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Personal Capital vs Mint: My Ratings After Using Both for Years

December 16, 2021 by Rob Berger

Personal Capital and Mint are two of the most popular personal finance apps today. I’ve used both for many years. In this article we’ll compare Mint vs Personal Capital to see which one is best.

As is often the case, both Personal Capital and Mint have pros and cons. In some cases Personal Capital is the best option. In other cases Mint is the better choice. And because both are free, there’s even an argument to be made for using both. So let’s dive in.

Personal Capital vs Mint
  • Overview of Personal Capital and Mint
    • Personal Capital
    • Mint
  • Personal Capital vs Mint Comparison
    • Similarities
    • Differences
  • Who is Personal Capital Best For
  • Who is Mint Best For
  • Should You Use Both Personal Capital and Mint?
  • Can Personal Capital or Mint Track Bitcoin and Other Crypto?
  • How do Personal Capital and Mint Make Money?
  • Final Thoughts

Overview of Personal Capital and Mint

Both Mint and Personal Capital are online tools designed to help us manage our money. The both enable users to connect their financial accounts for automatic download of transactions and balances. And they are both free.

Personal Capital

Personal Capital is owned by Empower Retirement, which itself administers more than $1 trillion in assets through retirement accounts. Personal Capital is a registered investment advisor in the business of managing investors’ portfolios. For our purposes, we will focus on the free financial tool that if offers, regardless of whether or not you use its investment management services.

The Personal Capital tool enables you to link your financial accounts. You can link bank accounts (checking, savings, money market accounts and CDs), credit cards, student loans, mortgages, car loans, retirement accounts (e.g., 401(k) and IRAs), taxable investment accounts, crypto coins and tokens, and real estate.

Once linked, Personal Capital provides a wealth of tools to monitor, manage and analyze your money. A glimpse of its dashboard reveals the power of this tool:

Personal Capital Dashboard

Beyond the dashboard, Personal Capital offers the following features:

  • Track income and spending by category
  • Track your net worth
  • Evaluate the asset allocation of your investments
  • Evaluate your investment fees
  • Calculate whether you can retire
  • Plan your retirement with multiple scenarios
  • Track upcoming bills
  • Have Personal Capital analyze your portfolio and make suggestions

Of all of these features, those related to investments are Personal Capital’s strongest features.

Try Personal Capital

Mint

Aaron Patzer founded Mint more than a decade ago, and Intuit purchased it for $170 million in 2009. Mint was the first personal finance app to aggregate a user’s accounts all in one place. While that’s commonplace today, it was unprecedented 15 years ago.

Mint Dashboard

As with Personal Capital, users can link virtually all of their financial accounts to Mint. Once linked, Mint provides tools to manage and evaluate your finances. Some of its key features include:

  • Budgeting by category
  • Create savings goals
  • Create goals to get out of debt
  • Check and monitor your credit score
  • Track your investments
  • Track upcoming bills

Of all of these features, those related to budgeting and goal setting are Mint’s strongest features.

Personal Capital vs Mint Comparison

Similarities

Both Personal Capital and Mint share a number of similarities:

  • Account Connections: Both enable users to connect to just about any financial institution with an online login. You’ll need to provide your username and password to create the connect, but both sites uses strong security features to keep user’s data protected. And at no time can either company control the money in any of a user’s accounts.
  • Financial Dashboard: Both apps offer a financial dashboard where user’s can get a high level view of their investments. Personal Capital’s dashboard shows your net worth, budget, cash flow, investment portfolio balance, retirement savings and emergency fund. Mint’s dashboard shows your upcoming bills, any goals you’ve created, spending, your credit score, monthly budget and investments.
  • Cost: Both apps are free, although as described below, the way they each make money is different and does affect the user experience.
  • Budgeting: Both apps offer budgeting tools to track your income and expenses. As noted below, however, Mint’s budgeting features are more robust.
  • Investing. Both apps offer tools to track your investments. As noted below, however, Personal Capital’s investing features are more robust.
  • Connecting Accounts: Both Personal Capital and Mint enable you to connect your financial accounts to the app. While this feature is similar with both services, I’ve found Personal Capital’s connection to more reliable. There are still some accounts I cannot connect to Mint no matter how often I try.
  • Bill Tracking: Both apps track your monthly bills and alert you when they are due.
  • Mobile Apps: In addition to their websites, both offer apps for smartphones, tables, and Apple watch.

Differences

Here are the key differences between Mint and Personal Capital:

  • Investing Tools: While both apps offer tools to track your investments, Personal Capital is by far the better option. There are several critical features it offers that Mint does not. First, it can show you details of your asset allocation, down to the specific stocks of fund you own. It automatically calculates your investment expenses and how those fees will eat away at your wealth over time. And it can analyze your portfolio and make recommendations based on your risk tolerance.
  • Budgeting Tools: When it comes to budgeting, Mint is the winner. Personal Capital will track your expenses, categorize them, and present spending data with useful graphs. What it doesn’t do, that Mint does, is allow you to create a budget with spending goals by category. Having said that, if budgeting is your primary focus, there are better options than Mint.
  • Goals: Here Mint is the better option. You can create savings goals or a goal to get out of debt. Mint offers tools to determine how much extra, if any, you should pay toward your debt or savings goal. It also tracks your progress. Personal Capital doesn’t offer this feature.
  • Retirement Planning: Personal Capital offers a robust retirement planner. Using Monte Carlo simulation, it can estimate your retirement readiness. You can plan for income (e.g., social security or a pension) during retirement and expenses (e.g., monthly expenses, vacation, home purchase). You can also create multiple retirement scenarios and run them against each other. Mint doesn’t offer this feature.
  • Credit Score: You can monitor your credit score through Mint. Personal Capital doesn’t offer this feature.

Who is Personal Capital Best For

Without question Personal Capital is best for those with investments. It can track retirement accounts (e.g., 401(k), 403(b), TSP) as well as taxable accounts and even HSAs. Earlier this year it also adding support to track crypto prices.

Personal Capital Asset Allocation

Once tracked, it offers some of the best tools available to retail investors. You can drill down into the details of your asset allocation across all of your investment accounts. It offers an excellent fee analyzer to evaluate your investing costs and their effect on your wealth over time. And its retirement planner is one of the best available today.

Unlike Mint, Personal Capital could serve as the only financial tool you use. While it doesn’t offer some of the budgeting features Mint does, its cash flow tracking and automatic categorization of expenses have been more than sufficient for our purposes.

Who is Mint Best For

Mint is a better option for those with little or no investments who want to manage their budget. Mint’s lack of investment tools is not an issue if you have no investments. And Mint’s budget tools, including its savings and debt payment goals, are more robust than what Personal Capital offers.

One might also add Mint’s ability to track your credit score. I find this feature less compelling. Today you can track your credit score through just about any credit card you have as well as many other financial institutions.

Should You Use Both Personal Capital and Mint?

Because both apps are free, many people do use both. One could use Personal Capital to track investments, while using Mint for budgeting. The downside is that it does require you to log into two different apps to manage all of your finances. So while it is one option, sticking to one app or the other if possible is ideal.

