Automatic For The People

robot_finance

For getting started with basic finance goals, we need robotic automation, not human resolution. I’ll explain.

Did you know that January 17th of each year is officially “Ditch New Year’s Resolutions Day?” This post lands squarely in the spirit and timeline of that tradition. Resolutions never work. Instead, automation works.

I’m a finance guy so my “automation, not resolution” idea pertains to your savings and investment goals. Like most sentient beings, you’d like to save more money and invest more money. But your best financial intentions for savings and investment in 2018 have already been ditched in advance of Ditch New Year’s Resolutions Day.

And I’m so, so sorry to learn your other 2018 New Year’s resolutions about eating clean, exercising more, and paying closer attention to family members isn’t working anymore. Same here.

If only I were a robot, I think, I would fulfill my resolutions so much better. Robot-Mike would never miss leg day at the gym. Robot-Mike would never eat those donuts. Robot-Mike would pay close attention to his beautiful children, instead of reading Twitter on his phone.

I just want to describe for you three automation things for savings and investment that worked for me in the past year. The beautiful thing about automation is that it brings that steely robotic resolve to solving the squishy human problem of savings and investment. Each one took about 10 minutes (maximum!) to set up. Then the automated process just hums in the background of your life. Human weakness regarding sugar, carbs, exercise-laziness and Twitter-distraction can’t knock these financial bots off track.

In the beginning of June 2017 I signed up for an automated savings program offered by my bank called “Tracker.” This is a goofy and effective savings scheme in which my bank slips a varying amount, between $1 and $9, out of my checking account and into my savings account, every Monday, Wednesday and Friday. The amount varies according to the bank’s own proprietary system, although it will not transfer any money if my checking balance drops below $100.

The “Tracker” app, with a picture of a dog, then sends me an encouraging text message to my phone every day about how much I have in my checking account, or how much I’ve saved, or some dumb factoid about either dogs, or money. This is silly except that I saved $504 over the course of 6 months without even noticing how. (Well, I noticed the text messages.)

And I know, $504 is not life-changing, but it’s also much better than not having that extra $504 in my savings account, without even trying. My bank built the Tracker app but I’m pretty sure any bank you may use in 2018 will let you set up an automatic transfer program to slip small amounts out of your spending account and into a harder-to-spend-from savings account.

In May 2017 I wrote about a funny savings app called Qapital (which I enjoy pronouncing incorrectly as Kwapital.) Qapital, like Tracker, slips small bits of money – you determine the amount and timing – out of your checking account and into a Wells Fargo account you access through the app. Qapital encourages you to set final goals for your savings (I chose to save $500 in order to purchase shares of stock for my daughters) and to pick the triggers for transferring. My trigger was a “52-week rule,” which started with $1 in the first week, and increased by $1 each week that followed. By November 2017, right on schedule, my Qapital savings account reached $500. The beautiful thing about Qapital, like the Tracker app, is that the tiny amounts of weekly money never pinched. I never missed the money removed from my checking account.

In May 2016  I downloaded and started investing through the Acorns app. Like Qapital, Acorns lets you determine an amount you’d like to automatically transfer from your checking account on a daily, weekly, or monthly basis. After a bit of prodding from the app, I settled on a plan to transfer $5 per day to Acorns according to their “Aggressive” (aka risky) portfolio of ETFs. Why $5?

Like many caffeine addicts, I can easily spend $5 or more on coffee and other non-essentials per day, so I decided $5 was the right “punishment” amount to contribute to Acorns.  21 months later I have $5,875 in my Acorns account. Most importantly, I’ve never missed the daily $5 hit to my checking account.

Maybe you’re thinking that $500 of savings ($1,000 if you count both Qapital and Tracker!) or $5,875 of investments doesn’t make a whole lot of difference in one’s life. You’re not impressed.

“Big deal, finance blogger,” you’re thinking, “what about the real money?”

