stocks does not actually mean you have ownership in the company. Instead it means you have ownership in the shares of the company.

Owning shares in the company allows you to share in the profits of the company but does not allow you to make any day-to-day decisions based on the how the company is operated.

For example, if you own stock (shares) of Amazon and they generate a profit, you will receive part of that profit (dividend) based on how many shares you own. You can also sell your shares at any time for a gain (appreciation) or a loss (depreciation). However, you don’t get to call up Amazon’s CEO (Andy Jassy) and advise him on how to run his company. The reason is you don’t actually own part of the company but rather you own the shares of the company.

Owning single stocks is also one of the riskiest ways to invest in the market, but also has the greatest possibility for reward. As I showed you with Amazon earlier, here’s another example using the company Xerox.

As you can see, the price of Xerox in October 1998 was $127 per share. If you still own that share in May 2022, that share would be worth $17.40. Therefore, $12,700 of Xerox stock in 1998 would only be worth $1,740 twenty-one years later due to depreciation.

Individual stocks are risky.

Investing for Beginners with Bonds

The simplest way to think of bonds is to pretend you are the bank.

We all understand when we get a loan from the bank, we are agreeing to pay back the bank plus interest. This is exactly how a bond works.

A private company, the government, or a local municipality may need to raise money and they can do so by issuing a bond.

This is where you may have heard of a corporate bond, a municipal bond, or a treasury bond. Simply put, the type of entity that issued the bond usually gives away the name of that type of bond.

The bond, just like a bank loan, has a predetermined interest rate and timeline for paying back the bond (loan). As the bondholder, you are agreeing to lend money to the bond issuer. The bond issuer then pays you back the amount you loaned plus the interest (AKA the coupon) for the bond.

Owning a bond does not give you any ownership of the company. This means if the company does well, you will unfortunately not benefit from their growth. On the flip side, if a company does poorly the bondholders are the first to get paid and shareholders (investors who own stock) are the last to be paid.

As you can see, there is often more risk and reward with owning stocks over bonds. However, both are important when investing because together they allow you to diversify risk throughout the changes in the market over time.

Historically since 1926, bonds have had an annual return of 4% – 6% whereas stocks have had an annual return of 8% – 10%.

Investing for Beginners with ETFs & Mutual Funds

So far we have talked about owning only one of either a stock or bond. But what if you wanted to own many stocks or bonds at the same time?

This is a GREAT way to minimize your risk.

ETFs

One of the better options for investing in multiple companies at once, is via ETFs. This acronym is short for exchange traded funds and these funds have different investing strategies. They can invest in stocks, bonds, or both.

To paint the picture, we will use an example of the S&P 500 which is simply a compilation of the largest 500 U.S. companies as a benchmark for the U.S. stock market.

When you buy an S&P 500 ETF, you are investing in the 500 largest companies that trade on the U.S. stock exchange. These companies are household names like Apple, Starbucks, Amazon and Southwest Airlines.

There are also other ETFs that invest in certain sectors like technology, banks, healthcare, or any other type of market. There are sector ETFs for almost any sector you can invest in.

For example, a healthcare ETF would be comprised of companies from the healthcare industry and you would expect to find the big banks inside a financial ETF.

Now, although ETFs are groups of stocks, bonds, or a mixture, they still trade like single shares of company stocks. You’re now probably wondering why this matters, right?

Here’s why investors LOVE ETFs: They trade in real-time while the market is open and they usually have lower management fees.

In the next section, you’re going to see why this matters.

Mutual Funds

Although ETFs are very popular today, mutual funds are much older and have a longer track record. Therefore, if you invest with a 401k, you most-likely are investing in mutual funds.

Again, the main difference between ETFs and mutual funds is how they trade. Instead of trading in real-time, mutual funds trade once-a-day after the market closes.

How they Trade

Let’s say you decide to sell a mutual fund at 10:00am and the price of the mutual fund is $30 per share. You hit “sell” at 10:00am, but remember the mutual fund doesn’t actually trade until the close of the market that day.

And, not only did you want to sell out of that mutual fund, but so did thousands of other investors. Since they all decided to sell, that caused the price to drop to $24 by the close of the market. So, instead of selling your mutual fund for $30, you sold it for $24.

The one benefit here is the sell (usually) didn’t charge you a transaction fee. But, since ETFs trade like stocks, you can expect to pay a trade fee every time you buy or sell and ETF.

Initial Investment

A second difference is the minimum initial investment. To open a mutual fund position, you may need to invest $3,000 upfront. With ETFs, you only need to pay the price for one share. If a share costs $20, you only need $20.

The third difference between mutual funds and ETFs are fund expenses. Most mutual funds have higher fund expenses than similar ETFs.

Index Funds

Oftentimes, these may be your only investment option in a 401k plan.

Index funds are one form of mutual funds. They track a broad market index. This means they try to match the market performance with passive investing. As a result, they have lower fund expenses than active funds.

For instance, the largest mutual fund is the Vanguard Total Stock Market Index. If you have a Vanguard account, it’s fund symbol VTSMX. It invests in 3,600 of the largest publicly-traded companies. It’s expense ratio (the cost to own the fund) is 0.15%. And, you must invest $3,000 to open a position.

To save you money, many online brokers now offer index ETFs and you invest by the share. VTI is the ETF equivalent of VTSMX. And, it only has an expense ratio of 0.04%. One share trades for about $150. Instead of needing $3,000 to start investing, you would only need $150.

You might decide to go with the ETF because of the lower fund expenses. With a 0.04% expense ratio, the fund manager keeps $4 of every $1,000 you invest each year. You pay $15 each year if the fund fee is 0.15%. This doesn’t seem like a lot of money now, but the fees add up. That’s money you can’t invest to earn passive income.

Many experts believe ETFs will soon completely phase out mutual funds including a financial advisor with over 32-years experience interviewed on the Money Peach podcast.

Money Tip: If you have a 401k, a great free tool to see what fees you are paying is Blooom. This app will scrape through your 401k, 403b, 457, 401a and TSP to show you how much you’re paying and how that compares to the average fee structure.

Target Date Funds

Another mutual fund option is target retirement date funds. If you want to retire in 2050, you choose a 2050 fund. You can think of these as “set it and forget it” investments. But, you should still make sure their investment goal matches your goals. And, that the actual performance meets your expectations.

These funds invest in a basket of stocks and bonds. They also hold index funds to keep fund expenses low. As you near retirement, the fund swaps stocks for bonds. These funds are a low-maintenance way to invest. However, more effort goes into managing these funds than an index fund, therefore you can expect to pay a higher expense ratio for them.

Buying and Selling Bond Funds

This can be a little tricky to wrap your mind around it so I’ll do my best to explain it.

Let’s say you purchase a bond fund for $10. The the interest rate (the yield) on that bond fund is 4%.

Next week, you find out the fund’s interest rate drops from 4% to 3$%.

But remember, you own a bond that has a yield of 4%. Anyone else who buys the bond will only get 3%. Therefore, your bond is now more desirable which means the price of that bond went up.

Similar to how a stock goes up in value, same holds true for a bond.

The easiest way to remember how bonds work is this: As interest rates go up, bond prices go down. As interest rates go down, bond prices go up.

Breaking Down the Dividends

Earlier we mentioned dividends, which were profits of the company distributed back to the shareholders. Many dividends are distributed at least once a year, but they can be paid out monthly, quarterly, etc. Interestingly enough, most index funds pay them in December.

Here’s an example:

• PepsiCo pays a 2.74% annual dividend (paid quarterly)
• If share price is $170, you earn a $4.67 dividend per share annually

Compound Interest

Albert Einstein said “Compound interest is the eighth wonder of the world” and he was spot on.

In a nutshell, compound interest is literally where your money makes money for you. Let’s paint the picture in this example.

We will assume you invest $1,000 into a healthcare ETF and it earns 10% in the first year. At the end of the year, the value of your ETF would be $1,100 ($1,000 you invested + $100 earned interest).

Now, instead of taking that 10% as profit, you keep all $1,100 inside the same ETF and in year 2 it earns another 10%. The new value would be $1,210 ($1,100 + $110 earned interest).

As you can see, your money is working for you by earning interest on the original amount AND the interest earned from the year before. As this plays out year-after-year, the amount begins to compound….hence why it is called compound interest.

One amazing way to further increase compound interest in your favor is by reinvesting your dividends. Instead of cashing your dividend check, it’s much wiser to choose to have your dividends (your share in profits) reinvested. Now you’re starting to see the power of building wealth!

The Best Places to Invest as a Beginner

My favorite place to invest as a beginner (or anyone for that matter) is at M1 Finance. I would start with M1 Finance for a few reasons:

1. You can invest in partial (or fractional) shares. The reason why I like this concept is purchasing a single stock can be expensive! Take a look at Amazon for example — 1 share on May 5th, 2022, is over $2,300! With M1 Finance, you can purchase Amazon with even just a few dollars.
2. They have “expert pies” which are a collection of portfolios made up of stocks and ETFs that focus on different investment goals. These goals can range from beginner investing, retirement planning, or even a more tailored responsible investing approach.
3. It’s FREE. In fact, M1 Finance does not charge any commissions or markups on trades you place.

Your Employer 401k Plan

The most well-known place to invest is inside your 401k plan. The main reason why is for matching 401k contributions from your employer. If your employer offers a match, maximize it! This is free money, and you don’t have to work overtime to earn it!

Let’s say your employer matches 50 cents of the dollar for the first 6% of your salary. If you make $50,000, that’s up to $1,500 of free money each year!

After you meet the match, you might decide to invest more. When you have a good 401k plan, it’s worth investing more money. But, not all 401k plans are the same and some have some terribly high fees and very lousy investment choices.

A great tool I personally use to check for 401k (457,403b, 401a) fees is Blooom. It’s a free checkup tool to show you how you how your fees may be affecting your nest egg.

Blooom also can help you optimize your 401k with your current investment options for only $10 per month as compared to the 1% management fee many advisors will charge.

To break this down, 1% on a retirement fund of $50,000 is $500 per year. You can do the same thing using Blooom for only $120 per year. Here’s a full review of how Blooom works and why it’s the best robo-advisor for your 401(k).

401k Tax Advantages

Another reason to invest in your 401k is the tax benefits. You must pay taxes every year on your non-retirement account investments. However, that’s not the case with your 401k account.

With a pre-tax 401k, you will reduce your taxable income. For example, if you earn $50,000 per year but you invest $10,000 into your 401k, you will only have to pay income tax on $40,000.

In addition to bypassing income tax, your earnings grow tax-deferred; meaning you don’t pay taxes on the growth. The only time you pay taxes is when you make a withdrawal after age 59 ½ .

Are There 401k Tax Disadvantages?

Financial expert Rebecca Walser was on the Money Peach podcast with a completely different point of view about the 401k. You can listen to the interview below, but in a nutshell she explains:

• How we are in the lowest tax environment in U.S. history
• Social security is expected will run dry by 2022
• There is a $21 trillion deficit in the United States

Her belief is that taxes will someday return to the same levels (higher) as they were when the 401k was created. The reason they will increase is because something is going to have to offset social security and the $21 trillion debt.

Therefore, her debate is whether or not the 401k is a good plan right now. If taxes do increase, then we would actually be avoiding the lower taxes now to pay higher taxes later.

ROTH 401k Plan

Contrary to 401k plans, a ROTH 401k is tax-free withdrawals on the back end.

Instead of paying taxes when you withdraw the money, you pay taxes today and then invest into the ROTH 401k. Just like the 401k, your growth is also tax-deferred. Then, when it comes time to withdraw your investment after age 59 ½ , your money will NOT be taxed again.

These same tax benefits apply to Individual Retirement Accounts (IRAs). You fund Traditional IRAs with pre-tax income. And, Roth IRAs receive your post-tax income.

On a side note, I am a HUGE fan of ROTH 401k plans. If you’re not sure if you’re employer has one, please call your HR department today and find out.

No 401k Plan Available?

If you don’t have a 401k plan as an option, please do not worry. There are so many very simple platforms which are perfect for someone getting started or even a seasoned pro.

One of the most well-known and trusted investing platforms is Betterment.

For simplicity, it’s doesn’t get much easier than Betterment.

In my opinion, Betterment hits the nail on the head when it comes to simplifying the investment process. They only use stock and bond ETFs and they help you choose your investments based on what your goals are. Whether it’s retirement, a wedding, a vacation, or whatever you want, Betterment will identify a plan based on your needs and wants.

Also, Betterment is flat out affordable. Whereas a financial advisor will usually charge between 0.75% – 1.5%, Betterment is 0.25%. If you’re not a numbers person, you can think of this way: Betterment is up to 6x less expensive than a traditional financial advisor.

And you can start with literally $1.

Below are three additional reasons why you might invest with Betterment.

1. Tax-Loss Harvesting

Betterment uses tax loss harvesting to reduce your annual tax bill. When Betterment rebalances your portfolio, they will sell some assets for a loss. Doing so can reduce your taxable income up to $3,000 per year.

2. Tax-Coordinated Investing

You might keep your IRA and taxable accounts at Betterment. Doing so can minimize your tax bill too. Betterment will put ETFs that earn more taxable income in your IRA. This strategy helps you pay less in taxes too. That means more money in your pocket!

3. Automatic Portfolio Rebalancing

Many people like Betterment because they handle the day-to-day portfolio tasks. They make sure your portfolio doesn’t get too risky or risk-averse. Most people don’t rebalance their portfolio at least once a year. If your portfolio is unbalanced, you might not reach your goals.

With each contribution, Betterment handles this task for you. First, they invest in the assets that are below their target levels. When necessary, Betterment sells to rebalance.

Acorns

Can you force yourself to invest?

With the Acorns app, you invest your spare change. Every time you make a purchase, Acorns rounds it up to the next dollar. You spend $1.50 on a Coke and Acorns invests $0.50.

Therefore, the more you shop, the more you invest!

Acorns invests your change in a several stock and bond ETFs. You can pick a portfolio with one of these investing strategies:

• Conservative
• Moderately Conservative
• Moderate
• Moderately Aggressive
• Aggressive

Since this is a micro-investing app, you still need to invest outside Acorns. But, you can also build a small fortune investing with Acorns.

A Full-Service Online Broker

Another great option is to invest through a full-service online broker like Ally Invest.

Online brokers are great for both beginner and advanced investors. They also provide more research tools and reports that free brokers don’t offer. Although you do have to pay to trade stocks, you can also trade many ETFs for free. And, you can also invest in index funds and target date funds as well.

An Online Stock Advisor

If you are comfortable purchasing your own stocks from places like M1 Finance but you need some advice on stock picks, take a look at the Motley Fool. I personally take a small percentage of my portfolio and I purchase multiple single stocks from the Motley Fool’s recommendations. I currently have a portfolio of approximately 40 different single stocks — all of them recommendations from the Motley Fool.

Also, as a stock advisor member from the Motley Fool, you have access to weekly and daily webinar/podcast shows all about teaching you how to become a better investor. 

Whether you’re just looking for expert stock picks or you want to really learn about investing, the Motley Fool charges less than $100 per year and it’s been well worth it for my portfolio!