Can Personal Capital or Mint Track Bitcoin and Other Crypto?

Personal Capital can track Bitcoin, Ethereum and other crypto coins and tokens. It can track meta tokens such as SAND and MANA, as well. That said, Mint allows you to connect your Coinbase, Coinbase Pro, Gemini or BlockFI accounts, while Personal Capital does not. Instead, with Personal Capital you create a manual account and add your Crypto and balances.

How do Personal Capital and Mint Make Money?

While both apps are free, it’s important to understand how they each make money. Their revenue models have a direct affect on your use of each tool.

Personal Capital makes money from those users who decide to use their wealth management services. As a result, they do require your mobile number as part of the signup process and they will call you. They offer to run a free analysis of your investment portfolio and how they believe their services can help you.

You are not required to accept this free analysis or use them to manage your investments. Either way, you can continue to use Personal Capitals financial tool for free.

In contrast, Mint uses an advertising model. As a result, you will be presented with targeted offers for bank accounts, credit cards and investment accounts. The integrate these offers into the user invoice, so it’s impossible to avoid them.

In either case, I find these revenue models to be benign and well worth the free tools.

Final Thoughts

For me, Personal Capital is better than Mint because of its investment tools. Further, its budgeting tools are more than sufficient for our needs. For those just starting out and with minimal investments, however, Mint may be the better option.

Filed Under: Investing, Personal Finance

The 7 Levels of Financial Freedom

December 9, 2021 by Rob Berger

The Financial Independence, Retire Early (FIRE) movement has underscored the power of financial freedom. It’s the central theme in my book, Retire Before Mom and Dad. Indeed, financial freedom is the guiding principle of how I manage money.

While financial freedom sounds good, however, many see it as a destination that’s at best 30 or 40 years away. To them, it’s just a fancy way of describing retirement.

I couldn’t disagree more.

While it’s true that we can and should define what ultimate financial freedom looks like (see below), we can begin to reap the benefits in a very short period of time. Financial Freedom is more of a journey than a destination.

It’s for this reason that my book walks through what I call the 7 Levels of Financial Freedom. And that’s what we’ll cover in this article. Be sure to check out the free financial freedom calculator near the end of the article.

Table of Contents
  • 4 Key Foundational Principles of Financial Freedom
  • The 7 Levels of Financial Freedom
    • Level 1: One Month of Expenses Saved
    • Level 2: Three Months of Expenses Saved
    • Level 3: Six Months of Expenses
    • Level 4: One Year of Expenses
    • Level 5: Five Years of Expenses
    • Level 6: Ten Years of Expenses
    • Level 7: Twenty-Five Years of Expenses
  • A Simple Financial Freedom Calculator

4 Key Foundational Principles of Financial Freedom

First, there’s value to money that you never spend. This is counter to what must people think. Even retirement savings will eventually be spent, even if it’s decades later. Until the money is spent, and even for money we never spend, however, there is tremendous value.

What’s the value? Our freedom.

Second, the benefits of financial freedom are experienced much sooner than retirement. The ability to retire is an empowering feeling, but it’s not the only kind of empowerment that savings can afford. Lesser tiers of financial freedom can change someone’s mindset and options for the better. The seven levels below will explain this more clearly.  

Third, the levels of financial freedom are calculated based on monthly expenses, not income. The focus should be on how many months of living expenses our savings can cover. That’s real freedom. As a result, we focus on what percentage of our income we can save.

Finally, we use Bill Bengen’s 4%  withdrawal rule when calculating Level 7 Financial Freedom. In other words, we achieve the ultimate financial freedom when are savings equals 25x our annual expenses. For example, a retiree who spends $54,000 a year in retirement would need $1,350,000 to reach Level 7.

The 4% rule has come under fire lately. Some say that given high stock valuations and low bond yields, it’s no longer viable. Morningstar recently released a report claiming 3.3% is the new “safe” withdrawal rate. Time will tell who is right. For our purposes, we’ll continue to use 4% for planning purposes only.

The 7 Levels of Financial Freedom

For each level you’ll find how many months it will take to reach the level if you save 10%, 15%, 20% or 30% of your income. Keep in mind that the number of months won’t change for different income levels. In each case, it’s your savings rate that determines your time to each level.

You can run your own numbers with the financial freedom calculator here (described in more detail below).

Level 1: One Month of Expenses Saved

Level 1 might not seem like Financial Freedom, but it’s an important start to your journey. It’s here that you stop living paycheck-to-paycheck. You may only have a one-month cushion, but that’s a big deal. It gives you breathing room for when—not if—the unexpected happens.

Studies show that most people cannot come up with $400 for an emergency. According to a study by the Federal Reserve, 4 in 10 Americans couldn’t cover a $400 emergency with their savings. In other words, most Americans have not achieved Level 1 Financial Freedom.

Time to Level 1:

Savings RateMonths to Level 1
10%9
15%5.5
20%4
30%2.3
Assumes a 5.0% Rate of Return (very conservative)

Note that saving 20% cuts by more than half the time to Level 1 as compared to saving 10%. That’s because as we save more we spend less. We thus get the double benefit of saving more money and need less money to meet our goal of one month of expenses. I call this the Boomerang Affect in my book.

Also note that compounding has very little to do with reaching Level 1. We haven’t yet saved enough money over enough time to see the benefits of compounding. That comes around Level 4 and after, when the majority of our wealth is from compounding.

Level 2: Three Months of Expenses Saved

At Level 2, we reach what most financial gurus say is the minimum emergency fund you should have. You now have enough money in the bank to handle most emergencies. The money could even help you survive during a short-term job transition.

Reaching this point should taste sweet. If an unexpected expense pops up, there isn’t a need to borrow money to cover it. This is important given avoiding high-interest debt is essential to reaching financial freedom. 

Time to Level 2:

Savings RateYears to Level 2
10%2.1
15%1.4
20%1.0
30%0.6
Assumes a 5.0% Rate of Return

The effect of compounding interest is still in its nascent stage by Level 2. The example shows that around 5% of the ending balance comes from investment returns. Building wealth takes time.

The numbers do change when the savings rate changes. Changing the savings rate in the example to 20% instead of 10% halves the time it takes to reach Level 2. As an investor lives further and further below their means, their journey toward greater financial freedom becomes exponentially faster.

Level 3: Six Months of Expenses

Level 3 is simply the upper bound of an emergency fund, with 6 months of expenses. The balance should be able to cover the unfortunate possibility of all insurance deductibles coming due simultaneously. An extended unemployment period also would be manageable. Compound interest begins to become noticeable.   

Time to Level 3:

Savings RateYears to Level 3
10%2.1
15%1.4
20%1.0
30%0.6
Assumes a 5.0% Rate of Return

Level 4: One Year of Expenses

Level 4 is when things start to get interesting. Two things happen.

First, with one year of expenses saved, you can handle a significant bout of unemployment. Today the average person will change jobs 12 times during their lifetime. While we hope these transitions go smoothly, Level 4 Financial Freedom will help you ride out any bumps in the road.

