16 Habits of Wealthy People

habits of wealthy people

habits of wealthy peopleI subscribe to Success Magazine because I want to learn about other successful people in the hopes that I can better myself and increase my odds of being successful. In a recent issue, there was a story about the 16 habits of wealthy people.

Since I want to become rich, I read that story first. It was so powerful, I thought it would be interesting to talk about these 16 habits because while some of them are ones I would classify as well-known to most of us, there are a bunch of habits on the list that I think many of us (myself included) tend to overlook. Here are the 16 habits and below them are detailed explanations:

16 Habits of Wealthy People

  • Live Within Your Means
  • Don’t Gamble
  • Read Every Day
  • Forget The Boob Tube and Surf The Internet Less
  • Control Your Emotions
  • Network And Volunteer Regularly
  • Go Above And Beyond In Work And Business
  • Set Goals, Not Wishes
  • Avoid Procrastination
  • Talk Less, Listen More
  • Avoid Toxic People
  • Don’t Give Up
  • Set Aside Self-Limiting Beliefs
  • Get A Mentor
  • Eliminate Bad Luck
  • Know Your Main Purpose

Live Within Your Means: Pretty straight-forward with this one. If you have to go into debt to buy something, chances are you cannot afford it. Granted, a house and a college education are exceptions (within reason of course), but for things like clothing, gifts, flat screen TVs, etc. you should not be going into debt to buy these things.

According to the article, wealthy people save 20% of their income and spend the remaining 80% (in other words, they pay themselves first) while almost all of those struggling financially spend more than they earn. Learn to automate your savings so you are paying yourself first.

Don’t Gamble: I gamble, but I don’t gamble. What I mean by this is that I take part in a weekly football pool picking the winners of each week’s games. I also will spend $100 on slots/blackjack when my wife and I or my friends and I head to Atlantic City. The keys are:

  • the money I spend is small in amount, and
  • the money is spend is money I can afford to lose

This is important because too many people play the lottery on a daily basis hoping to strike it rich or they use money that they really cannot afford to lose. If you are choosing between buying a loaf of bread and buying 2 scratch off lottery tickets, you need to seek help.

The main difference between the rich and poor here is simple: poor people rely on luck to improve their financial situation while wealthy people rely on themselves to improve their financial situation.

Read Every Day: I’ve gotten better at reading on a regular basis. Why is reading important? A few reasons come to mind:

  • it makes you think
  • it expands your horizons
  • it grows your vocabulary
  • it keeps your mind sharp

The more you work to better yourself, the more it will overflow into other areas of your life, like your career and income.

The key though is to read things that will better yourself. Only 11% of those that read on a regular basis read for entertainment purposes. Most read career-development material, self development books, current events and biographies. [Read more…]

Following Your Passion In Retirement

passion sign

passion signMaking the transition to retirement can be a difficult one for some people. They spend 40+ years getting up every morning and going to a job that when they retire, they suddenly feel as though they don’t have a purpose. But they do have a purpose, it’s just that it is buried deep inside them. It’s called a passion.

As we progress through life, some push aside their passion or their dreams because real life is happening and there are bills to pay and mouths to feed. But once you retire, you have to opportunity to find those passions and dreams that were once buried and see them through, to start a new chapter in life. In the video below, you will see examples of this. You will see real life people who have retired and are now living their passion. They understand that they only get one shot at life and retirement is their opportunity to follow their dream since they couldn’t do so earlier in life.

(Note that there are 6 versions of the below video. If you refresh the page, you will cycle through them all.)

3 Ways Of Becoming Your Own Financial Adviser

Expert

ExpertTolstoy famously said: “Everyone thinks of changing the world, but no one thinks of changing himself”. This can be very aptly applied to our own personal financial situations. When we find ourselves in a bit of fiscal rut, it can be tempting to pick loopholes in the economy and find shortcuts where there are none. But, when the chips are down, we can only ever look at our own financial habits in the hope of creating significant change.

You can’t change the financial world but you can change your own. Take a stand and regain control of your finances like so many others are – by becoming your own financial expert. We’ve outlined 3 simple ways you can become you own finance guru.

Plan Ahead

It may seem an obvious step to take but the biggest favor you can grant yourself is to have a long-term action plan. This means planning clearly and strategically for each of life’s milestones, whether you wish to set up a college fund or start saving for retirement.

Fortunately for the fiscally-challenged among us, finance data is more accessible than ever. So take advantage of the many internet tools available to you that do the work of a financial expert for next to nothing.
[Read more…]

5 Investing Lessons To Live By

investing lessonsIn a previous issue of Kiplinger’s magazine, Kathy Kristof wrote a column that compares the lessons learned in the movie Moneyball with investing advice.