9 Tips to Be a Great Investor

Picking the right online broker and investments are both important. However, these tips can help you become a great investor.

Diversify

The most important thing you can do is diversify your portfolio. This goes beyond owning stocks and bonds. You also should invest in multiple index funds or sectors. Nobody can precisely predict how the markets will perform. Putting all your money in one stock or sector is reckless.

Your broker should offer a model portfolio for your age and investing goals. You should hold stocks or funds in the following sectors:

• Large Cap U.S. stocks
• Mid Cap U.S. stocks
• Small Cap U.S Stocks
• Developed Global Markets
• Emerging Markets
• Corporate Bonds
• Government Bonds

All of these sectors have different earning potential. This way, your portfolio has exposure to every market sector. Every sector has positive and negative cycles. When you diversify, you minimize downside risk. And, you can still earn positive returns from the broad market.

Limit Single Stock Positions to 5% of Your Portfolio

By nature, investing $1,000 in one stock is more volatile than one index fund. This is because funds invest in thousands of companies. You should own stock shares of solid-growth companies. Stocks provide more upside potential than ETFs and mutual funds.

But, you need to limit your downside risk too. Make sure a stock is never larger than 5% of your total portfolio size. If your portfolio is $10,000, no single stock position is greater than $500. If the share price goes to $0, you only lose $500.

Because of this rule, you might wait to buy single stocks once your portfolio is at least $10,000 in size. Invest your first $10,000 in index funds and sector ETFs. At this point, you can diversify into stocks with new money.

Understand What You Buy

It doesn’t matter what you invest in, you must understand what you buy. If not, you can become poor quickly. At the end of the day, you’re responsible for what investments you pick.

To help pick good investments, understand these two topics:

• How the company makes money
• Potential risks and reason you might sells

You may only spend a few minutes researching index fund. But you can spend an evening researching a stock.

With any ETF or mutual fund, always read the prospectus. And, read the annual fund reports too.

Hold Long-Term

There’s a fine line between investing and speculating. Investing is holding quality stocks and funds. This is the secret to being a successful investor.

When you speculate, you hope you pick a lucky stock. Sadly, most people are wrong more than they’re right.

Plan on holding investments for at least one year. This way, you pay lower taxes when you sell.

I plan on holding stocks for at least three years. This holding period gives stocks enough time to appreciate in value. And, it encourages you to avoid the latest trend.

Don’t Time the Market

The hardest part for most investors is investing their first dollar. None of us know when a market will peak. Nor do we know when markets or stocks will bottom. Your best course is to invest today in quality businesses.

I make an investment the same day each month. It doesn’t matter if it’s a good or bad day for the markets, I buy stock.

Only Invest Money You Can Afford to Lose

Investing is one of the best ways to build wealth. But, you need a multi-year investing horizon. This is because share prices can drop without notice. It can take several years for some shares to return to your buy price. At this point, you can sell for a profit if share prices climb.

This is why it’s so important to have proper asset allocation. You can’t afford to be risky when you plan to retire in five years. If a recession hits, it might take ten years for your stocks to recover. In this case, you have two options:

• Work longer to recoup the loss
• Retire on a smaller income

When you decide to work longer, you have to hope you are healthy enough still.

Don’t Trade the Headlines

Any good investor tells you to ignore your emotions. This is one reason to consider investing on Betterment. By automating the investing process, you must ignore emotions.

In 2019 alone, we have seen these events:

• Record profits from many companies
• U.S.-China trade war threats
• North Korea tries to develop a nuclear bomb
• Apple is the first company to reach $1 trillion valuation
• The Fed raises interest rates three times
• Turkey and Argentina debt crisis

Some of the headlines make you want to invest more cash. Others might scare you away from investing. There are risks and rewards every trading day. You need to ignore the noise and focus on the facts.

Will any of today’s headlines be relevant in three years? Some might, but most only affect stocks for a few days or weeks. In most cases, one event isn’t going to impact a stock for long.

This is why you need to invest in long-term assets only. It’s the best way to mute the noise.

Invest at Least 10% of Your Income

Most financial experts recommend you invest at least 10% of your income. Even if you can’t invest that much, don’t wait until you can. Then, you will need to invest even more make up for lost time.

You might have to invest more for than 10% for these two reasons:

• You start investing later in life
• Want to retire with a $1 million+ nest egg

The 10% rule is a good suggestion if you’re in your 20s still. But if you’re older than 30, you need to invest more to retire on time.

So, how much do you need to invest each month to retire?

Do yourself a favor, use a retirement calculator to find out.

Invest Early and Often

Like anything in life, you must be consistent to have good results. With investing, you need to invest new money each month.

In the fact, the more you invest now means the less you need to invest later. This is for two reasons:

• Your money has more time to earn compound interest
• You can invest in more aggressive stocks when you’re young

Time is your greatest asset. Just ask Warren Buffett, the king of buy and hold investing. The best time to invest is today! Waiting until tomorrow means you might never invest.

When you’re young, invest hold more stocks than bonds. Stocks are more risky, but they have more profit potential. Some of my best investments are the stocks and index funds. I’ve held many of these since the Great Recession. Yes, prices drop in bear markets but they usually rebound later.

Summary

Investing is a time-proven way to build wealth. The best way to learn is by doing. Index funds might be the best way to start investing for dummies. As you gain experience and move away from dummy status, you can stat trading stocks, ETFs and real estate with more potential upside.

Want to start very small? Then try Acorns.

Want access to fractional stocks and customized portfolios? Head on over to M1 Finance.

Ready to start as simple as possible? Then you want Betterment.

Already have a 401k that needs a checkup? Start with Blooom.

Want a full service online broker? Then Try Ally Invest.

Want to learn from experts and get weekly stock picks? Motley Fool is your best choice.

Before credit scores, loans were made on a very casual basis and there was not a standardized method for determining the level of risk for lenders. Then in 1956, an engineer (Bill Fair) and mathematician (Earl Isaac) teamed up to create a credit scoring system. This would later become known as FICO.

Later in 1989, the first FICO scoring system was created and is used as the industry standard today. There are three credit bureaus that keep track of all the data to make up the credit score. They are Experian, Equifax and TransUnion.

Why Your Credit Score is Important

Having a good credit score may make you feel good about your financial situation, but even broke people can have good credit scores. In fact, your credit score has nothing to do with how much money you have or how wealthy you are.

The credit score does one thing: it shows lenders the level of risk they are taking by giving you a loan.

If you have a high credit score, this shows lenders you are good at taking out credit and paying it back on time. If you have a low credit score or no credit score, then you are determined to be a higher risk to the lender.

Why This Matters

The higher the risk, the more you will pay.

Let’s say you have a friend who is extremely reliable, they always do what they say, and they’ve never let you down.

On the other hand, you also have a friend who never follows through with what they say, they never show up on time, and they owe everyone money.

If you were going to lend $1,000 to each of them, which one would you charge a higher interest rate? Your credit score works along the same principle.

The Breakdown of the Credit Score

The credit score is calculated by the Fair Isaac Corporation, which is also where the name FICO score comes from.

The score is calculated using data from your credit report broken down into 5 different categories. The categories are payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

Payment History (35%)

The most important factor in determining your credit score is your payment history. The number one thing lenders want to know is if you have paid your past accounts on time. Since this information is the highest weighted out of the five categories, it will also have the largest effect on the change in your credit score.

In fact, one missed payment will stay on your credit report for seven years.

Amounts Owed (30%)

The second thing lenders want to know is the amount of debt you owe compared to how much you can actually borrow.

This is also known as the credit utilization limit and is calculated by your revolving credit.

Revolving credit is always open like a credit card, gas station card, or a home equity line of credit. Once you pay the loan off, you can immediately draw back from that same line of credit, which is why it’s called revolving credit. 

Installment loan is a fixed loan with a set monthly payment and payoff date. Once the loan is paid in full, it is automatically closed and cannot be drawn from again. Typical installment loans are mortgages, auto loans and student loans.

A good rule of thumb is to keep your credit utilization below 30%. You can calculate this by dividing the amount of revolving credit you are using (debt) by the amount of revolving credit you have available.

Example: You have a credit card with a credit limit of $10,000 and a balance of $2,000. This means you’re using 20% of your credit utilization.

Pro Tip: The MyFICO blog recently reported that those with a credit score over 785 had an average credit utilization of 7%.

Length of Credit History (15%)

It makes sense that the longer you have credit available, the better idea lenders have on your behavior with credit. 

Your credit history is based on the following:

• How long you have had your credit accounts, including the age of your oldest account, the age of your newest account and an average age of all your accounts

• How long you have had specific credit accounts 
• How long it has been since you used certain accounts

However, there are still plenty of people who have high credit scores that do not have a lot of credit history. This is because your credit history only makes up 15% of your overall score, whereas payment history and credit utilization make up 65% of your credit score.

Credit Mix (10%)

A small percentage of your score is made up of the mix of different types of credit available. This can be a mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

Lenders can get a better understanding at how you are at managing credit if they can see you can successfully manage all a mix of different types of credit. The better you are at managing multiple types of credit, the less of a risk you are to the lender.

Pro Tip: You may think you would benefit from opening multiple credit lines to increase your score, but this is never a good idea. Every time you apply for a line of credit, creditors do a “hard inquiry” to check your credit which will lower your FICO score.

Also, if a lender sees you have applied for credit multiple times in a short period of time, this could raise a red flag and you may not be approved for a loan. Lastly, keep in mind that credit mix only represents 10% of your overall score and will not be the deciding factor into whether you are or are not approved for a loan.

New Credit (10%)

At first glance, you may be thinking that new credit will improve your score. Why that is true, it’s also important to realize new credit could also decrease your credit score.

When you apply for a new line of credit, the “hard inquiry” is made by the lender, which will lower your score by a few points. Also, if you remember from above, new credit will decrease the length of your credit history by adding a new line of credit to the average overall credit history.

However, your score could also increase with new credit by diversifying your “credit mix” as mentioned above. In addition, your score may increase if you open a new line and never use it. This is because 30% of your score is made up of credit utilization and increasing your available credit without using the credit will lower your credit utilization percentage.

What is a Good Credit Score?

Credit scores range from the lowest of 300 to the perfect score of 850. 

Exceptional Score (800 – 850)

Twenty-one percent of Americans fall into the “exceptional score”. This score will give borrowers the lowest interest rates, the best terms and the largest credit limits. 

One thing to keep in mind is lenders are going to treat you the same if your score is 815 or 850. Even if your score is not a perfect 850, you’re still going to be treated by lenders as if you are a perfect score since you’re inside the exceptional range.

Very Good Score (740 – 799)

The majority of Americans, 25%, fall into this category. A “very good score” will get you above average rates and terms when you apply for credit.

Good (670 – 739)

While a “good” credit score still gives you access to good rates, terms and limits, but not the best. About 21% of Americans will fall into this range and unfortunately 8% of this group will become delinquent borrowers.

Fair (580 – 669)

People with “fair” credit are considered high risk to lenders. This group of borrowers are considered subprime borrowers and will have a hard time getting approved for loans. If they are approved, they will pay much higher interest rates than someone with even a “good” credit score. Currently, 17% of Americans are in this range.

Very Poor (300 – 579)

Those with a “very poor” credit score will most likely be denied credit. However, if they are approved for credit, the borrower may have to pay a high fee or deposit. If you are part of the 16% of Americans who are in this range, it would be wise to improve your credit score before trying to take out a loan.

The VantageScore

Most of us are very familiar with FICO score, but did you know there is also a second score in the credit score industry?

The VantageScore was created in 2006 and while it is definitely not as well-known as the FICO score, it is a score used by some lenders.

But, not-to-worry, the VantageScore isn’t much different from the FICO score and the scores tend to mimic one another since they’re based on the same information from the three credit bureaus. 

The big difference between the VantageScore and the FICO score is that the VantageScore combines all three credit bureaus (Experian, Equifax, and TransUnion) into one score. On the other hand, FICO really has three separate scores based on each credit bureau. 

The bottom line is this: if you have a good or bad FICO score, the chances are extremely high that your VantageScore would be very similar.

A Good Credit Score is Worth $100,000

If you are getting ready to purchase a house and you have a “fair” credit score of 620, your interest rate will be 4.61%.

But, if you had a “good” credit score of 760 your interest rate would decrease to 3.029%.

Example:

$300,000, 30-year mortgage loan at 4.61% APR has a $1,539 monthly payment with $254,000 of interest paid over the life of the loan.

$300,000, 30-year mortgage loan at 3.029% APR has a $1,269 monthly payment with $157,000 in interest paid over the life of the loan.

As you can see, a “good” credit score (not a perfect score of 850) will save the borrower just under $100,000 in interest over the life of the loan.

Final Takeaway

Your credit score is a very important number but it does not represent wealth. It simply allows lenders to determine the level of risk they are taking by opening a line of credit to you.

So many people have fallen into the trap that a good credit score automatically gives the impression they are good with money. While there is some truth to this, a good credit score simply means you are good at borrowing money from different lenders and paying them back on time.

With that said, the best way to improve your credit score and maintain good credit is to never miss a payment, keep your credit utilization below 10% and only take out a new line of credit if it’s absolutely necessary.

Watch Interview with Credit Expert

Credit expert Chris Huntley from Credit Knocks came on the Money Peach Podcast Live show to talk about some of the little-known hacks when it comes to improving your credit score. You can watch or listen to the interview here.

What do you do with your loose change you get from the cashier after a purchase? If you’re like most people, you put your leftover pennies and quarters in a jar that you take to the bank when it fills up, right?

A better solution is Acorns.

2020 Acorns App Review

Product Name: Acorns

Product Description: Acorns is a micro-investing app that allows people to automatically invest their spare change by rounding up their purchases made with with a linked credit card, debit card, or ACH transfer.

Offer price: 0.00

Currency: USD

Overall

4.9

• Account Minimum ($5 to Invest)
• Management Fee ($1 per month)
• Account Fee (None)
• The App's Features

• Try Acorns Now

Acorns is an app that takes your spare change and doesn’t just set it aside for you, but rather invests it for you using a method called “micro-investing.”

Micro-Investing

Instead of spending it on a double latte or a drive-thru supper because “you found five bucks,” what if you could put your loose change into a digital money jar that earns interest?

Enter Acorns, a micro-investing app that invests your spare change each month, so it grows in size. While Acorns definitely isn’t intended to replace your 401k at work, it can help you pay for some of life’s smaller expenses like a vacation or buying a new phone with cash.

There are many micro-investing platforms to choose from, but this post is going to focus on one of our favorite and one of the most widely-known platforms; Acorns.

In this Acorns app review, you’ll find out everything you ever wanted to know about it and how you can build a small nest egg with minimal effort.

What is the Acorns App?

The best way to describe Acorns is it’s an online money jar that also invests your spare change.

Acorns is a micro-investing app that collects your spare change in three different ways:

• Rounding up your debit and credit card purchases,
• Recurring daily, weekly, or monthly investments (optional)
• Cash back rewards when you shop online at select retailers

First, you choose the funding methods of your choice. The most popular option is the spending round-ups, but you might also do a recurring deposit or shopping through Acorns to give your an account a boost too.