Second, we start to see the benefits of compounding, something I call the Money Multiplier in my book. As we now know, most of our Freedom Fund doesn’t come from putting aside money each month. That’s how it starts, of course, when we are trying to reach Level 1, 2, or even 3.

Eventually, however, the money we save starts to earn a nice return. In fact, if done right, our investments will produce far more income than our jobs. That takes time, and it’s here at Level 4 that we start to get a glimpse of the power of the Money Multiplier.

Time to Level 4:

Savings RateYears to Level 4
10%7.5
15%5
20%3.7
30%2.2
Assumes a 5.0% Rate of Return

Level 5: Five Years of Expenses

At Level 5, you’ve already exceeded the savings that most will achieve in a lifetime. Assuming $50,000 in annual expenses (the round number makes the math easier), for example, you’ve amassed $250,000 in savings and investments. At a 9.3% return (the average return of an 80/20 portfolio over the last 90 years), your Freedom Fund will generate almost $25,000 in returns over the next 12 months. In other words, your investments are generating income approaching 50% of your annual spending.

Level 5 also represents a danger point. It’s here that some may become complacent. With so much money saved, it’s easy to return to old habits or to lose focus. Knowing that now will help you avoid this danger when you reach Level 5.

At this point you may be wondering what Level 5 Financial Freedom feels like. After all, one could say this is nothing more than traditional retirement savings. Oh, but it’s so much more!

Let me tell you a story.

In the middle of my career, I had a job that at times was very unpleasant. I have a vivid memory of a meeting with the boss. He was yelling at an employee on the phone. He was out of line. It was then I understood the true power of Financial Freedom.

While my wife and I hadn’t reached Level 7 at that time, we were right around Level 5. I knew I could walk out of that job if I needed to and we’d be fine financially. I wasn’t stuck. And it was a great feeling.

Less than a year later, I took a pay cut to pursue a new opportunity. I took that risk because I could; I wasn’t chained to my job or to the salary. It turned out to be the best career move of my life. And it was made possible because of Level 5 Financial Freedom.

This is an example of how money saved and never spent can have a profound effect on our lives.

Time to Level 5:

Savings RateYears to Level 5
10%23.6
15%17.7
20%13.9
30%9.2
Assumes a 5.0% Rate of Return

Level 6: Ten Years of Expenses

Level 6 is an important milestone. It’s here that your investment income will begin to equal and then exceed how much you are spending each year.

Let’s again assume you spend $50,000 a year. At Level 6, you will have a Freedom Fund totaling $500,000. A 9.3% return will generate returns of $46,500 over the next 12 months, bringing your Freedom Fund to $546,500. The following year, with a Freedom Fund totaling almost $550,000, you will on average generate just over $50,000 a year.

Talk about a great feeling! You are working hard, earning an income, and spending $50,000 a year. At the same time, your Freedom Fund is generating returns equaling the same amount. Like a snowball rolling downhill, your wealth is multiplying before your very eyes.

Time to Level 7:

Savings RateYears to Level 6
10%34
15%26.9
20%22
30%15.5
Assumes a 5.0% Rate of Return

Level 7: Twenty-Five Years of Expenses

Level 7 is the Ultimate Financial Freedom. It’s here that you can completely retire from work if you so choose. Or, if you’re like me, you can work on projects you love while still earning an income. The choice is yours.

Level 7 enabled me to retire from the practice of law at 49. Following my retirement, I continued to run my personal finance blog, newsletter, and podcast. Two years later I sold my blog, but I still record a podcast each month, and I became a Deputy Editor at Forbes for a couple of years. These activities generated income. But I did them because I’m passionate about personal finance and investing.

When you reach Level 7, you can pursue your passions. That may mean keeping your job. There’s nothing wrong with that if that’s what you love. It may mean starting a business. Here’s the point—you decide for yourself what you’ll do when you reach Level 7. It’s a beautiful feeling.

Time to Level 7:

Savings RateYears to Level 7
10%50
15%41.9
20%35.9
30%27.4
Assumes a 5.0% Rate of Return

A Simple Financial Freedom Calculator

I’ve created a free financial freedom calculator in Google Sheets. The tool is simple to use. You simply input the following four things:

  1. Rate of return
  2. After-tax income
  3. Savings rate
  4. Current savings

From there the tool estimates how long it will take you to reach each level of financial freedom.

The tool has an investment rate of return of 5% input by default. This roughly represents the historical post-inflation return of a 60-40 stock/bond portfolio. You can change the assumption to whatever you like.

Debt is conspicuously missing from the spreadsheet. This is because debt payments are accounted for in the after-tax income section. Debt repayment is considered a recurring monthly expense. It’s possible to be financially free while having some debt and the calculations reflect that.

The baseline savings rate is listed at 10%. That number is in line with conventional retirement advice. Over an average 40-45 working life an investor would be on track to retire at 65 given a 10% savings rate. Again, that figure can be changed in the spreadsheet.

Finally, be sure to alter the current savings section. Many will be starting at more than zero. The number should include emergency short-term savings as well as retirement or brokerage account balances.

Final Thoughts

Financial freedom is the best thing money can buy. As I was working toward the goal, I viewed every dollar I saved as buying my financial freedom. At first it starts off slow, but it quickly builds to the point that compounding generates far more money than we could ever make at work. The key is to get started now.

And for those that want to track their progress with a more sophisticated tool, check out Personal Capital. It’s free and the best overall net worth, investment and retirement planning tool available today.

Filed Under: Investing, Retirement

4 Best Target Date Retirement Funds in 2022

December 2, 2021 by Rob Berger

Target date retirement funds make investing in a 401(k) or IRA easy. Simply pick a fund that corresponds with when you plan to retire, and the fund does the rest. In this article we’ll look at several of the best target date retirement funds available today.

Table of Contents
  • 4 Best Target Date Retirement Funds
    • M1 Finance Target Date Retirement Funds
    • Vanguard Target-Date Retirement Funds
    • State Street Target Date Retirement Funds
    • Fidelity Freedom Index Funds
  • Target Date Retirement Funds in 401(k) Accounts
  • Backtesting Target Date Funds
  • Not All Target Date Funds are Good Investments
  • How Target Date Retirement Funds Work
  • The Downside of Target Date Funds for Retirees
  • Are Target Date Retirement Funds Diversified?
  • Final Thoughts

Target date retirement funds can be great tools for long-term investors. There are, however, factors that differentiate great target date funds from others I would not recommend. I’ve researched dozens of funds to identify the best options, as well as an example of a target date fund you should avoid.

4 Best Target Date Retirement Funds

For each of the target date funds below, we’ll explore the 2050 version. A 2050 fund is designed for those retiring around the year 2050. Each of these fund families offer funds in five-year increments (e.g., 2020, 2025, 2030).

M1 Finance Target Date Retirement Funds

M1 Finance retirement funds make the top of my list for several reasons. First, for each retirement year (e.g., 2020, 2025, 2030), M1 Finance offers three different funds. All of the other options below only offer one. Specifically, M1 Finance offers investors Aggressive, Moderate and Conservative options for each retirement year.