“Ok, Big Shot,” I’d respond to you, “fine.” All of these automated processes work at a larger scale as well. Crank it up to 11. Make my day. Go for the real money. That would really show me up. But also, the Acorns app has a neat little projection graph that shows my dumb $5 per day building up to a $100,000 portfolio by age 65 and a $400,000 portfolio by age 85. Which could matter some day.

automatic_for_the_peopleThe point here isn’t that your favorite finance blogger is really good at savings and investments. Rather, the opposite. The point is that anyone not very good at savings and investment could produce similar (or far better!) results while hardly trying. The further point is that automation of savings and investments means you don’t have to be disciplined throughout the year. You don’t have to stick to any resolutions. You make the robot do the thing for you.

After the initial 10-minute set-up of automated transfers, just literally do nothing the rest of the year. Heck, the rest of your life. Doing nothing becomes, in fact, the key to your success. “Doing nothing” feels like a New Year’s resolution we can stick to, long past January 17th.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle

 

Please see related posts:

Whoa…Acorns is really good

Qapital is goofy but might help kickstart savings

 

 

Post read (128) times.

Look Back Look Forward – New Years Resolutions

JanusIt’s January, the month named for Janus the two-faced Roman God who looked both backward to the past and forward to the future.

Looking back over 2016, I realized that I learned about three types of investment accounts, each of which – depending on your phase of life – might make for a nice New Year’s Financial Resolution.

Maybe best of all, all three investment accounts work well even if you start with small dollar amounts. And they each scale up to larger amounts, if you have the means.

Contemplating the start of a new year prompted me to divide these investment account ideas into three categories, past, present, and future. Or you could categorize them as investment accounts for the young, the middle-aged, and the old. I’ll start with the young.

Millennials – Automatic Deductions – Acorns

People in your twenties: This one’s for you. The number one key to investment success is starting early in life, yet we often don’t for a variety of perfectly good reasons. The Acorns app addresses many of these barriers, through automatic regular deductions into a super-simple, low-cost, diversified portfolio. The app takes about five minutes and just $5 to get started. It’s mobile-friendly and has an intuitive interface. Acorns gives you a picture of your investment value now, but interestingly also shows you graphs of how your investing activity – when you stick with it month after month and year after year – will grow your account over the coming decades. I’m a big fan of anything that shows the awesome power of compound interest.

acorns_2000
My Jan 1, 2017 balance, after just 7 months

Automatic deductions from your checking account into an investment account is not just A WAY to invest. It’s really THE ONLY WAY to invest for most people of modest means. In my experience, nobody has a surplus at the end of the month unless we’ve devised a trick to whisk our money out of our account before own greedy little hands spend it. The Acorns App is the latest, best, trick to do that automatic whisking. I set up a $50/week automatic program in May 2016, just before I wrote my blog post on it. This week I have more than $2,000 in my account, and I barely noticed how it got there. This is painless investing, made super simple.

If you are 20-something and wondering how to begin investing, here’s the solution to your New Year’s Resolution. If you have a 20-something in your life, send them an Acorns invitation link.[1]

Parents – College Savings – 529 Accounts are for grandparents

Parents: This resolution is for you if you’re in my demographic. Two kids. Big college bills ahead (should they choose that path.) The more I’ve learned about 529 college savings accounts, the more I’d always recommend parents avoid them and build up tax-advantaged retirement accounts instead of 529s.

mixalotAnd yet, Sir Mix-A-Lot, let me add to that statement a big BUT:

529 accounts make a lot of sense for grandparents who have a surplus. Grandparents who have solved their retirement needs already can use 529s to help the younger generation. Grandparent 529s do not count against financial aid calculations. Also, unlike IRAs and 401(k)s, there’s no age or income limit on making contributions. Finally, 529s are even helpful for estate planning purposes. All of these factors make 529s a better deal for grandparents than parents.

So here’s my New Year’s resolution advice to parents: You might not prioritize 529s yourself (compared to a retirement account) but work to open up an account so that you can invite YOUR parents to contribute toward their grandchild’s college fund. Do it. It’s the right way to approach 529 accounts.