Acorns only withdraws small amounts of money–usually $5– unless you designate a larger amount from your bank account so you won’t notice any money is missing unless you monitor your account balance on a daily basis. To prevent charging an overdraft fee, Acorns only makes a withdrawal when there are sufficient funds in your bank account.

Your Acorns money is invested in a taxable, non-retirement investment account. Beginning in 2018, you’ll also have the opportunity to fund an Acorns Later tax-advantaged Traditional IRA investment account that’s similar to your employer 401k plan that you fund with pre-tax income.

How to Access Acorns

You can download the Acorns app from any Android or Apple mobile device. Acorns can also be accessed online via their desktop platform here.

Does Acorns Replace Your Savings Account?

No!!

Acorns invests your money which means it’s constantly fluctuating in value and is not guaranteed to earn a profit. While most investments appreciate when invested for several years, a 10% market dip can cause you to lose money if you sell now instead of waiting for it to recover.

Hedging against market volatility is why Acorns only invests small amounts of money every month. This is money you don’t need to pay your bills with and by investing your extra money for the long-haul, your nest egg will be larger than if you keep it in a savings account or spend it instead.

You still need to keep an emergency fund and other savings you can’t afford to lose inside an FDIC-insured bank account.

Before you begin investing with Acorns, make sure you set aside $1,000 into an emergency fund to cover life’s unexpected expenses.

Who Can Join Acorns?

You must meet the three requirements to join Acorns:

• At least 18 years old
• Be a resident of the USA
• Own an active checking account

You will also need to link your credit and debit cards to Acorns if you want to participate in the round-ups program. If not, you can still fund your account on a regular basis with scheduled deposits and shopping online through the Acorns Found Money shopping portal.

Why Join Acorns?

The #1 reason to join Acorns is that you save money on a regular basis and can earn more interest than your bank account.

You will benefit most from Acorns if you’re one of the following:

• Do not currently invest or save money for the future
• Want to save money every time you spend money
• Want a 100% “hands-off” investing app

All of the change in your spare change jar doesn’t earn any interest until you deposit it into your savings account. Even then, the average brick-and-mortar interest rate is maybe 0.10% or one-tenth of one percent. While it’s still better than keeping your money under the mattress, you won’t be able to retire and live off the interest anytime soon.

Get 20x Savings Rates: The national average for savings rates is 0.09%. Right now CIT Bank is offering one of the highest savings rates at 1.75% with their CIT Savings Builder Account. Why earn 20x less on your money if you don’t have to?

Using Acorns can be a win-win proposition to build wealth because:

• Develop the habit of saving and investing money each month
• Investments usually earn more interest than your checking account

Many people view the money in their checking account as spending money to pay their regular bills and life’s smaller expenses. If there’s a $1,000 balance, that’s $1,000 to spend for the month and any money left over can roll over to next month instead of tucking some of it away for a rainy day.

One reason why so many Americans can’t afford a $500 emergency without borrowing money is because they don’t put enough money in a savings account on a regular basis. Acorns automates the savings process so you at least have something to pull from if you’re in a financial bind instead of running a credit card balance.

Is Acorns Free?

Acorns is free for college students with a dot.edu email address for up to four years.

If you don’t have a .edu address, you’ll pay $1 per month until your account reaches $5,000. After your balance exceeds $5,000, you’ll pay 0.25% per year–0.02% per month–on your total account balance which comes to approximately $12.50 per year or $1.04 per month with a $5,000 balance.

Acorns doesn’t charge the $1 fee until you make your first $5 investment. You can begin earning round-ups and Acorns will collect the first fee after your first $5 round-up balance is invested or you schedule your first cash transfer from your checking account.

While you might initially balk at paying $12 a year to have an app invest your loose change, take a second to look at it from a different perspective.

You automatically pay the fee for the year by going out to eat one less time a year at a sit down restaurant where you easily pay $15-20 per person. If you’re a fast food junkie and spend $6 on average, you only have to pack your lunch twice to pay the $12 fee.

Even though you pay $1 a month, Acorns is helping you save more money than before you joined Acorns. In my opinion, if Acorns is the difference between saving more money each month instead of spending it on something you don’t need, it’s well worth the price.

Also, don’t forget your investments earn regular dividends that can offset or exceed the monthly fee as well.

As we mentioned earlier in the review, Acorns automates the saving process by withdrawing small amounts of money on a regular basis while still leaving enough money in your account to pay your monthly bills.

Paying one buck a month can be well worth the additional peace of mind you’ll receive by automating your savings process with minimal effort.

How to Fund Your Acorns Account

There are three different ways to fund your Acorns account:

• Round-ups
• Recurring investments
• Found Money shopping rewards

You can participate in one, two, or all three of these funding streams. So decide which ones work best for you and start saving.

Round-Up Investing

Round-up investing is the digital equivalent of throwing your loose change in your money jar at home. It’s also the “bread-and-butter” savings tool for most Acorns users. According to Acorns, the average user invests $32 per month by rounding up their purchases.

Here’s how Acorns’ round-up investing feature works:

• Link your credit or debit cards to your Acorns account
• Acorns monitors your card spending and “rounds-up” each purchase to the next dollar
• Your round-up balance is invested each time it reaches $5 and withdraws the balance from your checking account

When you spend $4.73, Acorns rounds up your purchase to $5 and invests the 27 cent difference. Acorns will round up a $9.36 to $10 and invests 64 cents once your round-up balance reaches $5. After these two purchases, your round-up balance is 91 cents so you have $4.09 to go before Acorns withdraws $5 from your checking account and makes an investment.

Assuming you’re like the average American and use your debit card 23 times a month, Acorns can easily invest $5 a month assuming the average round-up is 25 cents per transaction.

You can easily estimate what your average round-up amount will be every month by looking at your own transactions for the last two months by counting the number of transactions and keeping a tally of the average round-up per transaction.

Acorns Round-Up Multiplier

To speed up the investing frequency for your round-ups, activating the Acorns round-up multiplier boosts your round-up total up to 10x the normal contribution. With a 10x multiplier, your standard 25-cent round-up becomes $2.50. Ten of these multiplied round-ups each month means you contribute $25 instead of $2.50.

The round-up multiplier is an optional feature, but it can be a good idea if you’re eager to maximize your round-ups and accelerate your savings rate. By rounding up $25 a month, you’ll have a principal balance of $300 every year before factoring in any investment returns.

If you choose to use the round-up multiplier, you do have a total of three options:

• 2x multiplier
• 3x multiplier
• 10x multiplier

You can also turn off or turn on the multiplier any time you’d like. So, you might decide to use it when you go on vacation or go Christmas shopping to optimize your investments from two of the most expensive financial events each year for many families.

Acorns Won’t Withdraw Money Until Round-Ups Reach $5

Acorns tracks your card spending in real time but they won’t withdraw any round-ups from your checking account until your balance reaches $5. When Acorns withdraws the round-up from your account, the balance is immediately invested so you can begin earning passive income.

Even if it takes you two months to reach $5 in round-ups, Acorns won’t withdraw any money from your checking account until your current round-up balance reaches the $5 minimum.

If you schedule a recurring investment, that contribution will be separate from your round-ups balance and you will still have to reach the $5 round-ups minimum before they can be invested.

Recurring Investments

In addition to rounding up your purchases, you can also schedule recurring deposits or a one-time investment from your checking account to build your Acorns balance. You can link your savings account, but this isn’t recommended since federal law only allows six total withdrawals each month.

Automate Weekly and Monthly Investments

People don’t become wealthy overnight; it’s usually through regular contributions to their savings and investing accounts. Automating your savings with Acorns is an easy way to start a rich habit because Acorns does the heavy lifting of transferring the same amount of cash into your Acorns account on the scheduled day. Unlike humans, computers don’t forget!

You can designate weekly or monthly contributions and Acorns lets you pick the day and the transfer amount. Weekly investments always take place on the same day of the week–every Monday for instance– and monthly deposits occur on the same day each month, like the 1st of every month.

On the Acorns dashboard, you have the option of investing $5, $10, $15, or $20 per week, but you can choose a different amount as long as it’s at least $5. You might decide to invest $100 each month and it only takes a few seconds to type in your custom amount and Acorns takes care of the rest.

One-Time Investments

You might decide to make a one-time investment to fund your account during the signup process. Five dollars gets you started and the money will deposit within three business days.

Or, you can send a one-time investment after you receive your tax refund or your boss gives you a bonus. Either way, you’re investing your money instead of mindlessly spending it, which is always a good thing.

Found Money

The third and final way Acorns invests your spare change is with the “Found Money” portal where select online merchants give a portion of your purchase amount back into your Acorns account when you activate a shopping session through Acorns.

If you shop online with Ebates, you’re already familiar with this concept of getting paid to shop online; the only difference is your cash rewards can grow in size because they’re invested instead of being sent to your bank account as a “Big Fat Check.”

Get Business Partners to Invest in You

Any rewards you earn from Found Money are in addition to your spending round-ups. To get extra cash rewards to invest, you need to follow these steps:

• Click “Found Money” button in your Acorns account
• Choose the online merchant you want to shop at
• Click the “Shop Now” button to open a unique Acorns shopping session
• Pay for a purchase with your linked credit or debit card
• Retailer invests a designated portion of the purchase amount

Each merchant offers a different cash back rate but you can expect to have between 2% and 10% of the purchase amount invested in your Acorns account.

If you spend $100 and the merchant invests 5% of the purchase amount, you will see an extra $5 invested in your account on their behalf! Some merchants offer a fixed cash amount instead like $100 when you refinance your student loans or $200 if you become an Airbnb host.

Acorns is continually adding more partners to the Found Money portfolio so you have more opportunities to invest while shopping online. Some of the notable partners right now include:

• Airbnb
• American Eagle
• Lyft
• Jet.com
• Stitch Fixed
• Walmart

Before you shop online, head to the Found Money section on Acorns first to get extra cash back. If you make a purchase directly from the retailer without activating an Acorns shopping session, you won’t receive the extra investment. You will still receive the round-up credit if you pay with your linked credit or debit card however.

How Long Does It Take To Receive the Found Money Rewards?

Although Acorns usually sends a confirmation email within 24 hours of your purchase with your Found Money amount, the actual investment won’t be made until 60 to 120 days later.

This is the one downside to cash back apps because of the lag time to deliver the money from the merchant back into your hands. The 60-day waiting period protects the merchant in case you need to request a refund which alters your cash reward balance.

How Does Acorns Invest Your Money?

Investing your spare change is what sets Acorns apart from other micro-saving apps.

Acorns adheres to the Nobel Prize-winning Modern Portfolio Theory by investing in stock and bond index ETFs that try to match the overall market performance (passive investing) instead of trying to “beat” the market (active investing) with low fund expense fees so you can earn the highest return possible without betting the farm.

This is the same investing philosophy followed by other robo-advisors like Betterment. While positive gains aren’t a guarantee because investment performance hinges on the overall market performance, Acorns won’t recklessly invest your money.

Acorns is a great way to invest in the market if you’re a beginner investor or don’t have the time to be a DIY investor.

How Acorns Determines Your Investment Portfolio

During the signup process, Acorns will ask you a few questions to gauge your investing goals and risk tolerance. Based on your responses, Acorns will a recommend a portfolio with an investing strategy that ranges from aggressive to conservative.

You’ll see the different portfolio options below to give you an idea of how Acorns will invest your money. Remember that you’re not locked into your initial portfolio recommendation and you can change your portfolio allocation at anytime if you want to be more aggressive or conservative.

Acorns only invests in iShares and Vanguard ETFs (exchange traded funds) that own small positions in a diversified basket of stocks and bonds that gives you exposure to the overall market with minimal risk. If you’re new to investing, Blackrock and Vanguard are two highly-trusted fund families.

What Does Acorns Invest In?

Acorns currently invests in the following asset classes and ETFs:

• Corporate Bonds: iShares iBoxx $ Investment Grade Corporate Bond (LQD)
• Government Bonds: iShares 1-3 Year Treasury Bond (SHY)
• Small Company Stocks: Vanguard Small-Cap Index Fund ETF (VB)
• Real Estate: Vanguard REIT Index Fund ETF (VNQ)
• Large Company Stocks: Vanguard 500 Index Fund ETF (VOO)
• Emerging Markets: Vanguard Emerging Markets Stocks ETF (VWO)
• International Large Company Stocks: Vanguard FTSE Developed Markets ETF (VEA)

The minimum investment is $5 and Acorns buys fractional shares of each ETF listed above. If you were to buy each ETF directly from your brokerage, you would need the exact amount of cash that a single share is trading for.

When an ETF like the Vanguard 500 Index Fund (VOO) trades for $250 per share, you need at least $250 to buy one share. If you only have $100 to invest, you’ll have to find another $150 before you can buy a share or invest in another fund that trades for $100 or less but might be too aggressive for your preference.

Even if you could only afford to buy one share of VOO–or any single ETF share–your portfolio is extremely risky because it’s not diversified. If the share price climbs 20%, you’ll consider yourself a genius. But, when your single share price drops sharply, you can potentially lose all your gains in a single day.

Because Acorns can buy a partial ETF shares, you get instant diversification with every investment that instantly gives you a partial position in over 7,000 different stocks and bonds. And, Acorns automatically rebalances your portfolio with every contribution to keep you on track with your investing goals.

The Five Different Acorns Investment Portfolios

During the signup process, Acorns will recommend one of five investment portfolios based on factors including your age, income, investing goals, and whether or not you’re an aggressive or passive investor.

As you will see, conservative portfolios hold more bonds than stocks. Aggressive portfolios hold incrementally more stocks, including emerging markets, and fewer bonds to earn a higher potential return.

Conservative

The most risk-averse portfolio is the Conservative portfolio with the following asset allocation.

• Large Company Stocks: 12%
• Small Company Stocks: 2%
• Real Estate Stocks: 2%
• Government Bonds: 40%
• Corporate Bonds: 40%
• International Large Company Stocks: 4%

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 Company Stocks: 16%

Aggressive

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

Young investors will most likely be placed in this portfolio because stocks historically outperform bonds long-term. While owning stocks is more volatile than bonds, you have a longer time horizon to recover any short-term portfolio losses.

Can You Change Your Acorns Investment Allocation?

If you want to be more cautious or aggressive than your current Acorns portfolio choice, you can change your portfolio allocation at any time for free!

Let’s say you currently have the Aggressive portfolio but you’re planning on withdrawing your balance soon to pay for a large purchase. You don’t want to lose all your earnings in a sudden 10% market correction, similar to the February 2018 stock market correction, and then you don’t have enough money to cover your planned expense.

To hedge against this risk, you can switch to the Conservative or Moderately Conservative portfolio allocation that holds at least 60% bonds which are historically more stable than stocks.

Once you decide to invest more aggressively, you can select a more aggressive portfolio even if it’s two days from now.

To change your investment portfolio, click on the “Profile” tab then “Portfolio.” The different portfolio choices from left to right with an incrementally more aggressive investing strategy.

How Do You Withdraw Acorns Investments?

Eventually, you’ll need to withdraw some of your Acorns investments when you accomplish your investing goals.

Withdrawing your Acorns investments is as easy as contributing money.

When you’re ready to make a withdrawal, you tell Acorns how much money you want to withdraw and which bank account to send the money to via direct deposit. You can send the money to a new checking or savings account by providing the routing and account numbers.