M1 Finance Target Date Retirement Funds

For example, the M1 Finance 2050 Aggressive Target Date Retirement Fund allocates just 3% to bonds, while its 2050 Conservative fund allocates 19% to bonds.

Second, each of M1 Finance’s funds (they call them Pies) include broad stock and bond exposure across more than a dozen low cost ETFs. Here, for example, are the ETFs used in the 2050 Aggressive fund:

M1 Finance 2050 Fund

Third, unlike the other funds in my list, there is no elevated expense ratio to pay. M1 Finance doesn’t charge a fee. The only fees are those associated with the low cost ETFs M1 uses in each portfolio, and these are lower than the fees a target date fund charges.

Finally, the fund for those now in retirement (the 2020 fund) is in my view the best option available. The Aggressive 2020 fund is approximately 60/40 stock to bond allocation a reasonable approach for retirees following the 4% rule. Without exception other retirement funds become far too conservative at this stage.

M1 Finance target date funds are automatically updated and rebalanced quarterly. There is no minimum initial investment required.

Summary

  • Expense Ratio: 0.08%
  • Dividend Yield: 1.831%
  • Minimum Investment: None
  • Website: M1 Finance

Vanguard Target-Date Retirement Funds

Vanguard’s 2050 offering, ticker VFIFX, is another solid option.

Vanguard Target Retirement 2050 Fund

The expense ratio for the fund is extremely reasonable at only 15 basis points (0.15%). Important to note given low fees often predict the later success of a fund. VFIFX checks that box. 

Turning to the Portfolio tab on Morningstar gives us a better look into the asset allocation of the fund.

Vanguard 2050 Fund Asset Allocation

Vanguard’s 2050 fund is 54% invested in US stocks and about 37% invested in international stocks. The remaining 9% of the fund is allocated to bonds. This aggressive investment mix makes sense given that it’s tailored for an investor with 30 years left to build their Portfolio. Keep in mind that this allocation will become more weighted toward fixed income as we get closer to 2050.

Vanguard implements this asset allocation plan using five Vanguard funds:

Vanguard 2050 Fund Portfolio

Five holdings doesn’t seem diversified. Here it’s important to understand that the number of funds in a portfolio tells us nothing about its overall diversification. We need to know what each of the funds owns. In this case, the holdings include thousands of stocks and more than 10,000 bonds. It’s well diversified.

Vanguard requires a $1,000 minimum initial investment.

Summary

  • Expense Ratio: 0.15%
  • Dividend Yield: 1.41%
  • Minimum Investment: $1,000
  • Website: Vanguard

State Street Target Date Retirement Funds

State Street’s 2050 target date retirement fund, ticker SSDLX, makes a strong impression with only a 9 basis point (.09%) expense ratio. It’s one of the least expensive options available today.

State Street Target Retirement 2050 Fund

Its asset allocation is similar to Vanguard’s.

State Street Target Retirement 2050 Asset Allocation

The Portfolio tab shows us the fund is invested 51% in U.S. stocks, 35% in international stocks, and about 10% in bonds. The holdings of the fund reveal more similarities to its Vanguard counterpart. It invests the fund in six index funds.

State Street Target Retirement 2050 Portfolio

Three stock funds and two bond funds substitute for the inverse with Vanguard’s offering. The U.S. stock portion of the fund is split into an S&P 500 large blend fund and a mid-cap growth fund. Still, State Street’s fund should perform in line with Vanguard’s, with the added benefit of the lower expense ratio we saw earlier. 

Summary

  • Expense Ratio: 0.09%
  • Dividend Yield: 1.32%
  • Minimum Investment: None
  • Website: State Street

Fidelity Freedom Index Funds

The final fund is Fidelity’s Freedom Index 2050 Investor, ticker FIPFX. The exact naming of this fund is important to note. FIPFX has the word index in the fund name. Fidelity offers another Freedom 2050 target-date fund, but the underlying holdings consist of actively managed mutual funds.

As a result, that fund charges 75 basis points (.75%) in fees. In contrast, the Freedom Index fund only charges 12 basis points (.12%). That expense ratio puts the Fidelity fund in between State Street’s and Vanguard’s options.

Fidelity Freedom Index 2050 Fund

The asset allocation of this fund is nearly identical to the Vanguard, State Street and M1 Finance Moderate funds.

Fidelity Freedom Index 2050 Fund Asset Allocation

Nothing surprising jumps out–53% of the fund is allocated to U.S. stocks and 37% to international stocks. Bonds fill out the remaining 10%. 

The holdings of the fund shouldn’t shock anyone either. Fidelity uses Fidelity index funds to implement its asset allocation.

Fidelity Freedom Index 2050 Fund Portfolio

Overall, another sensibly arranged portfolio–Diversified, low-cost, and convenient. 

Summary

  • Expense Ratio: 0.12%
  • Dividend Yield: 1.18%
  • Minimum Investment: None
  • Website: Fidelity

Target Date Retirement Funds in 401(k) Accounts

If target-date retirement funds are starting to seem like attractive options, it might be worth considering holding a target date fund in a 401k if one is available to you. Since company 401(k) plans often invest hundreds of millions at a time, mutual fund providers may offer companies an expense ratio discount to attract their business.

For example, ticker FRLPX is the Fidelity Freedom Index 2050 option offered in my 401(k) at Forbes. This version of the fund has the same asset allocation, holdings, and glide path but charges half the fees of the non-401(k) investor class fund. 

I mention this industry convention not only to highlight the fee difference but also to prevent any confusion when picking funds in a 401(k). If there’s any doubt as to whether one fund mirrors another, it’s best to check the Portfolio tab on the Morningstar listing for both funds and make sure the only difference is the expense ratio.

Backtesting Target Date Funds

For a performance comparison of the funds, we’ll be using Portfolio Visualizer. This site is great for backtesting portfolio options and provides a number of useful metrics for weighing funds. The data set will be limited by the age of the newest target-date retirement fund, but we have a reasonable length of time to compare the funds. 

Target Date Fund Performance

The 3 funds compete very closely with one another. The Fidelity fund ultimately wins out by only a couple hundred dollars. The standard deviation of the funds, a measure of portfolio volatility, is fairly uniform from fund to fund. The same goes for the maximum drawdown period of the funds. Safe to say, any of the three funds are reasonable and comparable options.

The M1 Finance fund has had similar return and risk characteristics.

Not All Target Date Funds are Good Investments

I’ve chosen one fund that exemplifies some suboptimal aspects that should signal investors to steer clear. I do this not to belittle the mutual fund company or fund in particular, but to illustrate what potential negative qualities of target date funds can cost investor’s future returns.

The fund is called the American Century One Choice 2050, ticker ARFMX. I would avoid the fund for two main reasons. 

American Century One Choice 2050 Fund

First off, the fund’s expense ratio is simply too high. American Century charges over 1%, making it more than 10 times as expensive as the fund options we’ve looked at. Unfortunately, that isn’t the end of the fees associated with investing in the fund. ARFMX has a front load fee, meaning there’s a sales charge paid every time you buy into the fund. Purchasing through a 401(k) would bypass that fee. Otherwise, and I can’t caution against this enough, that fee would recur every time a contribution is made.

