October 2, 2015
It's 2015. Computers are everywhere. But would you let them make investment decisions for you?
That's the premise behind robo-advisors, and they're the next big thing in retirement planning, according to analysts.
The rise of robo-advisors
Robo-advisors work by users punching in their savings goals and then an algorithm kicks in with a recommended investment strategy. Then, over time, the service will automatically balance and re-allocate funds as needed.
Firms offering robo-advisory services include a mix of big names and smaller start-ups:
- Charles Schwab Intelligent Portfolios
- Vanguard Personal Advisor Services
David Weliver, founder of Money Under 30, says one appeal of robo-advisors is their low cost and the minimal amount of money needed to begin investing, as low as $5 a month.
A report from consulting firm A.T. Kearney estimates 0.5 percent of investable assets will be managed by robo-advisory firms this year, then jump to 5.6 percent by 2020. About 7 of 10 of households say they are at least somewhat likely to use a robo-advisory service in the future.
While the firm notes early robo-advisory services adopters are often more sophisticated investors willing to take risks, subsequent waves of users are expected to include a larger percentage of novice investors.
Giving options to those who had none
Chris Costello, certified financial planner and CEO of Blooom, said robo-advisors aren't just about lowering investment costs. They also provide options to customers locked out of traditional financial planning methods because their portfolio value doesn't meet advisors' required minimums.
"The biggest thing robo-advisors are doing is giving help to people who never had help before," Costello says. "It feels really, really good to do for clients with $3,000 in their account what I used to do [as a financial planner] for those with $3 million in their account."
Most robo-advisors work with brokerage or individual retirement accounts, but Blooom is unique, focusing on maximizing 401(k)s. The company's algorithm analyzes available plan options, then selects the best investments based upon expected retirement date and even price. Every 90 days, the algorithm reanalyzes options to see if the plan added any better choices. The service costs $1 a month for those with a 401(k) balance lower than $20,000 and $15 a month for higher balances.
Blooom isn't the only company with a distinct angle on the market. Acorns allows users to begin investing with only $5 and can round-up purchases so spare change is redirected to retirement savings.
When a computer isn't enough
Robo-advisors may make it easy to invest, but Weliver says you can't expect them to do everything, suggesting people with no exposure to basic investing principles may want guidance from a personal advisor.
"Robo-advisors are for those who don't want to know anything about investing," he says, "but you still need to have some knowledge."
Some advisory services may want to know a user's risk level or preferences to split their money between stocks, bonds or other investments.
A human touch is also useful for those with multiple savings goals.
"The downfall of [robo-advisors] is, by design, it's a one-size-fits-all solution," Weliver says. "A financial advisor can create a much more personalized approach."
That approach could look at tax implications, consider both mid and long-term goals and incorporate strategies to maximize Social Security.
Getting a personalized approach to investing is great, but only if you qualify for it. Compared to firms that insist on big portfolio balances for their clients, robo-advisors offer an opening to those who otherwise would be left on their own with investment management.
"It's not a question of why would someone want to use a robo-advisor," Costello says. "It's, 'Thank goodness they are available.'"
Tell us: Are you thinking about or already using robo-advisors for your retirement savings? Let us know why you want to employ this technology or what your experience with robo-advisors has been like.
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August 25, 2015
Like most people, you probably haven't saved enough for retirement. That's OK though, as long as you have a good excuse.
Or is it? There are many excuses for not saving for retirement, but under closer analysis, most of them are not any good.
Here are six common excuses people make about retirement:
1. I don't make enough money
Making ends meet is tough for many Americans these days, so if you are just barely covering the bare necessities from paycheck to paycheck, you can give yourself a pass - but only until your next pay increase. You probably shouldn't miss money you didn't have before, so with every raise in pay, you should be able to ramp up your retirement saving.
2. I'm still paying off my student loans
Now that you've graduated, it is time to learn one of the first rules about household finances: you need to be able to multi-task and handle more than one responsibility at once. Paying off debt and saving for the future are not mutually exclusive. Every time you pay off a debt, you should use the money that no longer has to go towards those payments to increase your savings.
3. It's too early for me to be thinking about retirement
You very well could live 30 years in retirement, so don't you think you need at least 30 years to save up for it? If you don't start saving for retirement by your mid-30s, you will be falling badly behind.