Acorns doesn’t mail paper checks.

How Long Does it Take To Receive an Acorns Withdrawal?

It takes between three and six days to receive an Acorns withdrawal. This is due to federal regulations that require a two-day settlement period after you sell an investment. The same settlement rule applies to every investment brokerage and not exclusive to Acorns.

If you sell your investments on a Monday, Tuesday and Wednesday are the two-day settlement period, and you can expect to receive your funds as soon as Thursday.

Are Acorns Investments Taxable?

Yes. Any dividend income you earn from Acorns is taxable and will need to be reported on your tax return just like you need to report your bank account interest and your other investment accounts. It’s a small price to pay for earning passive income, but you’re still richer than before.

Acorns will send you a Form 1099 before March 15th for the prior tax year. While you receive most of your tax forms in late January or early February, your Acorns 1099 might be delayed because they are waiting to report the investment income from your real estate investments.

What is Acorns Later?

Acorns Later is the newest account type from Acorns. It’s a Traditional IRA (Individual Retirement Account) funded with your pre-tax income. You might prefer an Acorns Later account to reduce your taxable income for the current tax year.

Your investments will grow tax-deferred meaning you won’t pay any tax now, but instead on the withdrawal value in retirement.

Do You Need to Be an Existing Acorns Member to Join Acorns Later?

At this moment, yes, you need to be an existing Acorns members with a taxable, non-retirement to fund an Acorns Later IRA.

Once you open an Acorns Later account, you must make a minimum investment of $5 to get started; just like your regular Acorns account.

Is Acorns or Acorns Later Better?

It depends on how soon you want to access your investments. If you don’t plan on touching your Acorns investments until retirement, the Acorns Later account is better because you won’t have to pay taxes on your dividend income until you retire. Plus, all contributions reduce your taxable income for this tax year.

If you’re not sure how soon you want to withdraw your Acorns investments, you should open a standard Acorns account. Having the extra flexibility is better than paying the early withdrawal penalties that can erase all of your cumulative dividend income.

Because Acorns is a micro-investing app, it probably isn’t going to be your primary investment account. Most of your investments need to be with your employer 401k plan or with a regular brokerage like Betterment or Vanguard. So don’t worry too much about the tax implications from your Acorns account because you’re only investing your loose change.

Other Things You Didn’t Know About Acorns

Here are a few other things you might not know about the Acorns app that help make saving and investing fun!

Track Your Past, Present, and Potential Investing Progress

Once you’re logged into your Acorns account, you can view your investing progress so far and your potential future progress based on your age and investing rate.

Every time you log into Acorns, the first thing you’ll see is your current account balance. Directly above your current balance, you’ll see three buttons: Past, Present, Potential.

These three buttons are the secret sauce to navigating the Acorns dashboard like a boss.

Past

The “Past” button shows your lifetime Acorns app performance. Some of the statistics you’ll see includes your total amount invested, total gain or loss, referral bonuses, Found Money shopping rewards, and total withdrawal amounts.

You can also track your itemized earning history for your round-ups, recurring investments, and referral bonuses.

Present

You will visit the Present screen the most because it’s the primary screen for your Acorns dashboard. Besides your account balance, you can adjust your round-ups multiplier, schedule recurring investments, and quickly spot the best Found Money rewards offers.

This screen also shows your recent earning history so you can easily see if the purchase you made yesterday has been credited to your Acorns round-ups balance yet.

Potential

Any investing app worth their salt includes a projected investment calculator. When you first click the “Potential” button, you will see your projected account balance based on your age.

By clicking the “Change My Future” button you can see how adding a recurring investment on either a daily, weekly, or monthly basis can give you more money in the future. The projection calculator will show two lines on the graph plotting your balance trajectory:

• The dotted line is the projected balance at your current investment rate
• The solid line is your total projected balance including interest

While an extra $5 a week doesn’t seem like much now, it can grow to an extra $10,000 in 20 years. Over the next two decades, you contribute $4,800 during that time frame and earn $5,000 in dividends; that’s better than any savings account.

Refer Your Friends and Get $5

Acorns pays you $5 for every friend and family member you refer to Acorns. They will get a $5 bonus too and they begin saving money on a regular basis just like you! And, it might be the easiest money you’ve ever earned.

Integrate Acorns with Your Mint.com Account

If you use the free online budgeting app Mint, you can link your Acorns account to track your investing progress with your monthly budget.

When you log into your Mint account, you can add your Acorns account by clicking “Settings” button followed by the “Accounts” and “Plus” buttons to enter your Acorns login information. It only takes a few seconds and you’re all set!

Acorns Pros

• It only takes $5 to get started
• Five different portfolios with instant diversification
• Three ways to automate your investing
• Round-ups let you invest each time you shop
• Automatic portfolio re-balancing
• Mobile app is easy-to-use

Acorns Cons

• Monthly feed erode cumulative investment returns
• Investments can lose value during stock market corrections
• Cannot invest in individual stocks or ETFs outside the Acorns portfolio
• No option to invest in REIT or Real Estate

Alternatives to Acorns

Maybe you don’t think Acorns is a good fit for you. No worries.

These three micro-investing apps might be a better fit for your saving and investing habits.

All three of these alternatives let you fund your account with one-time or recurring contributions from your checking account. What separates Acorns apart from these other apps is the round-ups and Found Money investment options because the other recommendations only support bank account transfers.

Only one of these alternatives features round-up investing and none of them offer online shopping cash back rewards.

M1 Finance

Another growing micro-investing app is M1 Finance, a completely free micro-investing app that lets you buy fractional shares of your favorite stocks and ETFs or you can pick an “expert pie” ranging from ultra-conservative holding 98% bonds to the ultra-aggressive pie that holds 99% stocks.

M1 Finance requires an initial $100 investment and you can only make one-time or recurring monthly investments. After your account is funded, the minimum investment is $1.

Robinhood

Robinhood started in 2013 and has grown in popularity among the micro-investing community. Unlike Acorns, you can invest inside stocks, options, and even cryptocurrency in addition to ETFs.

The one thing I really like about Robinhood is the simplicity of it. It’s definitely a micro-investing platform targeting newbies or the less-experienced investor. You won’t find a lot of bells and whistles, and even the investing language they use is simpler than most other micro-investing platforms.

Robinhood is also completely free to sign up and they don’t charge any commissions. They do make money from Robinhood Gold (an add-on service which is optional), any interest from customer cash accounts and rebates from trading venues.

Also, unlike Acorns, Robinhood will allow you to trade full stocks. This is perfect for the investor who may not be ready to open up a brokerage account and start trading stocks and instead is looking to tip-toe into stocks via micro-investing.

You can access Robinhood from their desktop or mobile apps on both iOs and Android. Robinhood is for U.S. customers only.

Stash

Stash also features round-ups and recurring investments on a weekly or monthly basis and has the same fee structure as Acorns–$1 per month until your account balance reaches $5,000 then 0.25% annually–and is the most similar alternative to Acorns.

The biggest difference between Stash and Acorns is how your money is invested as Stash gives you more flexibility that DIY investors might like. Acorns takes a more direct approach by investing in an ETF portfolio based on your risk tolerance.

You have 40 different investing options with Stash so you can invest in a conservative, moderate, or an aggressive ETF similar to Acorns, but you can also invest in themed ETFs too. For example, you can invest in missions and causes like clean technology or gender diversity. Or, you can invest in a specific sector like technology, cybersecurity, China, or U.S. Treasury bonds.

Whether you want to invest in one ETF or all 40, you can make your own portfolio with Stash. Bear in mind that your Stash investments can be more volatile if you invest your entire balance in one ETF, especially if it’s a particular sector like technology or Europe.

Betterment

Betterment doesn’t offer round-up investing, but you only need $1 to make your first investment. You can fund future investments with recurring or one-time withdrawals from your bank account. The management fee is 0.25% on your entire balance which is more affordable than Acorns for balances less than $5,000.

Betterment also adheres to the Modern Portfolio Theory and your money will be invested in a basket of iShares and Vanguard stock and bond ETFs based on your risk tolerance.

This can be your best Acorns alternative if you can live without round-up investing and still prefer to have the investing app handle the day-to-day portfolio management decisions.

And, Betterment can also double as your primary brokerage account too which means you can keep all of your investments with Betterment until retirement if you prefer automated, index investing.

Summary

Acorns is a fun way to maximize your saving potential every time you use your credit or debit card by forcing you to set aside some of your money. You won’t be able to retire from your Acorns investments, but it’s an excellent way to squirrel away cash you would spend on lattes and movie tickets if it remained in your checking account.

However, since you’re rounding up every purchase, make sure to account for those roundups in your monthly budget. Good luck!

Recently I opened this email from a reader:

Hi Peach,

I need advice on a 401(k) that my husband rolled over to a ROTH IRA. He rolled it over almost 2 years ago and it hasn’t grown, but cents. Unfortunately, we haven’t contributed to it, but really want to start doing that. I just want to make sure that the ROTH IRA is the direction to go with a retirement account. Seems like it should have grown a little, even without us contributing to it. School me…I’m lost!

Thank-you,

Brandi

Before I jump into a ROTH IRA, it would be best if we understand how and why retirement investing works.

A 401(k), 403(b), 457, IRA, ROTH IRA, and a SEP IRA are all a bunch of confusing numbers and letters smashed against each other in an effort to confuse and eventually scare the crap out people when it comes to investing for retirement.

Well, maybe that is a stretch. Truthfully, the numbers and letters are simply where they are located inside the Federal Tax Code.

Example: The rules for a 401(k) are found inside the IRS’s tax code – Section 401 subsection K. 

Why We Have Retirement Accounts?

Retirement accounts are a benefit for you and I because it creates a way for us to avoid sending even more money to the government in the form of taxes. Thus, you may have heard retirement accounts referred to as tax sheltered accounts because that’s exactly what they do; they shelter your money from the IRS.

How Do We Avoid Paying Taxes on This Money?

When we save outside of a tax-sheltered account, we are taxed on the money before we ever invest it in the form of income tax. Then when we invest and our money grows, we pay a 15% (20% for high income earners) tax called capital gains tax whenever we sell the investment. However, when you invest inside a retirement account, you avoid this tax in a few different ways 🙂

Pre-Tax Retirement Investing

Pre-tax simply means the money you invest into your retirement account is not (yet) taxed. Instead, the money you send to your 401(k), 403(b), 457, is taken from your paycheck before the money is ever taxed . In addition to the pre-tax, the money inside your account grows tax-free over time. The only time you pay taxes on a pre-tax account is when you withdraw the money in retirement (age 59 1/2 ). As of right now, the amount of money you withdraw at retirement is taxed as ordinary income.

Note** If you don’t work for an employer who offers a 401(k) plan OR you are self-employed, you can still take advantage of this pre-tax retirement investing. Instead of the money coming out of your paycheck pre-tax you would simply deduct the amount you invested throughout the year when you file your taxes in the Spring. This type of account is called a traditional IRA (Individual Retirement Arrangement).

What About the ROTH IRA?

In 1997, William Roth, a U.S. Senator from Delaware, helped put the ROTH IRA into law. Remember this man’s name, because he is going to help you build a boat load of tax-free wealth over time!

The ROTH IRA is different than all other retirement accounts because instead of investing your pre-tax dollars, you are instead investing after-tax dollars.

Just like the pre-tax accounts, the money still grows inside tax-free, meaning you no longer pay capital gains tax. However, in retirement you can withdraw the money WITHOUT PAYING TAXES!

Example: You get paid on Friday. Saturday morning you go online and send your AFTER-TAX dollars into the ROTH IRA. Over time the money grows inside the ROTH IRA via stocks, bonds, mutual funds, certificate of deposits, etc., and when you withdraw the money, you don’t pay taxes.

Why Does the Government Give Me a Tax Break?

Great question! When you are investing into retirement accounts, you usually will have to wait until you are age 59 ½ before you can withdraw the money. If you do so before this age, you will pay taxes on this money AND a 10% early withdrawal penalty.

My Opinion: The only reason to pay the penalty would be to avoid a bankruptcy. Otherwise, leave the money alone! The more money you have in there, the more your money will go to work for you to build substantial wealth. As soon as you withdraw a portion of the investment, you would pay a penalty AND your money stops working for you.

Since the government can count on your money being left alone until you are of age (or they can count on your 10% penalty), in return they give you a nice little tax break.

The ROTH IRA Rules

Here’s exactly how a ROTH IRA works.

How Much Can I Invest Into It?

$6,000/year per person in 2020 with an additional $1,000/year if you are age 50 or older.

After-Tax or Pre-Tax Dollars?

After-tax dollars only.

Income Limitations?

Yes.

In 2020 single filers begin to phase out at $124,000 and then are ineligible for a ROTH IRA at $139,000.

In 2020 married filers begin to phase out at $196,000 and then are ineligible for a ROTH IRA at $206,000.

**Note: If you are outside the income limitations for a ROTH, you can back door your way into a ROTH IRA by converting a Traditional IRA to a ROTH IRA after paying taxes on it. I highly recommend this, but please contact your tax professional before you get started.

When Can You Invest Into a ROTH IRA?

You can invest all the way up until April 15th, 2021 for the 2020 tax year.

Do I Have to Have an Income?

Yes and No.

You must have an earned income to invest money into a ROTH IRA, and if your income is below the contribution limits, then you can only invest up to what you earned within the year. This means if you earned $4,000 in 2020, you would only be able to invest $4,000 instead of the $6,000 contribution limit.

**HOWEVER, A NON-WORKING SPOUSE CAN ALSO OPEN A ROTH IRA.

First off, let me rephrase this by stating there is no such thing as a non-working spouse. I have been home with my kids a few too many times when my wife is at work and it is way more work than actually going to work.

These types of ROTH IRAs are also referred to as Spousal IRAs, and the same rules apply. This means together, you and your spouse can invest up to $12,000 per year ($14,000 age 50 or older), even if only one of you have an earned income.

Can I Contribute If I Have a Retirement Account at Work?

Yes.

What About Mandatory Withdrawals at Age 70 ½ ?

No.

The government cannot collect taxes when you cash out on your ROTH IRA, so they don’t force you to withdraw from it when you are age 70 ½.

This is one of the BEST things about a ROTH IRA and is one of the main differences from pre-tax retirement accounts where you are forced to withdraw your money (so the government can start to collect taxes on that money).

What If I Don’t Need the Money Inside my ROTH IRA?

If you don’t need the money from a ROTH IRA, you can leave your tax-free money inside the ROTH for as long as you live. You can also leave your ROTH IRA to a beneficiary, and they can stretch this tax-free money over their lifetime. This is a fantastic bonus for future generations.

When and How Can I Withdraw From the ROTH IRA?

If you are OVER age 59 ½ , you can withdraw as much as you would like, tax-free, so long as your ROTH IRA has been open for at least 5 years.

Example: If you opened your ROTH at age 60, you wouldn’t be able to withdraw from it until age 65, or you would pay a 10% penalty.

If you are UNDER age 59 ½ , you can only withdraw the amount you have contributed (not the growth portion) without paying a penalty.