ARFMX Fees

The second reason why I’m not a fan of this fund is its asset allocation.

American Century One Choice 2050 Asset Allocation

Remember that American Century’s target date is a 2050 fund just like the 4 funds we explored. That means the typical investor in the fund is 30 years away from retirement. Nevertheless, the fund allocations 22% in bonds. For some investors, that conservative approach might be attractive. But in my estimation, that is too cautious a strategy for investors with such long time horizons.

An 80/20 split between stocks and bonds is perfectly reasonable in a vacuum, but remember the fund will increase its bond allocation over time. Overall, the fund is a suboptimal choice given its fee burden and asset allocation. 

The American Century fund performance in comparison to Vanguard’s offering should bear out my concerns. 

American Century One Choice 2050 Performance

That data for this backtest in Portfolio Visualizer goes back to 2009. The fund’s fees and asset allocation drag on the ugly duckling fund to the tune of almost a full percent less in returns.

The key point is to recognize that not all target date funds are created equal.

How Target Date Retirement Funds Work

Target date retirement funds feature a date in their name. For example, the funds we’ve discussed are 2050 funds. The date corresponds to the investor’s planned retirement date. Somebody seeking to retire in about 30 years would be especially interested in 2050 funds.

Target date retirement fund offerings are typically spaced out in 5-year increments, meaning there are 2045 and 2055 versions of the funds we’ve explored. Picking a retirement date is not an exact science and things do change. Still, having a target date in the fund name provides some useful information about the fund’s asset allocation today and in the future. 

Target date retirement funds hold a combination of U.S. stocks, international stocks, and bonds. The specific weighting of those asset classes adjusts over time and can vary between mutual fund companies. The expense ratio associated with target date funds goes, in part, toward paying for these adjustments. Allocation adjustments are made based on “glide paths”, which are predetermined rebalancing plans that each target date retirement fund follows.

As investors get closer to their chosen retirement date, target date funds shift more heavily toward bonds and away from stocks. This shift is meant to reduce portfolio volatility during investors’ retirements. An attractive approach in theory but one that can create some pitfalls, which we’ll address next. 

The Downside of Target Date Funds for Retirees

Target date funds are a reasonable approach to investing for retirement. Once you reach retirement, however, these funds have a downside. They become far too conservative.

These funds follow a declining glide path. That simply means that as we get closer to retirement, the funds move stock investments over to bond investments. That in itself is reasonable. The problem is that they become far too conservative.

For example, the Vanguard Target Retirement 2015 fund is only 30% invested in stocks. A retiree six years in might want the security of a healthy bond allocation, but I would argue there’s such thing as being too safe. Granted, I’ve shifted my own investments into safer investments in retirement. Still, I wouldn’t recommend divesting a portfolio of stocks past the 50% mark.

In fact, Bill Bengen, the father of the 4% rule, found that a retiree’s portfolio should have 50% to 75% in stocks. Anything less and their odds of running out of money early go up.

With the exception of M1 Finance, each of the target date funds mentioned above fall well below the 50% equity floor.

Are Target Date Retirement Funds Diversified?

Diversification is important to any investor. Investing in a single mutual fund seems counter to that idea, but not in the case of target date retirement funds. Target date retirement funds provide ready-made diversified portfolios that hold thousands of domestic and international stocks and tens of thousands of bonds of various credit qualities. So yes, these funds are well diversified.

Final Thoughts

While I don’t personally invest in target date retirement funds, they are still reasonable and effective options. I advocate that investors start their wealth-building plans with a 3-fund portfolio. That said, the solid target date fund options we’ve discussed are all reasonable approaches to retirement investing.

Filed Under: Investing, Retirement

How to Invest $1 Million | A Step-by-Step Guide to Investing a Windfall

November 23, 2021 by Rob Berger

Investing $100 a month is simple. Many use one or more low cost index funds. So why does investing $1 million or more seem to require a more complex portfolio? In short, it doesn’t.

In this article I talk about how to invest large sums of money. I’ll share my own personal experience of investing a windfall. And I give you some specific portfolio ideas that I believe are ideal for invest even tens or hundreds of millions of dollars. Finally, I’ll share some books and other resources you may find helpful.

Who Has $1 Million to Invest?

At first it may seem like this article is for just a select few. There are several ways to find yourself with a lot of money at one time. These include inheritance, life insurance, the sale of a business or from an IPO or other liquidity even. But let’s face it, those who receive a windfall like this are few in number.

There is, however, a more common way many find themselves investing a large amount of money at one time–retirement. After a lifetime of work, workplace retirement accounts can exceed $1 million. Rolling a weighty 401k over into an IRA can be nerve-wracking. That’s why so many retirees hire expensive investment advisors to manage what they had managed on their own in a 401k for decades.

And that raises an important question–why is investing a large amount of money so psychological challenging?

FACTOID: Ryan Cohen, of Chewy and GameStop fame, chose to stay the course with his fortune. He experienced a massive liquidity event to the tune of $3.4 billion when he sold his stake in Chewy. How did he invest his windfall? He put it all in just two stocks–Apple and Wells Fargo. Cohen accepted a lot of volatility by choosing to park his funds in only two stocks. I don’t recommend this approach, although with billions of dollars one can afford to take some risk.

How to invest a windfall

Investing a Windfall is Psychology Difficult–Here’s Why

There are three main reasons why investing a windfall presents unique challenges.

Small-Big Dichotomy

The first reason is what I call the Small-Big Dichotomy. “Small” refers to the idea that most people reach a $1 million net worth after years of monthly investing. Small, steady contributions to a 401k don’t feel daunting. You invest the best way you know how and watch your net worth grow.

Reaching $1 million gradually over time may be cause for celebration. When the second comma pops up in the account, you might celebrate or tell your significant other. But you don’t have to ask yourself “how am I gonna invest $1 million?” You just keep doing what you’ve been doing.

The flip side of the dilemma is a “big” event–$1 million materializing overnight. Those who receive a windfall from a business sale or inheritance naturally fear making an investment mistake. Even moving money saved over a lifetime from a 401k to an IRA can feel overwhelming and fraught with danger. That worry is perfectly reasonable. Bad portfolio management has consequences. But the dilemma is more the same than different. Taking the same approach in both “big” and “small” situations makes more sense than it seems.

The Road Less Travelled Dilemma

The second challenge is the Road Less Travelled Dilemma. Windfalls often occur in tandem with big life changes. That might mean no longer owning a business, a loved one passing away, or retirement. There’s often a lot of essential change swirling. “What am I going to do with this money?” often runs parallel to “what am I gonna do with my life?” The anxiety behind both decisions can compound.

Living Off Your Nestegg

The last dilemma is the fear of living off a portfolio. You can read all the retirement books out there and understand the 4% rule. It’s going to still feel strange. I can tell you from personal experience that living off a nest egg is a new experience. As with the other two dilemmas, working away the emotional weight of the change is the best approach, but it takes time.

The starting point is to ask three questions.