4. It's not worth it when interest rates are this low
According to the Federal Deposit Insurance Corporation, the average interest rate on savings accounts is just 0.06 percent. That hardly seems like an incentive to save, but if you do the retirement savings math, low interest rates mean you should save more, not less. The less your money can be expected to grow, the more retirement savings depends primarily on how much you set aside.
5. My employer doesn't offer a retirement plan
Naturally, employees whose company offers a 401(k) or similar plan have a leg up, but if your employer doesn't offer this benefit, that's no excuse for neglecting retirement saving. You could still be deferring taxes by saving for retirement in an individual retirement account, or IRA, for up to $5,500 this year ($6,500 if you are aged 50 or over).
6. I don't want to fight with my spouse over money
If a shortage of money is causing tension now, it will only be worse if your lifestyle has to plummet due to a lack of funds when you retire. It can be stressful on a relationship when money is tight, but this isn't splurging on a spa weekend or a new TV for the man cave. If you communicate about the topic calmly and sensibly, both spouses should be able to get behind making a few sacrifices to save for retirement.
As a starting point, find out how much money you need by using a retirement savings calculator. When you see the size of the job ahead of you, it may change your thinking from feeling you can't afford to save money now to realizing you can't afford not to.
In the long run, you won't find having an excuse so satisfying if you run out of money in retirement. You may live to eat your words, but you won't find them very filling.
Tell us: Have you found yourself making these excuses before?
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August 24, 2015
You need car insurance. Maybe you're ready to take out a mortgage loan to buy a home. Or maybe you'd rather rent an apartment in the heart of the big city.
If your credit score is low, all of this will cost you more, a lot more.
That's because lenders and financial services providers rely on your three-digit credit scores to determine how likely you are to pay your bills on time. If you have a low credit score, lenders consider you a risky borrower, one who is likely to pay bills late or skip them entirely. Generally, lenders consider a FICO credit score of 740 or higher to be an excellent one. If your FICO score is lower than 640, though, you can expect to pay more for credit cards, loans and other financial services, if you can even qualify for them at all.
"Because of a poor credit score, you may only have access to credit cards with higher interest rates," says John Heath, directing attorney of Salt Lake City-based Lexington Law Firm.
Heath also warned that poor credit may not only cause you to pay more for necessary expenses, but also result in being denied for insurance.
"If you have poor credit, you could be denied insurance, or your premiums may increase," Heath says.
Here are five services and products that you can expect to pay more for because of your low credit score:
1. Mortgage loans
It's not easy to qualify for a mortgage loan if you have a low credit score. But if you do qualify, expect to be charged higher interest rates. That can cost you tens of thousands of dollars.
Tim Lucas, editor of MyMortgageInsider.com, puts it like this: Borrowers with a FICO credit score of 740 today could qualify for a 30-year fixed-rate mortgage loan with an interest rate of 4 percent. A borrower with a FICO score of 640 would be charged an interest rate of 4.375 percent for the same loan. On a 30-year loan of $250,000, the borrower with lower credit would pay $55 more every month. That comes out to almost $20,000 if that borrower pays off the mortgage in full over 30 years.
And for borrowers with even lower credit scores? They'd be charged even higher interest rates that will cost them even more money as they pay back their mortgage loans.
"The lifetime cost of having a bad credit score is staggering when it comes to a mortgage," Lucas says.
2. Credit cards
Credit cards already come with high interest rates. But if your credit score is low, you can expect to pay even higher rates. Gary Herman, president of ConsolidatedCredit.org, says that even a few points difference in the interest rate on credit card debt can have a significant impact on your budget.
Say you have credit card debt of $5,000 at 18 percent interest. If you only make the minimum required payment each month to pay off that debt, you'll pay more than $3,000 extra in interest than if you only made the minimum payment each month and your interest rate was 13 percent.
"That's a much larger burden, which is why high-interest credit card debt can be so difficult to manage and pay off," Herman says.
3. Auto loans
Auto loans are smaller than mortgage loans, of course. But they can still add up to large monthly payments, especially if your credit scores are low. Auto lenders, like all lenders, charge higher interest rates to borrowers with low scores. The difference between an interest rate of 3.5 percent on a $15,000 five-year car loan and one of 5 percent on the same loan can add up.