Older generation – Passing on Values – Donor-Advised Funds

I am not yet part of the older generation – at least in my own mind – but opening a Donor Advised Fund (DAF) in 2017 is actually my own personal New Year’s Resolution.

The idea of a DAF is that you can make a charitable contribution this year – reaping an income tax benefit now – while parceling out charitable gifts over a longer period of time, even decades. Investments in the DAF can grow in a tax-advantaged way, while you take your own sweet time to decide who should receive your philanthropic dollars in the coming years.

charitable_givingIf you already have an investment advisor or brokerage firm, you could ask them about the availability and terms for opening up a DAF with them. If they don’t offer DAFs or you don’t like their terms, you should know that a few of the online supermarket brokerages have account minimums as little as $5,000, and charge a reasonable 0.6 percent annual fee. The point is you don’t need $25 million to open up your own private foundation. A DAF makes tax-advantaged philanthropic-giving available to the masses.

But what is the real reason for a DAF, in my mind? And why is this my own New Years’ Resolution, and maybe could be yours too?

Just this: The DAF allows you to appoint trustees, who then share in the decision-making for future charitable gifts. I have in mind appointing my 6 year-old and 11 year-old as fellow trustees of my $5,000 DAF endowment. Could we three generate maybe $250 in investment income every year – a 5 percent annual return – that we then plan together to give away each year? That renewable $250 in annual giving – driven by conversations with my kids – is the real point of the DAF. What I’m really getting for my $5,000 contribution is something of immense value: a conversation-starter.

I know I can’t move the dial of any particular charity with just $250 per year, or even a one-time $5,000, but I can create a vehicle to talk about values with my kids. We can engage in a forward-looking conversation about the uses, and meaning, of wealth.

If you’re in the older generation, with an even bigger surplus, maybe that’s a useful New Years’ resolution for you too.

I wish you peace and prosperity in 2017, and welcome your input into what financial topics you would like to read about in the coming year.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

 

See related posts:
College 529 Accounts are for Grandparents

This Acorns App rocks

DAFs help you create a pretty cool legacy

 

[1] And if you sign up using this particular link (rather than the generic one I inserted above in the main section), I get a $5 referral fee and you get a $5 starter fee, because those Acorns people are clever and give out $5 referrals to both inviter and invitee. But I’m seriously not whoring myself and my blog for the $5. This app is good.

Post read (156) times.

Check Out This Acorns Thing

acorns_appI downloaded a fin-tech app called Acorns a few weeks ago. I recommend you drop this blog post now, text your favorite twenty-something, and make sure they’ve downloaded this thing already. I am now an evangelizing convert.

Here’s a short list of problems many people have in getting started investing and building wealth.

  1. No money (duh, obviously)
  2. No time to figure out investing
  3. No interest in following stock and bond markets
  4. No confidence navigating investment choices
  5. No plan for ongoing automation of investments
  6. No experience avoiding high-cost service providers

Each of these problems afflicts twenty-somethings even more than the rest of us.

And yet, as any fifty year-old who wakes up from a few decades working and paying down debts learns (when they finally make that appointment with an investment advisor) even small amounts of money socked away decades ago would have made the problem of retirement and wealth-building so much easier.

But how does anyone even begin? As I’ve mentioned before, beginning is perhaps the hardest part of investing. Enter Acorns.

Endorsing a product

Now, I really hate to endorse a specific product or company when I write about finance topics, because part of my whole “ex-banker in recovery” identity is to form opinions without the reality – or even appearance of – “selling a product.”

Having said that, I’m almost annoyed with myself to say: this is an awesome product and every investment beginner should be using it. The crazy thing about Acorns is that they’ve addressed all six of the problems I listed above.

spare_changeNo money?