3 Questions to Ask Before Investing a Windfall

  1. How much cash do I need over the next 5 years?

First, think about how much cash you’ll need over the next five years. Factor in both month-to-month expenses and large one-time purchases like home renovations, traveling, or paying for a child’s wedding. As a general rule, one should not invest money needed over the next five years in the stock market (although one can argue in favor of investing for short-term goals).

Setting aside five years of expenses serves another purpose, too. It helps create mental preparation for the market potentially going sideways or down for that period of time. Historically, there have been a number of periods where returns stayed flat or gone down over a five year period. For that reason, cash is king over short time periods. 

  1. Do you invest in one lump sum or dollar cost averaging

My approach has always been to invest a windfall in a lump sum rather than dollar cost averaging over an extended period. It’s the approach I followed when I received bonuses at work. It’s also the approach I took when I sold my business a few years ago. Further, studies show that lump sum investing beats dollar cost averaging most of the time.

Notice I said most of the time. There will be periods of time when it would have been better to dollar cost average into the market. The key here is to accept that we cannot know the future, and therefore, we cannot know which approach would be the best at any given point in time.

If it makes you feel more comfortable to dollar cost average of say a 12 month period, that’s perfectly reasonable. Just put your plan in writing and follow it.

  1. What are your specific investing goals?

The last thing to consider is how hands-on you want to be with your portfolio. Many investors prefer to be hands-off and automate the management of their investments. Others enjoy investing and what to handle everything from fund selection to rebalancing on their own.

There is no right or wrong choice here. What you chose to do, however, may affect how you invest and where you keep your money. A DIY investor may open a standard brokerage account. Someone who wants an automated service, by contrast, might select a robo-advisor such as Betterment.

How to Invest $1 Million

Now let’s turn to the actual investing of a large sum of money. What follows are three simple, easy to manage portfolios that I believe are reasonable choices whether you want to invest $500 or $500 million.

Warren Buffett Portfolio

A few years ago Warren Buffett described how he thinks most people should invest their money. It’s become known as the Warren Buffett Portfolio. He advocates a portfolio that consists of 90% in an S&P 500 index fund and 10% in short-term U.S. treasuries. Buffett even instructed that his wife’s trust be allocated as such when he passes away.

The portfolio is attractive given its low-cost, broad market diversification, and mix of stocks and bonds. Here’s a snapshot of the portfolio implemented at M1 Finance.

Factoid: The Warren Buffett Portfolio is very similar to the 2-fund portfolio William Bengen followed in his landmark study that brought us the 4% Rule. The two key differences are that Bengen used intermediate term Treasuries and advocated no more than 75% in stocks.

3-Fund Portfolio

Buffet and Bengen’s 2-fund portfolios are perfectly reasonable, but there are more diversified strategies. The 3-fund portfolio adds international exposure and features a total bond market fund. There’s no guarantee it will outperform the 2-fund option, but the added asset classes should smooth out volatility over the long term. 

The Total Stock Market Index ETF (ticker: VTI) adds some welcome mid and small-cap exposure compared to the S&P 500. You can see my VTI vs VOO comparison here. The Total Bond Market fund diversifies bond risk across a number of types of bonds. The portfolio’s expense ratio remains low at just 5 basis points (.05%).

6 Fund Portfolio

The 3-fund portfolio works well for $1 million, $10 million, even $400 million. It’s a solid starting point for any investor. Investors looking for more granularity should consider the 6-fund portfolio, which is what I use. The 6-fund portfolio adds exposure to REITs, small-cap value stocks, and emerging markets. 

The additional asset classes in the portfolio are historically volatile. The theory is that the excess risk brings greater returns. Adding non-correlated assets to the portfolio can help ensure that if several sectors are going down, one is at least going up. 

Avoid Expensive Investment Advisors

An itch best left unscratched is the urge to seek out a high-cost investment advisor.  Commissioned brokers sell pricey financial products disguised as unique opportunities. They’re never going to recommend keeping fund expenses low because that’s not in their best interests.

After I sold my business, I talked with some investment advisors. They were recommending exotic investments like non-traded REITs, expensive insurance products, and private equity that enriches the brokers who sell them but rarely justify their expense to the investor.   

Getting Help

There are reasonably priced methods of getting professional investment advice. As a rule of thumb, avoid advisory fees that exceed 50 basis points (.50%). For example, Vanguard offers advisory services for 30 basis points (.30%). To the best option is an advisor who charges by the hour or a flat fee. There’s simply no reason to give away part of your wealth each and every year for financial advice.

Resources

I recommend a number of books that further detail the investing strategies outlined above. A few of the books either reference or were written by Jack Bogle. Bogle founded Vanguard and gave rise to the “Boglehead” approach to investing.

The Bogleheads’ Guide to Investing by Taylor Larimore is a great resource on investing and retirement. An older title, but one that is still relevant, is The Four Pillars of Investing by William Bernstein. The book is a great learning tool when it comes to portfolio construction and investing.

Another book by Jack Bogle worth your time and money is The Little Book of Common Sense Investing. It’s worth exploring the Boglehead forum as a supplement to picking up a book. The discussion on the site is quite interesting and evidence-based.

Final Thoughts

Investing a large sum of money at one time can feel daunting. It causes many to hire expensive financial advisors who put them in complex, expensive and unnecessary investments. I firmly believe that the best approach is a simple, low-cost portfolio constructed of index funds.

Filed Under: Investing

VOO vs VTI: An Easy Way to Choose Between an S&P 500 and Total Stock Market Index Fund

November 3, 2021 by Rob Berger

I’ve been investing for over 30 years. I’ve been writing about investing for the past 15 years. One of the questions I get the most is whether you should invest in an S&P 500 Index fund or a total stock market index fund–VOO vs VTI (ETFs) or VTSAX vs VFIAX (mutual funds).

Table of Contents
  • VTI vs VOO
    • Portfolios
    • Holdings
    • Cap Weighted vs Equal Weighted
    • Dividend Yield
  • VOO vs VTI Performance
  • VOO vs VTI–How to Choose
  • Final Thoughts

It’s an important question that torments a lot of investors. It shouldn’t. The answer answer is really, really simple. It doesn’t matter. But the explanation takes a little bit of explanation. We’re going to walk through that today using Vanguard ETFs (VOO and VTI), although the same rationale applies to any fund family.

First we’ll compare the portfolios of the S&P 500 index with the total stock market index. We’ll look at both the differences and the similarities. Second, we’ll look at the historical returns and volatility of both indexes. Finally, I’ll offer a simple approach to deciding whether VOO or VTI is best for you.

VTI vs VOO

Both VTI and VOO are lost cost index funds. Vanguard currently charges just 3 basis points (0.03%) in fees for both funds. As ETFs, they don’t have minimum purchase requirements (Vanguard mutual funds do, typically $1,000 or $3,000). They are also both very large funds, each with more than $250 billion in total assets.

Portfolios

The investing style of both an S&P 500 and total stock market index fund are similar. They both portfolios heavily weighted to large U.S. companies. Using Morningstar’s style box, we can see that both funds are classified as large-cap blend (i.e., core) funds.