BONUS: If you have had the ROTH open for at least 5 years, you can withdraw from the account penalty-free (but not tax-free) for the following expenses:

1. First time home purchase up to $10,000 per account for you, your children, or your grandchildren.
2. For College expenses for you, your children, or your grandchildren.  This can be a little tricky and you should contact your tax professional before starting this process. A 529 Plan is a much better option for this.

Back to the Brandi’s Email

Here is the answer to Brandi’s question:

Hi Brandi,

Your ROTH IRA is not actually the investment. It is the tax-advantaged bucket that holds your investment inside it to protect your money from taxes. If your ROTH IRA is performing badly, which it sounds like it definitely is, your ROTH IRA is not to blame. Instead, you should be looking at what is INSIDE your ROTH IRA.

Thanks for the question,

-Chris Petrie

In a Nutshell…

For those of you who skipped to the bottom (you should really go back to the top), here is the ROTH IRA breakdown:

1. After-tax contributions up to $6,000/year per person ($7,000 if over age 50) in 2020
2. Tax-free growth for the investment inside the ROTH IRA
3. Tax-free withdrawals at age 59 ½ (or for qualified withdrawals – see above)

Where Can I Open My ROTH IRA?

You can really open a ROTH IRA anywhere. Almost all investment companies, banks, and financial advisors offer ROTH IRA accounts.

Here are the questions I would be asking:

1. Is there a fee to open the ROTH IRA?
2. What are the annual expenses for the ROTH IRA?
3. What can I invest inside the ROTH (mutual funds, ETFs, managed funds, etc.)?
4. What are the fees for buying/selling inside the ROTH?
5. Is this a DIY account or will and advisor be helping me?

**I currently have my ROTH IRA at Ally Invest.

Ally Invest

Ally Invest is my first choice when it comes to opening a ROTH IRA and it’s also where we have our own accounts. Here’s why I recommend Ally Invest:

• Low Fees: 0.00% – 0.30% is the lowest you will find for the quality you receive.
• Large Investment Selection: Many different investment portfolios to choose from based on your risk tolerance
• Integration to online savings accounts: We also have our Sinking Funds set up with Ally Bank.

Personal Capital

Fees are a little higher than Ally Invest, but they are still lower than 95% of investment brokerages you will find. Fees are higher because you will have your own human advisor to help you get started. You can also try their free app which allows you to see all of your account in one place in real time. I use personally use this tool to track my own net worth in real time.  You can open an account at Personal Capital here.

Did you know rich people focus on their net worth while poor people focus on their working income? I highly recommend everyone start tracking their net worth. When I started – it was a negative net worth! With that said, what gets measured, gets managed. Start tracking your net worth right away — don’t worry, it’s very simple.

I am an affiliate with the investment brokers listed above. If you do open an account with either of them, they will be sending me a thank-you referral commission at no extra cost to you whatsoever. If this doesn’t sit well with you, simply close out your browser and go directly to their landing page from a new browser. The thank-you commissions I receive allow me to continue to provide you free content on this blog, podcast, and YouTube channel. Thank-you for your support!

Open Up Your ROTH IRA Now

You’ve read this far through the post and you’re ready to open up your first ROTH IRA. Your best bet is going to be with Ally Invest where you open up an account with $100 minimum deposit and start growing your nest egg from there. If at all possible, set up automatic recurring deposits into your ROTH IRA. Don’t forget, you can invest up to $6,000 per year ($500 per month or $115 per week).

If you’re age 50 or older in 2020, then you can add an additional $1,000 per year. 

Good luck!

Similar to a 401(k), a ROTH 401(k) is an employer-sponsored investment account for retirement. The main difference between a 401(k) and a ROTH 401(k) is how the savings are taxed.

This rules for the ROTH 401(k) also applies to the ROTH 457, ROTH 403(b) and ROTH TSP.

Savings into a 401(k) are invested using pre-tax dollars. The money going into the 401(k) is not taxed, it then grows tax-free, and taxes are paid on the withdrawals made in retirement.

However, a ROTH 401(k) acts just like a ROTH IRA. The investment is made with after-tax dollars, the investment grows tax-free, and then you do NOT pay any taxes when you withdraw the money in retirement.

ROTH 401(k) Overview

The ROTH 401(k) is a combination of the traditional 401(k) and the ROTH IRA. Up until the creation of the ROTH 401(k) in 2006, the best retirement savings option for an employee would be to invest into the employer-sponsored 401(k) plan. In addition to the 401(k), an employee (or anyone for that matter) could also open up their own ROTH IRA and take advantage of after-tax retirement savings. However, there are some limitations to the ROTH IRA.

One limitation is the maximum amount you can save into a ROTH. In 2020, the maximum you can save into a ROTH is $6,500, with an extra $1,000 if over age 50. With the 401(k), the maximum you can save into a 401(k) is $19,500, with an additional $6,500 if over age 50.

There are also income limitations for the ROTH (see charts below).

Why a ROTH 401(k) vs a Traditional 401(k)?

It all has do with when you want to pay the taxes.

It all started off with the creation of the 401(k) in 1978. Section 401, subsection “k” of the IRS tax code created the ability for employees to defer some of their compensation from taxation until retirement.

Why Did The Taxes Matter So Much More Back Then?

If you go back to 1978 the United States looked a lot different. One of the biggest differences in 1978 vs 2020 is the federal income tax brackets. The highest tax bracket we currently have in the United States is 37%. For example, if you’re married/filing jointly and your income is over $622,050, you will pay 37% federal income tax.

However, if it was 1978, you would be paying 70% income tax.

Example: If you factor in inflation, someone making $100,000 in 2020 would be the equivalent of making $25,000 in 1978. The federal income tax rate for $100,000 in 2020 is 24%. The equivalent in 1978 would have been 45%.

What About Taxes Today?

Fast forward to 2020 and we pay a lot less in taxes than we did in 1978. However, when we invest into a 401(k) (or any pre-tax retirement account), we are using the same strategy of avoiding taxes now and paying them later.

Here’s the question to ask yourself: Do you think taxes will be higher or lower when you retire?

I can’t answer that question for you, but instead I can give some things for you to think about. First off, we are in one of the lowest tax rate environments in our history. Secondly, we have over 25 trillion in debt that will eventually need to be paid off. To put that in perspective, that is more than $200,000 owed per tax payer in the United States

The next question to ponder is whether or not you believe taxes will ever increase to pay off this debt while we are currently in an extremely low tax-rate environment? In my opinion, I think they will eventually have to increase over time.

ROTH 401(k) vs Traditional 401(k)?

ROTH 401(k) or Traditional 401(k)?

Since over half of employers who offer a 401(k) now offer a ROTH 401(k), I would almost always recommend a ROTH 401(k) over the traditional 401(k).

As someone who is just shy of 40 years old, my belief is taxes will eventually go up. Therefore, I would rather pay lower taxes now and avoid paying higher taxes later.

Note: This is merely my opinion and I have no way of predicting the future. No one does.

Frequently Asked Questions About the ROTH 401(k)

Now that you have an idea of why (or why not) you should choose the ROTH 401(k), here are some of the most common questions in regards to how the IRS has structured the ROTH 401(k).

Are There Income Limitations to the ROTH 401(k)?

No. Unlike the limitations with a ROTH IRA, there are not income limitations to the ROTH 401(k).

How Much Can I Save Into a ROTH 401(k)?

In 2020, the maximum you can save into the ROTH 401(k) is the same as the traditional 401(k) of $19,500. If you are age 50 or older, you contribute an additional $6,500.

In contrast, the maximum you can contribute to a ROTH IRA is $6,000 with an additional $1,000 if age 50 or older.

What are the Withdrawal Rules for a ROTH 401(k)?

Similar to the ROTH IRA, withdrawals on both your contributions and the growth are tax-free at age 59 1/2. However, any contributions made by your employer cannot go into the ROTH and are sent to the 401(k) where taxes will be due at withdrawal.

Example: If you saved $100,000 into your ROTH 401(k) and your employer matched you 5% during your employment, you would pay taxes on the 5% ($5,000) when you withdraw at age 59 1/2.

Also, withdrawals cannot be made within the first five years of saving into a ROTH 401(k). Therefore, if you think you may need withdraw from the ROTH 401(k) in less than five years from your initial deposit, you may want to think twice about the ROTH option.

Is there a Penalty If I Withdraw from the ROTH 401(k) early?

Yes, if you withdraw from your ROTH 401(k) before age 59 1/2, you will be subject to a 10% early withdrawal penalty. There are some circumstances where you can withdraw without a penalty, and those include (but not limited to) if the account owner becomes disabled or dies.

This is slightly different than a ROTH IRA since you can withdraw the contributions anytime (after you have held the account for 5 years) without paying a penalty.

Required Minimum Distributions

When you reach age 72, you are required to start making withdrawals from any pre-tax retirement account, including your 401(k). These are called required minimum distributions (RMDs).

The amount you are required to withdraw and pay taxes on each year is based on the amount you have in your retirement account and your life expectancy provided by the IRS. For those who intended to leave an inheritance behind through their retirement nest egg, this provides an obvious hiccup.

However, with a ROTH IRA, RMDs are not required, but with a ROTH 401(k) those RMDs are still in effect. The good news is you can easily avoid required minimum distributions by rolling over your Roth 401(k) to a Roth IRA.

Can I Convert My Current 401(k) to a ROTH 401(k)?

Yes, but you would have to pay the taxes on contributions into your 401(k).

Example: Let’s say you have saved $100,000 into the 401(k) and you are thinking about converting that to a ROTH 401(k). If you are in the 24% tax bracket, then you would have to write a check for $24,000 and then roll it from the 401(k) to the ROTH 401(k).

Note: I would never recommend using funds from inside your investment to pay the taxes for the rollover.

When Would I Want to Avoid a ROTH 401(k)?

If you are nearing retirement in a few years, you may want to reconsider the ROTH 401(k). Since you’re not allowed to withdraw from the ROTH 401(k) in those first five years, you may be better off with the pre-tax retirement account.

Final Thoughts

The ROTH 401(k) is often thought of as a hybrid from the 401(k) and the ROTH IRA. It combines some of the best features from both the ROTH and 401(k), to include higher contribution limits without income limitations.

The decision on whether or not to start a ROTH 401(k) should be based on when you want pay taxes on your nest egg. If you would rather pay taxes later in life, then the 401(k) is your best option. However, if you are looking for tax-free withdrawals in retirement, then start contributing to your ROTH 401(k) today.

What is a 529 Plan?

A 529 savings plan offers tax advantages for parents who are saving for both college and/or K-12 tuition. 

Similar to a ROTH IRA, a 529 plan uses after-tax dollars for savings. The earnings inside the 529 plan then grow tax-free and withdrawals are not taxed if used for qualified college or K-12 expenses.

How Does a 529 Plan Work?

You may have been told in the past that 529 plans were only for higher education (college) expenses, and you were once right. However, with the passing of the Tax Cuts and Jobs Act, 529 plans can be used to pay for up to $10,000 worth of tuition per beneficiary each year at an elementary or secondary (k-12) public, private or religious school.

Every state and the District of Columbia has at least one state-sponsored 529 plan. For example, Idaho has just one 529 plan — The Idaho College Savings Plan (IDeal)

The state of Virginia has two 529 plans – a direct-sold 529 college savings program called Invest529 and an advisor-managed 529 plan called CollegeAmerica through American Funds. 

You can also invest in any state’s 529 plan you choose, however there may be increased tax advantages to saving inside your own state’s plan.

The Benefits of 529 Savings Plans

The amount saved into 529 plans has increased from $113 billion in 2009 to $352 billion in 2019. The reason for the increased popularity of college savings plans are the tax and financial benefits that go along with the flexibility of saving in them.

1. Tax-Free Earning and Withdrawals

Your 529 plan contributions do not qualify as a federal tax deduction but they may qualify for your state tax deduction. Most states will not give you the state tax-deduction unless you save inside your own state’s 529 plan. 

2. State Tax Deductions

Depending on the state you live in, you can get a state tax deduction on your after-tax dollars saved into a 529 plan. 

Most states require you to invest inside your own state’s 529 plan, however there are a few states that will give you the deduction no matter where you choose to save.

These seven states let you deduct 529 contributions even for out-of-state 529 plans:

• Arizona
• Kansas
• Minnesota
• Missouri
• Montana
• Pennsylvania
• Utah

For example, if you live in Arizona and you invest in Virginia’s 529 plan, you will still receive a Arizona state tax deduction for your contributions.

The following states only offer tax benefit if you invest into the state’s plan where you reside.

• Alabama
• Arkansas
• Colorado
• Connecticut
• Georgia
• Idaho
• Illinois
• Iowa
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Nebraska
• New Hampshire
• New Mexico
• New York
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Rhode Island
• South Carolina
• Vermont
• Virginia
• West Virginia
• Wisconsin

Now for example, if you live in Idaho and you invest in Utah’s my529 Plan, you will not receive a state deduction for contributions. 

Also, each state sets their own limits on deductions. For example, in Virginia both single and married filers can deduct up to $4,000/year per beneficiary if they invest into a Virginia 529 plan.

However, if you live in Arizona, you can deduct $2,000/year filing single or $4,000/year filing jointly and you can also invest in any state’s 529 plan.

3. Flexibility

Every 529 plan can have only one beneficiary. However, if the beneficiary no longer needs the funds from the 529 savings plan, you can change the beneficiary to any qualifying family member.

Qualifying family members are any of the following:

1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
2. Brother, sister, stepbrother, or stepsister.
3. Father or mother or ancestor of either.
4. Stepfather or stepmother.
5. Son or daughter of a brother or sister.
6. Brother or sister of father or mother.
7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
8. The spouse of any individual listed above.
9. First cousin.

This often happens if the beneficiary either decides they no longer want to attend college, they get a scholarship and no longer need the funds, or they only require a portion of the funds. 

Another perk with a 529 plan is you can take the unused portion after the beneficiary finishes college and can apply it to another child. For example, let’s say you have two children and they are 5 years apart. If the older beneficiary finishes college and has funds leftover, you can then change the beneficiary of that 529 plan to your younger child.

4. High Contribution Limits

529 plans themselves have very high contribution limits. The contribution limits are not annual limits, but instead are lifetime contribution limits that range anywhere from $235,000 to $500,000.

However, as the individual contributing to the 529 plan, you are limited to $15,000 per year, per child, or $30,000 per year, per child if married filing jointly. There are unique ways around this limit to increase this amount up to $150,000 and you should contact your tax professional to understand more.

5. Anyone Can Contribute to the 529 Plan

Usually the parent or grandparent will open the account and become the custodian for the beneficiary. However, anyone that wants to save money into the beneficiary’s 529 plan is allowed to and can also take advantage of the tax deduction.

For example, let’s say you open a 529 savings account for your newborn son. Not only can you save into the plan, but so can any other family member, friend, or anyone else who would like to.

CollegeBacker is one the most popular 529 savings platforms because they focus on this area of the 529 – making it simple for anyone to save into your child’s 529 plan using a simple link via text message or email.

The Downside to 529 Plans

Just like with any type of investment vehicle, there will be pros and cons. The pros of using a 529 plan are the tax advantages and the focused intent on saving for future college expenses. However, there are some disadvantages as well.