The app invites you to begin with an initial $5 bank transfer. The app’s opening pitch is that it will invest your “spare change.” They use a technique Bank of America pioneered about 10 years ago, which was to “round up” little transactional odd-lots – the equivalent of pocket change you’d throw into a coin jar at the end of the day – and invest it for you. Acorns tracks these spare change amounts from all accounts you choose to link – such as a debt, credit, or checking account – and automatically transfers it into an investment account. Pretty clever.

No time?

The app took about 5mins to get started, and another 3 minutes that first day entering a bit of personal data and linking bank accounts. I never spoke to a live human, which is great. I never set aside time to do it. I set it up on my phone, in between my kids talking to me about their day.
“No, sweety, I didn’t really listen to your story about the turtle. Can’t you see Daddy’s moving money around with his phone? This is 2 minutes of sacred Daddy-time.” (I’m a really good parent.)

parenting with phoneNo interest?

After about 2 minutes of entering personal information, the app suggests one of five portfolios on a risk spectrum from “Conservative” to “Aggressive.” Each of these is built from a blend of Exchange Traded Funds (ETFs) to get you exposed to bonds and stocks, but without having to know anything about these things. While I personally find markets fascinating, I think the ultra-simplification makes sense for everyone who finds stock and bond markets utterly dull.

No confidence?

With no investment choice to make beyond one of five portfolios on a risk spectrum, app users don’t get stuck by the deadly indecision-problem – what behavioral economists call “the paradox of choice” – in which we avoid something entirely because we can’t face the problem of choosing between too many options.

Based on my age, income and wealth, the app suggested the merely “Moderately Aggressive” portfolio for me.

black_camaro
Bitching Black Camaro because YOLO

“Are you calling me old?” I hissed angrily into my phone. I chose the “Aggressive” portfolio instead, like the middle-aged man who rents the black Camaro convertible because #YOLO.

No plan for automation?

This, right here, is the most powerful part of the Acorns app, since automation is the key to moderate-income people getting wealthy. The app continuously pestered me to commit to an automatic investing program, either daily, weekly, or monthly, and in any amount, from as little as $1 per transfer. It prompted me so many times that I finally agree to do it weekly, in an amount affordable to me.

By the way, nobody’s accumulating much money based on the “spare change” gimmick I described above, but this automated-invested feature is what will make a twenty-something a millionaire in the long run, with hardly any suffering along the way.

Cost avoidance?

Acorns charges $1/month until you get $5,000 with them, after which they charge 0.25 percent per year on your portfolio. This is the kind of rock-bottom robo-advisor fee that has the investment advisory business a little freaked out right now. I like it.

Acorns’ limitations

Can I come up with some criticisms of this thing? Of course I can.

  1. I personally wouldn’t choose a blend that includes even the 10 percent corporate and government bonds I got – despite the fact that I chose “Aggressive” as my allocation. Fortunately my “Aggressive” Acorns allocation is 90 percent risky, the way I like it.
  2. A person confident and informed about investments could do all of what Acorns does without paying the Acorns fees, obviously. Their fees are low, but yes you could do this yourself, fee-less.
  3. The simplicity of the app does not allow for a complete suite of investment activities. I happen to think simplicity almost always works better than complexity when it comes to our personal investments, but of course the entire money management industry is built on the opposite idea – the conceit that complex tools help us “beat the market.” Not only can you not execute butterfly call spreads or hedge foreign-exchange exposure with Acorns, but you can’t even buy individual stocks. Again, that’s a feature not a bug from my perspective, but shockingly not everyone sees things my way. (Not yet they don’t.)
  4. If you already have some wealth, and your system works for you without too much cost, Acorns seems mostly unnecessary. It’s definitely geared toward the “just getting started” crowd.

On the other hand, I’m not even the right demographic for Acorns, and I’m a total convert.

So…basically…like, download this thing right now.

 

A version of this post ran in the San Antonio Express News.

 

Please see related posts:

Getting rich slow through automation and small regular contributions

Getting started is the hardest part of investing

Automation may be the most important feature of your investment program

 

Post read (1396) times.