VTI Stock Style
VTI–Total Stock Market Index
VOO Stock Style
VOO–S&P 500 Index

If you’re new to Morningstar’s tools, check out my Guide to Morningstar.

What these charts tell us is that both VOO and VTI are large cap funds (see the blue dots in the top row). They also tell us that both funds’ investment style is a blend of value and growth companies (blue dot is in the middle column).

Now they are not identical. The S&P 500’s Style Box shows that the average company’s market capitalization (market cap) is a bit larger (the blue dot is a bit higher). We can see this more clearly by looking at what Morningstar calls the “Weight” style box.

VTI weight
VTI–Total Stock Market Index
VOO weight
VOO–S&P 500 Index

The weight style box shows us the percentage in each fund invested in small, medium and large companies, organized by value, blend or growth. As you can see, the S&P 500 is predominately large companies, with 14% in medium size companies and nothing allocated to small cap. In contrast, VTI has more allocated to medium companies and 7% allocated to small cap companies.

The big question for us is whether these differences should matter. Before we answer that question, let’s take a deeper dive into the actual companies these funds hold.

Holdings

If we go to the actual holdings, this is where things get interesting. Using Morningstar, we can see the top 10 holdings in each fund.

Here are the top 10 holdings for VOO, followed by the top 10 for VTI:

VOO top 10 holdings
VOO top 10 holdings
VTI top 10 holdings
VTI top 10 holdings

As you’ll see, the top 10 holdings are identical for both funds. Apple is the current #1 holding (this may change to Microsoft soon) with Berkshire Hathaway holding the #10 spot. What is different is the percentage that each fund holds of each of these stocks.

You can see that for the total stock market index, Apple comprises about five percent of the fund, whereas for the S&P 500 index, it’s just over six percent (these percentages can change daily as the price of each stock changes).

To understand why there’s a difference, we need to understand cap weighted versus equal weighted indexes.

Cap Weighted vs Equal Weighted

Most index funds are market cap weighted. That means that the more valuable a company is the more it represents in the particular index. Since Apple is the most valuable company in the world at the moment (actually, Microsoft took the lead, but the change hasn’t been reflected yet in the Morningstar data), an index fund allocates more of each investment in Apple than it does smaller companies.

There are equal weighted index funds, too. These funds divide investors’ money equally among all of the companies in the index. This type of index fund is much less common. Both VOO and VTI are cap weighted index funds.

Thus, if we add up the top 10 companies that you see for each fund, we’ll see similar but not identical results. With VOO, the top 10 companies represent about 26% of the fund. For VTI, the top 10 comprise about 21%. Again, these percentages do change as company market caps change.

VTI’s percentage allocated to the top 10 is less than VOO because it must allocate its assets among all publicly traded companies headquartered in the U.S. (about 3,700). VOO only allocates its capital among 500 companies.

Dividend Yield

It’s worth noting that the dividend yield is different for these funds as well. VOO has a trailing twelve month (TTM) yield of about 1.25%. In contrast, VTI’s yield is 1.20%. The difference isn’t significant in my view, but for some it’s a critical factor.

VOO vs VTI Performance

Now we move to what really matters, performance. Using Portfolio Visualizer, we can see how the S&P 500 has compared to a total stock market index over several decades.

First, let’s see how a $10,000 investment in each of these asset classes beginning in 1972 (that’s as far back as Portfolio Visualizer goes) would have performed:

S&P 500 vs Total Stock Market Returns

Note that I’m comparing asset classes, not VOO and VTI. I’m doing that because we get more data. As you can tell, the performance has been almost identical. The Compound Annual Growth Rate (CAGR) was just 8 basis points higher for total stock market. The S&P 500 had slightly less volatility as measured by standard deviation. For all practical purposes, the investments were identical.

If instead of investing one lump sum, we start with $100 and add $100 every month, the results continue to be nearly identical:

Total Stock Market vs S&P 500 DCA

During shorter periods of time, VOO or VTI might outperform the other by small margins. Over the long term, however, they’ve performed very similarly.

VOO vs VTI–How to Choose

Given the nearly identical performance and volatility, how do we decide between VOO and VTI? I’m going to suggest three factors to consider.

First, in a 401(k) or 403(b), you may not have a choice. The 401(k) I currently have offers an S&P 500 index fund, but doesn’t offer a total stock market index fund. In this situation, take whichever one your workplace retirement account offers. It doesn’t really matter and you shouldn’t view that as a problem or something to worry about.

Now, if you do have a choice or you’re investing in an IRA or a taxable account where you absolutely do have a choice, then I’d suggest one of two approaches.

If simplicity is your goal and you want all of your U.S. stocks in a single fund, go with VTI or another total stock market index fund. For example, if you invest in a three fund portfolio, I prefer a total stock market index fund. It’s not because I think it’ll outperform the S&P 500. We just saw that the performance numbers are pretty much identical. What VTI does give you, however, is added diversity. If the volatility or risk is effectively the same, and the performance is effectively the same, why not get greater exposure to the equities market.

On the other hand, if you want to slice and dice your portfolio into several U.S. asset classes, as I tend to do, I prefer the S&P 500. Why? It gives me more control over the specific asset allocation I’m trying to achieve.

Final Thoughts

So there you go. There are some of the key differences between an S&P 500 index fund and a total stock market index fund. We specifically looked at VOO versus VTI, but these considerations apply to similar funds from Fidelity, Schwab or other investment companies. The good news is that while there are differences between the two types of investments, both are excellent options for U.S. equity exposure.

I use Personal Capital to track all of my investments. The free tool shows me my asset allocation, total costs, and even retirement projections. Check out my Personal Capital Review and User’s Guide to learn how it can help you, too.

Filed Under: Investing

Best Round-Up Apps for Saving and Investing

October 30, 2021 by Rob Berger

Saving and investing money is a lot like eating broccoli. We know we should do it, but it’s not so easy. One easy way to save money is with an automatic savings app. To help you get started, here are the best round-up apps for both savings and investing.

Best Round-Up Apps Table of Contents
 [show]
  • Best Overall Round-Up App for Investing–Acorns
  • Best Overall Round-Up App for Savings–Chime
  • Full List of Round-Up Apps
  • Other Round-Up Apps
  • How Round-Ups Work
  • The Psychology Behind Automatic Savings
  • Can Round-Ups Really Make a Difference?

Best Overall Round-Up App for Investing–Acorns

Acorns App

Acorns is my pick for the best overall round-up app for investing. Acorns is one of the first round-up apps with over 9 million clients. It offers both low cost investing, free checking and a free debit card. As such, it works for savings, investing or both.

After creating an account, you link the credit and debit cards you use for spending. Acorns tracks your round-ups and transfers them from your linked checking account once they reach $5.

You choose how you want Acorns to invest your round-ups. Users can select from several pre-configured portfolios, ranging from conservative (100% bonds) to aggressive (100% stocks). You can also chose among socially responsible portfolios. Acorns does the rest, making the investments for you in low cost, diversified ETFs (Exchange Traded Funds).

Acorns Investment Options

For savers, Acorns offers a checking account and debit card. The FDIC-insured account offers direct deposit, mobile check deposit and free nationwide ATMs. It does not, however, pay interest on its checking account.