1. Ten Percent Penalty If Not Used Correctly

Just like any other tax advantage plan, if not used correctly, you’re going to pay the government a 10% penalty. If you don’t use the savings for qualified expenses such as tuition and fees, books and supplies, room and board, computers, or any other equipment required for class, then you’re going to pay the penalty.

2. Costly Fees in Some 529 Plans

Every state sponsored 529 plan is going to be different. Some will have higher fees and some others will have better 1-year, 5-year, or 10-year performance records.

There are many factors when determining which 529 plan and what fees are going to be appropriate for you. These factors depend on college preference, how many years away from college the beneficiary is, and your level of risk tolerance.

CollegeBacker is a great platform to help you decide which state-sponsored plan to choose from. 

Frequently Asked Questions

1. Can I have one 529 plan for multiple children?

No. Each 529 plan can only have one beneficiary. If you have multiple children, you will need to create a separate 529 plan for each child.

2. What colleges or schools can 529s be used for?

The IRS states that any college, university, trade school, or other post secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.

This includes most accredited public, nonprofit and privately-owned–for-profit postsecondary institutions.

There are also hundreds of foreign colleges and universities where your 529 plan can be used. To determine if a foreign college is included, they must be eligible for Title IV federal student aid.

3. What are Qualified Educational Expenses?

• Qualified Educational Expenses
• Tuition
• Fees
• Books
• Equipment required for course enrollment
• Computers (if required by school or program)
• Room and Board

4. What happens if the beneficiary gets a scholarship or doesn’t need the 529 savings?

529 plans are very flexible and you can change the beneficiary to another (distant) family member of your choice at any time. For example, if your child gets a scholarship or doesn’t want to attend college, the 529 beneficiary can be changed to a family member (see list of qualified members above).

5. Can I open a 529 for my unborn child?

Yes, but there is a work-around. A 529 plan must have a living beneficiary with a social security number. What you can do is open the 529 and list yourself as the beneficiary. Once your child is born and has a social security number, you can then change the beneficiary from yourself to the child.

This is a popular way for parents to boost the savings early on when the child is born through financial gifts from friends and family members.

6. Does anyone who contributes to the 529 get the state tax deduction?

Yes. If your state offers a state tax-deduction, then anyone who saves into a 529 will receive the tax deduction. The tax deduction is based on the investor – not the 529 plan.

7. What is a Direct vs Advisor Sold 529 Plan?

You have the option to do-it-yourself, or you can have an advisor help you.

A Direct Sponsored Plan

This option will cost less because you are not paying an advisor for help. Anyone can open a 529 plan and if you bypass an advisor, you ultimately are responsible for determining how this plan is funded.

There are great DIY platforms such as CollegeBacker to help you choose the best 529 based on your overall risk tolerance.

An Advisor Sponsored Plan

This is where a financial advisor is paid to help you set up and manage the 529. The financial advisor will charge an additional fee and these fees can often range from 1% – 2% of the balance of your 529.

8. Will it Affect My Child’s Ability to Receive Financial Aid?

Yes, but it’s very minimal and in the long run you’ll benefit more from the tax advantages thank you will lose out from financial aid.

When you go to apply for financial aid, you will have to fill out a FAFSA (Free Application for Federal Student Aid).

The FAFSA will take a look at the student’s financial situation and their current assets to determine if they are eligible for financial aid.

However, since the 529 plan is actually owned by the parents and not the student, the educational institute will look at something else called the Expected Family Contribution (EFC).

In a nutshell, the higher the EFC, the less financial aid your child is going to receive.

The good news here is the school is only allowed to use 5.64% of the EFC to calculate eligibility requirements. When you compare this amount to the 20% they are allowed to use for the student’s own assets, I’ll take the 5.64% via a parent-owned 529 plan over the 20% calculation all day long.

Remember, the higher the EFC the lower the amount of financial aid.

Summary

Saving for college into a 529 plan is a great strategy for saving for college. With the tax benefits of tax-free growth and tax-free withdrawals, this ends up saving investors thousands of dollars over time.

However, saving for college should never come before more things such as building an emergency fund, paying off consumer debt, and investing into retirement. As much as I love saving into a 529 plan, I would never recommend saving for college before you have built a solid financial foundation.

If you’re someone who is currently paying down consumer debt such as credit cards, auto payments, personal loans, or student loans – push pause on saving into a 529 plan. Instead, pay off your debt, save up some cash reserves, start investing for retirement, and then open up the 529 plan.

CollegeBacker is an investment platform allowing you to save for college with tax advantages through a 529 plan. Collegebacker has simplified the college savings process while also making it easy for friends and family to make deposits into your child’s college savings.

Their mission is to make college affordable for every American family and to make it easy to start saving for college.

If you are ready to open an account with CollegeBacker today, you can get a $25 bonus when you fund fund your 529 plan through my link here.

What is CollegeBacker?

CollegeBacker is a robo-advisor specifically focused on 529 college savings plans. The company was founded in 2016 by current CEO Jordan Lee and is based out of San Francisco.

What Does CollegeBacker Offer?

Just like other 529 investment platforms, CollegeBacker is an investment platform which gives investors access to a diverse selection of 529 college savings plans. However, the thing that separates CollegeBacker from other investment platforms is they solely focus on college savings plans. In addition, they also have added the ability for multiple contributors to invest in a single 529 plan.

Why does this matter?

Allowing family and friends to invest into your college savings plan via a single shared link will help you save for your child’s college savings. Now friends and/or family members can click a link and make one-time or recurring investments on your child’s behalf. And to make it as simple as possible, CollegeBacker allows anyone to invest via a credit card, debit card, or bank transfer.

What are the Benefits of CollegeBacker?

What makes CollegeBacker stand out is:

• Simplified investing for 529 plans
• Access to a diverse range of 529 plans
• Recommendations based on low-cost funds
• Tax savings on college savings
• Risk analysis based on age of child
• Simplified process for having friends or family save

In addition to the college savings for your child, CollegeBacker also makes it easy to send a 529 savings gift to anyone – even if they don’t currently have a 529 plan. The next time your child is invited to a birthday party, you can actually send a 529 contribution in lieu of a traditional gift.

Pro Tip: Do you have currently have a student loan? Before you send off another payment, make sure you’re getting the best possible loan and rate.

Who Can Join CollegeBacker?

Any family member at least 18 years old can open an account for a child or future college student. This member also does not need to be a parent or legal guardian. However, since the person opening the account can withdraw funds, it’s a good idea if they are the child’s primary caretaker.

CollegeBacker doesn’t require you to attend a specific college, earn a certain income or live in a qualifying state.

Children of any age can have a CollegeBacker account. For each child you add, CollegeBacker will gauge your risk tolerance and recommend a state-specific 529 plan.

Note: You can live in one state and invest into a different state’s 529 plan, and the student can go to any college of their choice.

Can I Open an Account for a Future Child?

Yes, you can create an account for a future child when you have a due date.

Once the baby is born, you can edit their plan details. If you have enough diapers, wipes and baby clothing, your friends can shower you with 529 contributions instead.

The idea here is to get the ball rolling on college savings as soon as your child is born.

How Do I Open an Account

You can open an account for free here.

Opening an account only takes a few minutes. When enrolling, CollegeBacker recommends a 529 college savings plan with the best plan fees and tax treatment for your state of residence. Avoiding these hidden costs means your child can have more money to pay for school.

Listen here: You can hear more about CollegeBacker from one of their advisor’s Abby Chao on Money Peach Podcast Episode 67.

Who Can Contribute to a CollegeBacker 529 Plan?

Any family member or friend can contribute to a child’s plan. The 529 plan provider (not CollegeBacker) invests the cash in stocks, bonds and fixed-income assets. When your child needs to pay for college, the funds can be withdrawn tax-free for eligible education costs.

Note: CollegeBacker is an investment platform only – meaning they do not hold your money but rather act as the interface between the investor and the 529 plan.

What are the CollegeBacker Fees

CollegeBacker is free to join, however, the 529 plan administrator (not CollegeBacker) collects an annual fee. The fee amount depends on which state plan you choose and the fund expense ratios.

For example, the fees for a Utah my529 can be between 0.174% and 0.187%. For every $1,000, you pay $1.87 with a 0.187% fee.

A third-party payment processor also charges 3% for credit and debit transactions to make a contribution. All bank account ACH transfers are free.

Does CollegeBacker Have Other Savings Plans?

No, just 529 college savings plans.

There are several different tax-advantaged college savings plans you can open for your child. Perhaps you know of 529 plans, Coverdell accounts and even prepaid tuition plans.

However, CollegeBacker only recommends 529 college savings plans. The primary reason for choosing a 529 plan is for their flexibility. This plan type is easy to qualify for, has high annual contribution limits and all withdrawals are tax-free for qualified education expenses like tuition, room and board, books and computers.

How 529 Plans Work

529 plans can seem confusing at first glance. If you use a Roth IRA to save for retirement, the college savings equivalent is a 529 plan.

One reason for the complexity is that most states offer their own 529 plan. Yet each plan can have different costs and investment options. You can join any state’s 529 plan even if your child won’t attend college there.

CollegeBacker can recommend your home state’s 529 plan or a different state’s 529 plan. For example, you might live in Tennessee but you might join Utah’s my529 plan because of their low plan fees.

But your home state might be CollegeBacker’s recommendation for you. This can be the case when your state lets you deduct 529 contributions on your state income tax return.

Because they are a fiduciary financial advisory, CollegeBacker does not accept commissions for recommending a certain 529 plan. CollegeBacker does accept cash donations from CollegeBacker to cover its operating expenses.

CollegeBacker’s Investment Strategy

CollegeBacker doesn’t manage the investment portfolio. Each state 529 has its own investment team. For example, Utah’s my529 uses Vanguard.

Typically, 529 plans invest the plan funds into a stock and bond index funds. These funds have low fund expenses to keep your investment fees low. Fewer fees mean more of your contributions can earn passive income.

The plan administrator will invest more aggressively while your child is young. The Utah my529 plan, for instance, invests in stock and bond funds managed by Vanguard.

As your child approaches college age, the plan shifts to a more risk-averse allocation to preserve the fund balance. Before enrolling in a specific 529 plan, you can see the investment glide path. This plan lets you see the planned asset allocation based on your child’s age.

Because you can invest the contributions in the stock market, you can earn potentially higher returns than relying on a bank CD. Like any investment, 529 contributions do contain some risk and all investors should be aware your investment does not always increase in value over time.

Tax Benefits of CollegeBacker 529 Plan

One of the reasons so many people use 529 plans to save and pay for college is the tax advantages. Similar to a ROTH IRA, the money you invest into a 529 will grow tax-free – meaning you don’t pay capital gains tax.

Then when it comes time to withdraw the funds to use for qualified educational expenses, you won’t pay any tax either.

Your 529 plan contributions do not qualify as a federal tax deduction but they may qualify for your state tax deduction. Each state is a little different on their tax savings for 529 plans, and it’s important to know how each state’s rules on deductions.

How Can I Make Contributions

It’s easy to contribute to any CollegeBacker 529 plan. CollegeBacker only requires each contribution to be at least $5.

The family member opening the account can link a bank account or pay with credit and debit cards. Bank transfers can take several days to complete but you don’t pay a processing fee.

You can add other family members to help manage the account. However, CollegeBacker only allows the person opening the 529 plan to make withdrawals. Your friends and family don’t need to be a plan manager to make contributions.

The easiest way to invite others to contribute is by sharing your child’s personal link. Grandparents, family and friends can click the link and make one-time or recurring contributions.

As friends contribute, CollegeBacker includes their name as a backer on your child’s account page like a crowdfunding platform. Other visitors won’t see another’s person’s contribution amount but will see that someone did participate into the 529 plan.

The plan owner (whoever opens the 529) does have 90 days to accept a friend’s contribution. If they don’t, CollegeBacker refunds the gift amount.

Using CollegeBacker

You can access CollegeBacker online using a laptop or mobile device browser. A mobile app is available for Apple devices as well. An Android app is in development as of February 12, 2020.

The CollegeBacker platform is easy to navigate. The claim is true that you can open an account within five minutes. You start the enrollment process on CollegeBacker. After choosing a state’s 529 plan, you activate your account on the plan provider’s website.

Once you activate the 529 plan, everything else you do is within the CollegeBacker website. You can schedule contributions from your account. When you have multiple child accounts, first decide which account you want to fund.

Inside your account, you can schedule recurring contributions. It’s also possible to invite others to make a contribution.

A third really nice feature is the ability to send gifts to other families even if they currently don’t have a CollegeBacker account. This is a great way to nudge someone in the right direction for starting up a savings plan for their child’s future education expenses.

CollegeBacker Savings Calculator

Anticipating how much your child’s 529 plan may be worth when they enter college can be a tough guess.

However, you can use CollegeBacker’s savings calculator to estimate the fund balance when the child turns 18. The calculator has you enter your monthly contribution plus the gifts from your family and friends.

Then, CollegeBacker also displays the projected returns if you were to invest your same gift into a taxable investment account or a savings account. They do this as a way for you to visualize why 529 plans are a much better tool than anything else when it comes to college savings.

Customer Support

While CollegeBacker is easy to navigate and their FAQs cover most questions, you may still need additional help.

You can email CollegeBacker at any time and live chat is available from 9 am to 5 pm Pacific Standard Time.

Their support team can answer your general questions about using CollegeBacker, however, CollegeBacker doesn’t provide personal investing advice.

Is CollegeBacker Safe?

CollegeBacker uses bank-level security to protect your personal data. The 529 plan provider you choose stores your investment account information. It’s likely that their security protocol is on par with CollegeBacker.

Is CollegeBacker Reputable?

I had someone from CollegeBacker come on The Money Peach Podcast in 2017 just a year after they got started….imagine me puffing my chest out right now as I say this.

However, since then they have grown and have been featured in Yahoo Finance, People Magazine, The New York Times, Forbes and The Wall Street Journal.

What Happens if CollegeBacker Goes Out of Business?

Your child’s college savings are not stored in CollegeBacker’s vault. If CollegeBacker were to close, the account balance is with the plan provider.

Theoretically, you can access your child’s account directly from the state’s 529 plan website. This is the same website you visit to activate the 529 plan to start making contributions.

Who Should Join CollegeBacker?

CollegeBacker is a good fit for those who want a hassle-free way to open a 529 account with low expenses and potential state tax benefits. Any 529 plan can offset college costs with tax-free funds. But CollegeBacker helps you quickly find the best 529 plan for your family.

You may also appreciate how easy CollegeBacker makes it for friends and family to send a gift.

Young children can benefit the most from a CollegeBacker 529 plan. This is because they can have their entire childhood to earn passive income. Even if your child has already started attending grade school, it may not be too late to start.

What I Like About CollegeBacker

• It’s free to use
• Minimum $5 investment
• Can open a 529 plan in minutes
• Family and friends can easily make contributions
• Tax advantages
• Ability to send gifts to other students

What I Dislike About CollegeBacker

• Processing fees for debit and credit card transactions
• Customer service via email or chat only

My Recommendation

You can open a 529 plan anywhere — at any brokerage account or with any financial advisor. However, none of them will have the perks that CollegeBacker has.