"The cars for the new model year are coming out now, and auto manufacturers are advertising low interest rates," says Ken Chaplin, senior vice president of the consumer division with national credit bureau TransUnion. "But those rates are only for those people with the best credit scores. The better the score, the better you look to lenders, the more likely it is that you'll be able to enjoy those low advertised rates."
It might surprise you, but many insurers charge consumers with low credit scores higher rates for auto insurance. Insurers say that drivers with high credit scores tend to get into fewer accidents and file fewer claims. That's why those with low credit scores are charged more. It's important to note, though, that insurers in Hawaii, California and Massachusetts are not allowed to use credit scoring when setting policy rates for auto insurance.
You might also pay more for homeowners insurance if your credit is score. Again, insurers say that homeowners with low credit scores are more likely to file claims, making them riskier customers.
5. Your apartment
Landlords will check your credit, too, before approving your application for an apartment unit. If your score is too low, landlords will view you as a risk to miss your monthly rental payments. Because of this, landlords might either charge you a higher monthly rent or make you come up with a larger security deposit.
There is some good news, though: Repairing your credit score is a relatively simple process. These steps include making all of your payments on time and paying off your credit card and other debts. If you do this, your credit score will slowly improve.
Just don't expect immediate response. It can take several months or a year or longer of on-time payments and debt reduction to make a noticeable improvement in your score.
Tell us: Have you had to pay more for something because of a low credit score?
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August 21, 2015
When you were 20 years old, you may have thought you knew everything. Then you aged another 10 years and realized you weren't nearly as smart and savvy as you thought.
If you could go back in time and give yourself some advice, what would be it?
That was the question put to finance professionals Jennifer Landon and Charlie Harriman. Landon founded Journey Financial Services in Idaho Falls, Idaho, and took a straight path into the world of finance. She began working in the field directly out of college, which was 15 years ago.
Harriman took a detour into education before earning his MBA and entering the finance industry. He's been with Cloud Financial in Huntsville, Alabama, for the last five years, where he works as a certified estate planner.
Landon and Harriman say if they could go back and talk to their younger selves, these five points are the pieces of advice they would give themselves:
1. "Be afraid of debt."
It's not enough to simply avoid debt. Landon says she would advise her 20-year-old self to be downright afraid of it.
"Every time you borrow money, you give away a future dollar earned," she says.
Not only can interest payments stretch already thin budgets, but always being in debt means you will also be perpetually paying off your past with no chance to save for future dreams and goals.
2. "Make sure advice is right for you."
Harriman notes there is no shortage of personal finance advice available today. It's posted on the Internet, written in books and shared by well-meaning friends and relatives.
"It's great to listen to what people say, but a lot of that is general information," he says. When asked what he would tell his 20-year-old self, Harriman says, "You have to make sure the advice you're taking is right for you."
Rather than trying to wedge yourself into someone else's investment philosophy or savings strategy, young professionals should take into account their own personality, goals and circumstances when making money decisions.
3. "There is absolutely no correlation between income and financial success."
Don't fall for the mistake of believing a big paycheck is a sign of financial success. On the contrary, Landon says she would tell herself that success is actually measured by your habits, not your circumstances.
"Financial success is based upon good habits, and those are habits you can have at any income level," Landon says.
Good foundational habits that lead to success include living on less than you earn, putting money into savings and paying cash for big purchases whenever possible. Landon notes that 20-somethings might want to make excuses about why they can't stop spending or start saving, but ultimately, it all comes down to cultivating self-discipline.
4. "Invest early and open a Roth retirement account."
Although Harriman opened a Roth Individual Retirement Account at age 21, he regrets not putting more cash in it during his younger years.
"I see some 30-year-olds with a quarter million in their 401(k) account," he says. "I wish I would have put more in a retirement account."
For today's young professionals, Harriman suggests putting money in Roth IRA and Roth 401(k) rather than traditional retirement accounts. While you don't get a tax deduction for putting money into the account, you can withdraw from tax-free savings in retirement. Harriman says people early in their careers are likely in lower tax brackets than they will be in retirement. That means it's better to get a tax hit on the money now instead of later.
However, the most crucial thing is to simply start saving. Time is a critical component to maximizing compound interest in retirement accounts and as Harriman says, "You can't get back time."