Acorns costs just $3 a month for a personal account. The fee covers investing and checking accounts. For $5 a month, get the family plan that enables kids to start investing early.

Open an Acorns Account

Best Overall Round-Up App for Savings–Chime

For those focused on building an emergency fund or other savings, Chime is my top pick for round-up apps. Why? Unlike most round-up apps, Chime pays interest on your savings.

Chime comes with a long list of features:

  • Get paid up to 2 days early with direct deposit
  • Fee-free overdraft protection of up to $200 if you qualify
  • More than 60,000 free ATMs
  • Savings earn interest (currently 0.50% APR)

It’s key feature for our purposes is automated savings. Chime automates savings in several ways.

First, it does off a round-up feature. Called “Save When You Spend,” Chime will round up to the nearest dollar purchases made with its free Visa debit card. Chime then transfers the round up from your Spending Account to your Savings Account.

Chime Round-up feature

Second, Chime enables customers to setup automatic savings. After each paycheck, you can have an amount of your choice automatically moved from your Spending Account to your Savings Account.

There are other things I like about Chime. It has arguably one of the best secured credit cards to help customers build their credit. It’s called the Chime Credit Builder Secured Visa® Credit Card, charges no annual fee and has no required minimum security deposit.

Open a Chime Account

Full List of Round-Up Apps

In addition to Acorns and Chime, here are several other round-up apps worth considering.

Greenlight

Greenlight

Best for kids and teens

Greenlight is perhaps best known for offering a debit card for kids and teens. It also offers an investing platform to teach young people the importance and power of saving and investing. With Greenlight Max, kids can invest in their favorite companies or ETFs. There are no trading fees and parents must approve all trades.

Greenlight Max investing

Greenlight offers several ways to encourage savings through what it calls Savings Boosts. One Savings Boost is round-ups. Transactions are rounded up to the nearest dollar and transferred to savings. Other Savings Boosts include earning 1% cash back on all purchases and up to 2% interest on their savings.

In addition to investing, Greenlight can serve as a child’s bank and budgeting app. Monthly costs range from $4.99 to $9.98 a month for up to five children.

Stash

Stash round-up app

Best for investing in individual stocks

Stash is similar to Acorns. You connect debit and credit cards to a Stash account. Stash monitors transactions and rounds them up to the nearest dollar. Each time round-ups total $5, Stash transfers this amount from your linked checking account to your Stash investment account.

There are several important differences between Stash and Acorns. Where Acorns uses diversified portfolios of ETFs, Stash enables users to invest in fractional shares of individuals stocks. It has over 3,900 companies on its platform, in addition to EFTs and bonds.

For those who prefer a portfolio of ETFs, Stash offers what it calls a Smart Portfolio. Introduced in March 2021, Smart Portfolios use stock and bond ETFs to create a diversified portfolio. These portfolios are automatically rebalanced for hands-off investing.

The cost of Stash ranges from $1 to $9 a month depending on the plan. These fees are in addition to the cost of any underling ETFs.

Qapital

Qapital

Best for microinvesting

While all round-up apps are a form of microinvesting, Qapital takes it to another level. In addition to round-ups, Qapital offers a number of Rules that will trigger automatic saving and investing:

  • Payday Divvy: This feature enables you to automate how much of your paycheck goes to spending, savings and investing.
  • Set and Forget: Set up automatic transfers to savings or investing every week.
  • Guilty Pleasure: Enjoy your morning coffee at Starbucks, but save some money at the same time. You can designate the merchants and how much you save each time you shop there.
  • Spend Less Rule: Set a spending limit at the grocery store and automatically save the difference between the set amount and what you typically spend.
  • Freelancer Rule: For 1099 workers, you can set a percentage of all deposits of $100 or more to be transferred to Qapital’s FDIC-insured account for estimated taxes.
  • 52 Week Rule: Save $1 in week one, $2 in week two, and so on, for a total of $1,378 over the course of a year.
  • Apple Health: Set automatic transfers to savings each time you walk, bike or run.

Money saved can be invested in one of several portfolios using low-cost ETFs:

Qapital portfolios

Qapital offers three plans ranging from $3 to $12 a month.

Qoins

Qoins

Best for paying down debt

With Qoins, you create either a debt or savings goal. You can also create what Qoins calls a Bundle, with both a debt payoff and savings goal. With goals set, you pick how you want money transferred toward your goal. There are several options:

  • Round-ups
  • Weekly transfers
  • Payday transfers
  • Smart Savings

Smart Savings is a feature unique to Qoins. You set how aggressively you wan to save, and Qoins’ algorithm determines how much to put toward your goal. Unlike round-ups, Smart Savings doesn’t require you to link a debit or credit card.

Qoins offers two plans costing $2.99 or $4.99 a month.

Other Round-Up Apps

I continue to evaluate round-up apps and will update this article based on new research. Here are other apps I’m evaluating:

  • Digit
  • Empower
  • MoneyLion
  • N26
  • Betterment
  • Worthy Bonds
  • Current

It’s worth noting that some banks offer round-up features. Bank of America is one example. The problem is that its interest rates on savings accounts are terrible.

How Round-Ups Work

Round-up apps bring the concept of a change jar into the digital world. When cash was king, it was common to have a change jar in the house. Each day when you got home, you took the change out of your pocket and put it in the jar. It wasn’t a lot of money, so it didn’t crush the budget. And while each deposit into the jar didn’t amount to much, over time it grew into some serious cash.

Round-up apps take the same concept and apply it in the world of electronic payments. You connect your checking account and credit cards to the round-up app. The app then keeps track of your transactions and the round-up amount. For example, if you spend $3.74 at a coffee shop, the app adds $0.26 to your round-up balance.

Once your round-ups reach a threshold (typically $10), the app transfers the amount from your checking account to either a savings or investment account. As such, round-ups are one form of microinvesting.

The Psychology Behind Automatic Savings

There are several psychological “tricks” that make round-up apps so effective. First, they require just one easy decision. Once you turn on the round-up feature, it continues to work without any additional effort on your part. This simple decision makes it easy to overcome the status quo bias. And once overcome, the round-ups become the status quo.

Second, they are automatic. The round-ups don’t require us to make decisions each day, week or month. They happen behind the scenes, even if we forgot all about them.

Finally, round-ups involve relatively small amounts of money. Trying to save hundreds of dollars a month might feel daunting. Saving our spare change every day, on the other hand, is less intimidating even if it adds up over time.

Can Round-Ups Really Make a Difference?

Yes. In fact, one study found that saving even $100 had a profound effect on financial well-being. And with the power of compounding, even small amounts of money saved over time can grow into significant wealth. For example, investing just $50 a month over a working career can grow into more than $400,000 at a 10% return.

Of course, returns aren’t guaranteed and a working career can last 40 or 50 years. At the same time, $50 a month is not exactly a flood of money. It’s a start. Continue to increase your savings and your wealth will continue to compound over time. In the end, compounding will generate for more wealth than the amounts you actually save.


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Filed Under: Investing

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