By perks, I am talking about the ability to make it extremely easy for family and friends to contribute to your child’s 529 plan. Or the ability to send a gift to another friend or family member in the form a 529 savings account for their child.

You also won’t have the dashboard and the user-friendliness of CollegeBacker. If you have a current investment account at a brokerage, you know what I am talking about — it was built for people who simply just want to invest.

If you currently don’t have a 529 account, I would highly encourage you to simply get started. You can open an account for free and all it takes is $5 to fund your account. The best time to start saving for college was yesterday. The second best time is right now.

2020 Fundrise Review

Name: Fundrise

Description: Fundrise allows everyday investors the ability to diversify their portfolio by investing in private market real estate. People who choose to invest with Fundrise, invest directly in hotels, apartment buildings, commercial real estate, and even single family homes. Since the company started in 2010, they have grown to over 500,000 investors and $2.5 billion in real estate investments with an average 5-year return of 8.42%.

Overall

4.8

• Minimum Investment
• Investment Options
• Liquidity
• Customer Satisfaction
• Fees
• Historical Performance

Summary

Overall summary of investing with Fundrise.

Pros

• $500 min investment 
• Open to all investors
• Different plans to choose from
• Low minimum investment
• IRA Accounts available
• 90-day money-back guarantee
• High ratings from current users

Cons

• Illiquidity: Can’t easily sell assets. Must wait five years to avoid the early redemption fee.
• Expensive IRA Option: You must pay a $125 annual fee to the third party IRA custodian

• Fundrise

Investing into private real estate via platforms like Fundrise is now an extremely popular way to earn reliable passive income.

Until a few years ago, the only option for most people was buying rental property, flipping houses, or requiring large upfront capital to gain access to a private investment deal. All of these require large amounts of time, focus and money.

However, with the use of technology and deregulation of the government and real estate, there is now an option for everyone to become a real estate investor.

This sector used to only be available to the wealthy. Now, you can invest in private real estate deals and earn potentially more than regular stock investments.

If you want to gain exposure to a new real estate sector, and you can invest $500 for at least five years, Fundrise can be the answer you’re looking for.

Fundrise Review 2020

Fundrise is a real estate investment platform that services over 500,000 investors and manages $2.5 billion in real estate investments. They also have a A+ rating with the BBB.

If you don’t remember, 2012 was a big year for private real estate investing. In this year, the JOBS Act opened the doors for regular non-accredited investors (i.e. non-millionaires) to invest in private real estate deals.

With Fundrise, you’re somewhere in between being a commercial real estate landlord and investing in real estate stocks. Instead of investing in companies that own apartments, office buildings and shopping centers, you directly invest in these properties.

In short, you are cutting out out the middle man and you are the bank.

Since you’re directly investing in real estate projects, you actually get paid before public investors. And, you can earn more because you’re assuming more risk.

With public real estate investing, the tenants pay the bank their monthly payment. After the company or real estate investment trust pays their bills, you (the investor) gets the remaining profit as a dividend.

The biggest difference with private equity real estate investing (Fundrise) is the profit/dividend goes directly to the investor. And, up until just a few years ago, the up front capital to get started was significant — upwards of $50,000 to get started and additional follow-up investments over time.

However, Fundrise allows investors access to private real estate starting at  $500 to open an account.

Advantages of Private Real Estate Investing

Since you’re a “stakeholder” instead of a “shareholder,” your investment can earn more dividends and equity appreciation than investing in public real estate.

More importantly, stock market dips don’t affect private real estate returns to the same extent as public real estate investment returns. Private real estate has its own set of risks, but you can expect monthly dividend payments each quarter.

Tax Advantages

Investing in private real estate through Fundrise should also consider an investment period of five ore more years. The reasoning has to do with the length of time you own the asset and how you will be taxed.

Short-Term Capital Gains

If you the investor only decided to invest for one year or less, your private real estate earnings are considered short-term capital gains and are taxed as ordinary income. This means they are taxed at your regular (higher) tax bracket. For example, if you held onto a Fundrise investment for one year or less and earned $1,000, you would be taxed just as if you were given a $1,000 raise with your employer.

Long-Term Capital Gains

However, if you were to invest and hold the investment for over one year, you would get a tax break through long-term capital gains tax and would be taxed at a lower rate than short-term gains. You the investor would then be subject to a tax rate of either 0%, 15% or 20%, depending on your tax bracket and filing status. Whichever long-term capital gains tax rates you fall into, they are still lower than your income tax bracket which means you save a lot of money come tax season.

IRA Option with Fundrise

You can also invest with Fundrise inside an IRA and take advantage of increased tax savings. Fundrise now offers IRA investments via a third party IRA custodian. There is an additional $125 annual account fee associated with opening an IRA and investing with Fundrise.

Disadvantage of Private Real Estate

There is one main disadvantage to investing in private real estate.

Your Funds Are Not Liquid

With Fundrise, you need to invest for the long haul. One of the reasons you can earn more with private real estate versus public real estate is the long-term investing horizon. If you want to sell your investment, it takes 60 – 90 days to get your money out. Also, there is a tiered penalty of 1% – 3% for withdrawing your funds from Fundrise before the five year mark. This is because Fundrise has to find another investor.

If you’ve ever tried selling a house, you know how long the closing process takes. Investing in private real estate is very similar.

Who Can Join Fundrise?

Any U.S. resident at least 18 years old can join Fundrise and it’s open to accredited and non-accredited investors.

Definition: The term “Accredited Investor” states you make at least $200k ($300k if married) a year and/or you have a $1 million net worth.

The year 2012 was very important for private real estate investing. In this year, the federal JOBS Act opened the doors for regular non-accredited investors to invest in these same deals.

Most private real estate investing sites only allow accredited investors, which is what makes Fundrise so unique at a startup investment of $500.

Who is Fundrise Best For?

Perhaps the more important question to ask is if you can benefit from investing in Fundrise.

Although there are many similarities, Fundrise is different than investing in real estate stocks and ETFs on Betterment or with your favorite investing app.

You should only invest money with Fundrise that you don’t need for at least five years. This is because of the 1% – 3% penalty for early withdrawal of your funds from Fundrise.  In addition to the penalty, you can expect 60-90 days from the time you decide to sell your share of the investment and see the funds in your bank account.

The one exception is during the first 90 days — Fundrise offers a 90-day satisfaction guarantee.

By nature, private real estate investing in highly illiquid.

Definition:  “Iliquid” means your money cannot be easily converted back into cash.

You cannot decide to sell your investment today and instantly get paid. As a reward for your commitment, you are more than likely to earn more passive income than other investments.

This illiquidity is why Fundrise and crowdfunded real estate shouldn’t be your only investment. Most of your investments should still be in liquid assets like stocks, bonds, and higher earned-interest bank accounts. With these three options, you have immediate access to cash if you need it.

Fundrise vs. Owning Rental Property

Maybe you’re already in a position to own rental property outright. But, you might also like Fundrise as an alternative way to invest in private commercial property. And, you can also own out-of-state rental property as well. This allows you to focus your efforts on local real estate and leave the rest to Fundrise.

Owning rental property can produce better results than Fundrise since you own the entire property. However, you know that rental properties require “sweat equity.” You also need to determine how valuable your time is.

If Fundrise can offer slightly less returns with minimal effort required, it can be a better option.

How Much Money Can You Earn on Fundrise?

Before you think you’re going to become the next millionaire real estate mogul, let’s clear the air:

• Fundrise is a great alternative to owning rental property
• It’s also a good alternative to only owning stocks, bonds, and a savings account
• Crowdfunded real estate doesn’t replace investing in stocks and bonds

Investing in private real estate is another way to earn passive income. It’s a good way to hedge against stock market volatility. And, you can gain exposure to another investing sector. But, its returns are similar to the broad stock market.

Most Fundrise investing plans have a projected return between 8.7% and 12.4% per year. This is slightly higher than the historic 7% annual return of the S&P 500, but you won’t become wealthy overnight.

In other words, don’t head to the Ferrari dealership yet.

Two Ways to Earn Income on Fundrise

Your investments earn passive income in two ways:

• Loan interest and tenant rent payments
• Appreciation of investment property values

You can either reinvest your dividends to earn more money. Or, Fundrise can distribute them to your bank account. To earn compound interest, you need to reinvest the dividends.

Loan interest and rent payments provide consistent monthly payments. Also, having the ability to sell properties at a profit helps Fundrise outperform the broad stock market.

Fundrise vs. Public REITs

For non-accredited investors, your two investing options are Fundrise eREITs and Public REITs.

Definition: “REIT” stands for Real Estate Investment Trust which is simply a company that owns, operates or finances income-producing real estate. 

Both options invest in a basket of real estate properties. The largest difference between both options is that Fundrise invests in private real estate, and public REITs invest in companies that manage properties.

It’s not quite an apples-to-apples comparison because Fundrise eREITs invest in different assets than public REITs.

The U.S. REIT index includes residential and commercial properties. But, there are a few other property types that Fundrise doesn’t invest in like self-storage complexes.

Fundrise Historical Performance

According to Fundrise, this is the average annual return for the whole portfolio:

• 2019: 9.47%
• 2018: 9.11%
• 2017: 11.44%
• 2016:  8.76%
• 2015:  12.42%

For these five years, your average annual return is 10.24% with Fundrise.

These annualized returns are net of fees and assume you reinvest dividends. Fundrise bases these numbers on the dividend income and property appreciation.

There are several eREITS to choose from, so you might not earn 10% every year. Plus, fund performance changes each year as market conditions change.

Never assume any investment will earn a profit each year.

Public REIT Historical Performance

To be fair, the public US REIT index had an average return of 7.49% for the same time period. That’s is definitely lower than with Fundrise, however the last year the public eREIT did much better than the Fundrise private eREIT.

You will notice much more volatility in the returns:

• 2019: 25.84%
• 2018: – 4.57%
• 2017:  5.07%
• 2016:  8.60%
• 2015:  2.52%

Past performance doesn’t predict future results for any investment. From 2015, it doesn’t look like you “lose” money with Fundrise. If you missed the 2019  U.S. REIT boom, your Fundrise returns can be notably higher.

Fundrise vs Public REITs in 2015 – 2019

Below you will see overall Fundrise has definitely outperformed the REIT sector.

Fundrise vs REIT Annual Returns
	Fundrise	REIT
2019	9.47%	25.84%
2018	9.11%	-4.57%
2017	11.44%	5.07%
2016	8.76%	8.60%
2015	12.42%	2.52%
5-Year Avg	10.24%	7.49%

Although, Fundrise is outperforming most public real estate investments through 2019, this might not happen every year. As you can see in 2019, Fundrise fell way short of the REIT market. However, every year before that Fundrise has continued to outperform the index.

How Does Fundrise Work?

Not every real estate project receives funding from Fundrise. In 2015, only 2% of over 2,000 proposals received funding. This high rejection is on par with other crowdfunding sites.

Before Fundrise approves a project, it undergoes this vetting process.

Initial Submission

Real estate companies send funding requests to Fundrise.

Basic Screening

Fundrise removes all proposals that don’t meet basic underwriting criteria.

Detailed Underwriting

A Fundrise team visits the potential property. An in-depth analysis of the local area and investment potential is performed too.

Final Approval

If the project passes the in-depth analysis, Fundrise offers financing. The interest rate and is determined by the borrower’s risk rating.

When possible, Fundrise tries to be the primary lender. This reduces risk of loss if the project goes bankrupt.

Fundrise Risk Rating

Each approved property receives a risk rating. The system ranges from A to E with “A” being the least risky. Most properties either have a “B” or “C” risk rating. While the income potential isn’t as high as a “D” or “E,” the chance of default is lower too.

You can browse the active and past properties in each eREIT. In the property listing, you can see the risk rating, the rate of return, and the debt type.

Although you can’t invest in individual properties, looking at the portfolio before you invest is helpful. With this information, you know what property types you invest in. And, it helps you know Fundrise is legit.

If you live near a project, take the time to inspect it yourself. Then compare your thoughts to Fundrise in-depth analysis.

What Does Fundrise Invest In?

Before you invest in any stock, bond, or real estate project, you must understand the investment. You need to know what you’re investing in. And, you need to know how the investment makes money. More importantly, you need to understand how it loses money.

What makes Fundrise unique is that you invest in private real estate. You own a direct stake in many real estate projects. With each investment, Fundrise divides your money among the different properties.

Because Fundrise is open to non-accredited investors, your only investment options are real estate investment trusts (REITs). Fundrise calls them eREITs, but they’re basically the same thing. With a Fundrise eREIT, the Fundrise team picks which properties to invest in.

Each eREIT has a different investing theme and strategy. Some focus on earning monthly dividends and others emphasize appreciating property values. Also, some eREITs only invest in certain geographic areas like the U.S. East Coast, Midwest, or West Coast.

Fundrise invests in these U.S. property types:

• Multifamily Apartments
• Single Family Townhomes
• Shopping Centers
• Office Buildings

By owning commercial and residential property, Fundrise diversifies your investment. Both real estate markets perform differently.

Many people have ambitions of owning rental property. But, they don’t have the time, cash, or desire to own physical property. Fundrise helps bridge the gap. You can directly invest in residential and commercial real estate projects with a $500 minimum initial investment.

Each of properties above are currently active projects. As you can see, each has the rating, the structure (debt or equity), and the projected return.

Also, each real estate project is either an equity or debt structure.

Debt vs. Equity Real Estate

When you look through the different properties, you will see either debt or equity financing in the description.

To new real estate investors, these two terms are confusing. So, let’s cover them first.

Debt Investments (Income)

• Lower risk and lower reward

Think of debt investing as getting a bank loan. In this case, you’re the bank and receive a monthly interest payment from the borrower. Most Fundrise debt investments are to improve apartments. Each month, Fundrise collects a fixed payment until the loan is paid in full.

Fundrise calls these payments dividends. It’s like the money you get from an interest-bearing savings account each month. And, the dividends deposit in your account quarterly.

Debt investments are less risky, but they have less income potential too. If a project fails, debt investors are usually the first to get paid.

Equity Investments (Growth)

• Higher risk and higher reward

With equity investments, you own a piece of the property. Instead of receiving fixed monthly dividends from interest payments, you earn money in two different manners:

• Rent payments
• Appreciation after the property sells

There are a few different types of equity investments Fundrise participates in. Some projects are “Preferred Equity” that’s more of a medium-risk financing. You still earn some fixed dividends, but you still rely more on appreciating property values.

With most equity investments, you don’t see large gains until a property sells for a profit. In other projects, Fundrise may increase the monthly rent to boost returns as the property value increases too.

Potential Investment Risks

So far, Fundrise produces annual positive returns each year. But, there are potential investing risks.

Investment Property Goes Bankrupt

If a property goes bankrupt, Fundrise investor must take the outstanding balance as a loss. Thankfully, Fundrise invests your cash in a basket of properties. So, you should have more winners than losers.

Property Values Don’t Appreciate

Equity investments depend on rising property values to reach the higher projected returns.

Sometimes, property values remain flat or continue to depreciate. Fundrise tries to buy growth properties for below potential market value. Doing so limits downside risk, but the local real estate market must support higher prices.