5. "Don't wait for your circumstances to make you happy."
Landon says her final piece of advice to herself would be to not wait around for the stars to align before being content with life.
"We wait for our circumstances to make us happy," she says.
However, time can quickly slip away while you're waiting for the perfect job, a bigger payday or a great circle of friends. Rather than waiting for an ideal life, Landon would tell her 20-year-old self to "be relevant in the space you're in."
On the flip side, if life does bring material success, Landon would remind herself to never feel like she needs to apologize for living well. "It's OK to work hard and have a great lifestyle because of it," she says.
For those who are older, it's easy to look back and have second thoughts about decisions made earlier in life. However, for today's 20-somethings, the future is a blank page. Make the most of it by listening to the wisdom of professionals who have gone before you.
Tell us: What money advice do you wish you could tell your 20-something self?
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August 17, 2015
Debt is often a hated, four-letter word among savers. Contrary to popular belief, debt isn't always bad, especially when it boosts your personal wealth in the long run.
Paul Kuzmickas, who has helped many clients file for bankruptcy protection, said it's not unusual for many of these clients to believe that all debt is bad debt because of their unfortunate financial experiences.
But Kuzmickas, a bankruptcy attorney based in Cleveland, says that this isn't true. There are bad forms of debt, of course. But there is also good debt that can help you build your credit score as you pay if off.
Consumers -- especially younger ones -- often have to steadily build their credit scores by accumulating debt and then paying it off. Until they do this, these consumers might have a low credit score or no credit score.
"Most people need to borrow money to buy life's 'big-ticket' items," Kuzmickas says. "While some might consider all debt as bad debt, that is not always the case. There are several forms of debt that can be viewed as good or smart debt."
As you look to build your credit score, it's better to incur certain types of debt than others. Here are five signs that the debt you are taking on is smart debt:
1. Paying it back boosts your credit score
Your credit standing is crucial because lenders rely on your three-digit credit score to determine if you qualify for loans and what interest rate you'll pay on the money you borrow. Employers may use credit scores when deciding which employees to hire. It can also affect your annual expenses as your insurance company might look at your score when determining how much to charge you for auto insurance.
Ideally you want your on-time payments to be reported to the three national credit bureaus: TransUnion, Equifax and Experian. When these on-time payments show up on your credit report, your three-digit credit score will improve. According to credit score provider FICO, your payment history accounts for 35 percent of your credit score.
Look into debt payments that boost your credit score, which include mortgages, student loans and credit card purchases.
2. The interest rates attached to it are low
The best type of debt is debt that comes with low interest rates. Today, that includes both mortgage loan and some student debt. The low interest rates mean that this debt grows more slowly than does high interest rate debt, like the debt you accumulate from making purchases with your credit card.
If possible, make sure that the majority of your debt comes with a low interest rate.
3. The debt helps you accomplish a goal
Certain types of debt help you get ahead in life. Again, student and mortgage loan debt top this list. Mortgage debt allows you to buy a home that you can build equity in. Many homeowners have the goal to sell this residence one day for a profit. Student loan debt helps you gain a college degree, one of the best ways to ensure that you'll earn more money throughout your adult life.
"While the media are very concerned -- rightfully -- about the amounts of debt students are graduating with, student debt can be very beneficial," says Eric Meermann, portfolio manager with Palisades Hudson Financial Group's Scarsdale, New York, office. "Taking on this debt allows you to improve your skills, gain an education and a degree and hopefully make yourself more marketable to future employers."
4. It's not oppressive
Some debt weighs more heavily on you than others, with credit card debt usually attributed to consumers' money woes. Yes, charging items on your credit card and paying them back in full every month can help you build your credit score. But carrying a balance on your credit card from month to month can put you in a financial hole.
This is why Tom Anderson, a Chicago-based private wealth manager and author of the book "The Value of Debt in Retirement," recommends that you speedily eliminate any debt that comes with an interest rate of 10 percent or higher.
5. Your debt will help you earn money
Kuzmickas says that it's smart to take on debt for something that will eventually help you generate income. He points to student loans as a big example.
"You're investing in your future," he says. "An education will help you generate an income post-graduation."
Tell us: Do you feel the debt you have now is good for your finances or is it stopping you from achieving what you want?
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