If it doesn’t, Fundrise may sell for a loss when the investing period ends.

Fundrise Investment Plans

To some extent, you can choose which Fundrise eREITs you invest in. But, you must select one of four investing plans.

	Starter	Core	Advanced	Premium
Minimum Investment	$500	$1,000	$10,000	$100,000
Target Diversification	5-10 projects	40-80 projects	80+ projects	80+ projects

For the purpose of the is post, we are only going to focus on the first two options: Starter and Core

With each plan, you pay the same flat fee of 1%:

• 0.15% advisory fee
• 0.85% management fee

Tip: Besides reading these brief descriptions, read each plan offering circular. These circulars are similar to an ETF prospectus. It tells you all the fund fees, potential risks, and investing strategy.

Fundrise Starter Plan

Currently, the investment allocation for the Starter Plan is:

• Income eREIT 2019: 40%
• Growth eREIT V: 20%
• Growth eREIT II: 20%
• Balanced eREIT: 20%

With the Starter plan, you can get started with only $500 minimum and they also offer a 90-day risk free grace period if you decide to change your mind on your investment. Your investment will be inside a diversified portfolio of real estate projects located throughout the United States that Fundrise identifies, acquires, and manages on your behalf.

For example, this is where you can expect your Starter Portfolio properties to be. Of course, the cities can change as Fundrise adds and sells properties.

Fundrise Core Plans

Once your balance reaches $1,000, you can pursue one of three advanced investing plans. If your investing goals change, you can easily change which plan you want.

Supplemental Income

• 74% Debt and 26% Equity Investing
• Projected dividends between 3.1% – 3.4%
• Projected appreciation between 5.65% – 6.8%
• Projected annual returns between 8.7% and 10.3%

This is the least risky of all investing plans. If you LOVE dividend income, this is your plan.

You won’t earn the most income, but you don’t have to rely on appreciating property values to earn larger returns.

As of this review, the Supplement Income plan holds the following eREITS:

• Income eREIT (40%)
• East Coast eREIT (30%)
• West Coast eREIT (30%)

27% of Core investors choose this plan with an average investment of $6,251.

Balanced Investing

• 64% Debt and 36% Equity Investing
• Projected dividends between 2.5% – 2.8%
• Projected appreciation between 6.2% – 7.5%
• Projected annual returns between 8.8% and 10.3%

This is the most popular of the advanced investing plans. The balanced investing strategy favors dividends, but you still have plenty of upside potential with equity investing too.

Having the balanced plan also lets you invest in all of the Fundrise eREITs:

• Income eREIT (20%)
• East Coast eREIT (20%)
• West Coast eREIT (20%)
• Growth eREIT II (10%)
• Growth eREIT VI (10%)
• Balanced eREIT (20%)

This is the most popular of the Core plans, with 42% of investors choosing this plan with an average investment of $6,376.

Long-Term Growth

• 57% Debt and 43% Equity Investing
• Projected dividends between 1.5% – 1.7%
• Projected appreciation between 7.6% – 8.5%
• Projected annual returns between 9.1% and 10.1%

Young investors might prefer the long-term growth investing plan. And, since you have to hold any Fundrise investment for five years for penalty-free withdrawals, you may decide to go all-in.

• East Coast eREIT (10%)
• West Coast eREIT (10%)
• Growth eREIT II (10%)
• Growth eREIT VI (30%)
• Balanced eREIT (40%)

31% of Core investors choose this plan with and average investment of $6,847.

Most of your income from this plan comes from rising property values. When Fundrise sells their investment stake, you receive a cut of the profit. You will also receive quarterly dividends from the debt investments.

To maximize growth potential, Fundrise looks for properties in growing areas. When possible, they invest in new or existing properties selling at a discount. So, they may “fix and flip” apartments. Or, finance new construction on vacant land.

Navigating the Fundrise Platform

Fundrise makes their platform easy to navigate. Although you must decide which investing plan to follow, Fundrise does the most of the work for you.

Recent updates make Fundrise more transparent. Now, you can instantly track your investing progress. And, you can see what project you’re investing in and why Fundrise holds them.

Before these updates, a common investor complaint was the lack of transparency. It no longer seems like your sending money to an online company and hoping it’s legit.

Try Fundrise Platform for Free

Joining Fundrise is easy. You only need to enter your personal information to create an account.

And, you can browse the platform for free.

Then, you must fund at least $500 from your bank account to make your first investment inside the Starter Plan. If you decided to increase your investment to at least $1,000, you can move up to one of the three Core plans.

Also, you have a 90-day satisfaction period. If you decide Fundrise isn’t for you, they refund your money penalty-free. After three months, you pay a redemption policy up to 3% during the first five years.

If your account balance is less than $1,000, Fundrise automatically enrolls you in the Starter Portfolio. Once your balance reaches $1,000, you can remain in the start portfolio or choose an advanced plan.

From personal experience, the Fundrise platform is easy to navigate.

What I Like About Fundrise

• $500 Minimum: One of the lowest minimums for real estate crowdfunding.
• Non-Accredited Investors Welcome: One of the few real estate platforms for the non-rich.
• Different Investment Strategies: Can pursue income, growth, or both!
• Instant Diversification: Fundrise invests in many residential and commercial projects. This limits downside risk so you earn a profit each year.
• 90-Day Satisfaction Guarantee: You have three months to try Fundrise penalty-free.

What I Don’t Like About Fundrise

• Expensive IRA Option: You must pay a $125 annual fee to the third party IRA custodian
• Illiquidity: Can’t easily sell assets. Must wait five years to avoid the early redemption fee.

Fundrise FAQs

After being a member with Fundrise and asking others about the platform, here are the most common questions you will hear asked.

Is Fundrise a Legitimate Platform?

Yes.

Fundrise is a real company that pays you real money. They are also regulated by the Securities and Exchange Commission. And, they send you a federal tax document each year.

Each month, you can also print off your monthly account statement to track your account balance too.

Is there an investment minimum?

The only investment minimum is the required $500 to open an account. After that, you can invest as much as you want.

Fundrise invests all your money according to the plan you choose. If you begin with the Starter Plan with $500, then $250 goes to the Income eREIT and $250 to the Growth eREIT.

You can also schedule auto-investing for free.

When does Fundrise pay dividends?

Fundrise pays dividends quarterly from Fundrise. You can track your dividend progress in real-time on the Fundrise dashboard.

And, you can either reinvest your dividends or deposit the earnings in your bank account.

What fees does Fundrise charge?

You pay 1% in annual fees on your Fundrise balance. If you invest $500, Fundrise keeps $5 each year plus 1% of the dividends you reinvest.

Also, each eREIT may have their own fund fees. For example, you might pay a 2% agent fee if Fundrise sells a property. These fees are relatively uncommon. But, it’s something to be aware of.

What are the Fundrise redemption fees?

Fundrise processes redemption requests at the end of each quarter. After the quarter ends, it can take 60 days to receive your cash.

There is also a tiered redemption fee depending on how long you hold your investments:

• First 90 days: 0% fee
• 91 days to three years: 3% fee
• Three years to four years: 2% fee
• Four years to five years: 1% fee
• After five years: 0% fee

How are Fundrise earnings taxed?

Each year, Fundrise sends you the proper tax documents. You receive a 1099-DIV for each eREIT. Long-time Fundrise investors who invest in eFUNDs receive a Form K-1.

Unless your eREITS are in an IRA, your dividends are taxable income each year. Unlike public REITs, they don’t receive the lower capital gains tax rate.

Does Fundrise have an IRA option?

Yes, but it’s not cheap. You must create a self-directed IRA with Millenium Trust Company.

Each year, you must pay a $125 annual fee for each eREIT in your IRA. The annual cap is $200. If you own at least four eREITs, the most you pay each year is $200.

This fee doesn’t apply to any non-IRA holdings. But, you will have to report your earnings as taxable income each year. So, you must decide if the fee is worth the tax savings.

My Takeaway on Fundrise 

As a user, my opinion is Fundrise is the great addition to diversify your portfolio. I myself would never put all my nest egg into just real estate, but I like the idea of diversifying into private real estate. And, if you don’t have the large upfront capital of $50,000 or more to get started in private real estate, Fundrise is a wonderful option.

In this 2020 Blooom review, I will share with you what Blooom is, how it works, and why it’s a great free tool for your own retirement plan.

2020 Blooom Review

Product Name: Blooom

Product Description: Blooom is a robo-advisor that is specifically for your employer sponsored retirement plan. Blooom connects to your current 401(k), 403(b), 457, 401(a) or Thrift Savings Plan (TSP) and manages your current investment options to with their propitiatory software. Blooom does not charge a percentage of assets under management and instead costs $10/month for all investors.

Brand: Blooom

Offer price: 10.00

Currency: USD

Overall

4.8

• Management Fee
• Hidden Fees (None)
• Accounts Supported
• Account Rebalancing
• Free Tools

• Try Blooom Now

First, let me share a little bit about how Blooom (yes, there are three o’s) has helped my own retirement plan.I was 23 years old and getting ready to start my career as a firefighter.

During the twelve week long academy, we would spend 50 hours per week fighting fires, pulling heavy hoses, climbing ladders, learning how to safely rescue a trapped victim, and how to not get killed inside our dangerous profession.

We also spent one hour at the very end of a long academy going over our retirement plan.

Since we were only given an hour, I did what most people do when choosing investments during employee orientation.

I just looked at the person next to me and chose the same ones he did.

A few years later I learned I could have my retirement managed by a financial advisor. I couldn’t believe how much they wanted to help me (wink wink). They would also help me lower my expensive 401(k) fees, which in all honesty didn’t even know existed.

With all of this talk about investing, 401(k)s, portfolios, advisors, and everything in between, I really didn’t which way to go.

Interview with their Founder

I had Chris Costello on Episode 99 of the Money Peach Podcast to learn as much as I could about Blooom and ask some questions about their service.

Do I have any control over my 401(k)?

Yes, you maintain full control of your account at all times.

Just 401(k) plans?

No. Blooom can work with 401(k), 403(b), 401(a), 457 and Thrift Savings Accounts.

How long does it take for Blooom to do a free analysis?

Approximately 5 minutes.

How long does it take Blooom to fix my 401(k)?

Within 10 – 30 days your account will be adjusted.

Does Blooom notify me when they make a change to my investments?

Yes, they will send you an email anytime a transaction is made.

Is it all done by computers or by people?

Blooom mainly uses an algorithm (computer) to determine how your investments are managed, but they also have registered advisors continuously testing and reconfirming the algorithms.

Is there someone I can actually talk to at Blooom about my 401(k)?

Yes, you can log into your account and connect via live chat, through email, or by calling 1-888-550-9956

Are the any other fees?

Blooom only identifies the investment fees in the account, there are most likely other administrative fees included that blooom will not identify. Plus, blooom is limited to the investment options in the employer sponsored retirement plan and will seek out the most cost-effective options from what is available and what is most appropriate for the client’s time to retirement.

Do I have to move my 401(k) anywhere?

No. As long as you have online access to your 401(k), Blooom simply connects to it just as you would logging in from your computer.

Is Blooom a fiduciary?

Yes. This term means they are required by law to act in your best interest, no matter what. Currently only 10% of financial advisors are fiduciaries.

Investing in your employer sponsored plan is an absolute must because of the pre-tax advantageous, the tax-free growth, and the company match if your employer has one.

Once you have your 401(k) operating as efficiently as possible, it’s time to start thinking about your next step – starting your ROTH IRA.

What Blooom Doesn’t Do

Blooom does not work with non-retirement plans, nor does it work with retirement investing outside of an employer sponsored plan. Therefore, if you have a ROTH IRA, Traditional IRA, SEP, or other types of investments not listed above, you will not be able to use Blooom.

Blooom vs DIY

If you remember the story above, I started my career and spent 60 minutes going over my 401(k) plan during employee orientation. Maybe this was you too, right?

In fact, a group of students inside our last money coaching program had stated the following when we first started:

• “I have a 401(k)…I think.”

• “Should I be contributing to my retirement, right now?”

• “Maybe my employer is saving for me.” (Sadly, many are not.)

• “I looked inside the pamphlet they sent me and it was really confusing.”

• “I’ll just save for my retirement later.”

• “I don’t know how my retirement is doing because I’ve never looked at it.”

The problem isn’t you. The problem is the system is completely broken and you are left to figure it out all by yourself.

This may be a little bit conspiracy-ish, but in his book Unshakeable, Tony Robbins interviews the world’s top 50 investors, and what he discovers is shocking to say the least.

Why are 401(k)s so confusing?

In a nutshell, our 401(k) plans are designed to be as confusing as possible.

Think about it – the mutual fund companies inside your 401(k) are required to send you a prospectus each quarter, but have you ever opened one of these up and peeked inside?

Do yourself a favor and try reading through the next one that comes come in the mail. I have friends who are licensed financial advisors with decades of experience who will tell you they don’t even have a clue what is going on in there.

Not to mention, it’s also 50-pages long and written in a very hard-to-read light gray ink with a size 6 font!

I don’t think these things were ever really meant to be read.

Your Choices Beyond Blooom

There are some great choices you can take to have a better chance at a rewarding retirement, and each one of them comes with it’s pros and cons based on your level of experience.

Robo-Advisor

Currently Blooom is the only robo-advisor dedicated to employer sponsored plans. Other great robo-advisors such as Betterment and Wealthfront are great, but they do not address your 401(k) or any of the other accounts Blooom helps you with.

Do it Yourself

According to the MarketWatch, there are on average 8 – 12 investment options for you to choose from inside your 401(k). These can be made up of mutual funds, stocks, bonds, company stock, money market accounts, target date funds, and more.

In addition to these options, you still need to identify the pros and cons for each of your investment choices in terms of fees, performance, and any underlying rules that are unique to a fund.

If you don’t have an investment background and you don’t want to dive in and learn, I would not recommend you use the DIY method when saving for your retirement and your future.

Pro: You have complete control inside your 401(k).

Con: Unless you have an investment background, this can often be overwhelming for the majority of plan participants.

Self Directed Option

The majority of 401(k) plans offer a self-directed account (SDA) into a brokerage account. This allows plan participants to still save pre-tax dollars inside their 401(k), but opens up their investment options to a whole universe of funds versus the limited funds inside the employer-sponsored 401(k).

Pro: You are no longer limited to the pre-determined investment choices inside your 401(k) and your financial advisor can now help manage your 401(k) plan via a Schwab brokerage account for example.

Cons: Since you now have access to a universe of investment options, it can become extremely overwhelming to choose where to invest. In addition, if you choose to have a your 401(k) managed by a certified financial advisor, you will be paying an added management fee which can eat into nest egg over time.

Summary

Investing in your employer sponsored plan is an absolute must because of the pre-tax advantageous, the tax-free growth, and the company match if your employer has one.

However, the current strategy the financial world would love you to follow is the one making them the most money from your retirement funds. Keep in mind, the financial world loves making finances as complicated as possible because the less you know, the more they make.

Instead of doing normal and following the plan the banks have set out for you, set aside five minutes right now just to see how much you are really paying in fees.

Remember, it’s free to get a checkup on your 401(k). 

Good luck my friends and thanks for being here.