For those that haven’t seen the movie, Moneyball is a baseball movie about the Oakland Athletics General Manager Billy Beane. The A’s are a small market team, meaning they can’t spend a ton of money on high priced free agents. They have to find a way to win with a small payroll. Beane accomplishes this by looking at statistics of players and building his team around this. In many cases, he looks at statistics that other general managers overlook. It has proven successful as the A’s have been a competitive team most years since he took over. This is quite an accomplishment when there are so many other teams spending large amounts of money on the best players in the world.

In the magazine, Kristof takes the lessons from the movie and applies them to investing. In summary the investing lessons are:

  1. Don’t Believe Your Eyes
  2. Capitalize On Inefficiencies
  3. Don’t Watch The Game
  4. One Game Is Not A Season
  5. Experience Reduces Risk

I love all of these investing lessons. Here is my takeaway from each one.

5 Investing Lessons

Don’t Believe Your Eyes

For baseball, not believing your eyes simply means to dig deeper into analyzing a player. Just because he hits the ball the farthest doesn’t mean he is the best player. He may have artificial help or maybe he is playing against inferior opponents. The key is to not trust what you see, but to do the research to get to the real reasons why a certain player is successful.
[Read more…]

Income Versus Personal Net Worth

personal net worthPaul Stanley, the author of  The Millionaire Next Door: The Surprising Secrets of America’s Wealthy and The Millionaire Mind talks about why one should focus on personal net worth over income when building wealth. Why is this? Because in the long run, you need wealth, not a high income to survive financially.

In this country, many times we mistake someone that has a high income for being wealthy. This isn’t always true. Just because a person has a high salary, it doesn’t mean they are living like a king. If you really want to be wealthy, forget about focusing on having a high income and focus instead on your personal net worth.

On average, a millionaire’s income is 7% of their personal net worth. The median income is 8% of their net worth. (For a quick lesson on average versus median, read this post.) But what exactly is this telling us?

It means that the typical millionaire has a ton of money! In all seriousness, it shows that the typical millionaire is safe should they lose their job. After all, the income they bring in from their job only accounts for 7% of what they are worth. Should they lose their job, they can still get by financially intact because most of their income comes from other sources (think rental real estate, investments, side hustles, etc.).

This is also the reason why the wealthy pay less in taxes than most others. Income from your job is taxed at ordinary income levels while investment income is taxed at investment income levels. The rate for ordinary income is much higher than investment income tax.

So I ask you, what is your income to personal net worth ratio? Do you know?

Calculating Your Personal Net Worth

Remember that net worth is your assets minus your liabilities. (I have a free net worth template for you to download here. I also have a net worth calculator as well.) Your income is your salary plus any dividends and interest you receive, as well as any other forms of income you earn.

To calculate your ratio, simply take your income number and divide by your personal net worth. The lower the number, the better off you are financially. Currently, my wife’s and my ratio is 50%. Not ideal by any means. When I analyze our numbers, what are weighing us down are my house and my wife’s house. If we were to magically breakeven on my house (currently underwater), we would be at 35%, which is better.

You Need To Increase Your Personal Net Worth

This is a relatively easy calculation to perform and it will give you a good idea of where you stand. While earning money is important, it is equally important to save as much of it as you can. Saving and investing your money creates your net worth. The higher your personal net worth, the better your ratio will be.

Take a look at this example as proof. You have two doctors, John and Mark. Both earn $100,000 per year. John’s net worth is $600,000 while Mark’s is $50,000. John is a saver and Mark is a spender. What are their ratios?

personal net worth chart 1

John’s ratio is 17%, which is very good. Mark’s on the other hand is 500%. Remember, the lower the number the better. While you may see Mark earning a high salary and “living the life” with his big house and multiple cars, he really is barely keeping his head above water. In fact, Mark is really Stanley below:

Using the personal net worth ratio holds true for lower income people. Take Joe and Kevin for example. They both earn $30,000 per year. Joe has a personal net worth of $600,000 while Kevin has a personal net worth of $50,000. Their ratio’s are 5% and 60% respectively.

personal net worth chart

This shows us that Joe is a master saver and is truly wealthy. Kevin on the other hand saves some money, but could save more.

Your Takeaway

The point of this post is to show you that you shouldn’t focus on income alone. Yes, you should do everything in your power to earn the highest salary possible, but that high salary is worthless to you if you aren’t saving any of it.

While calculating your personal net worth is a great first step in looking at your financial life, it’s not a complete picture. By running this ratio, you can see exactly how well you are doing and how well you can handle an emergency should it ever come up.

Action Steps

You may be asking how you should go about increasing your net worth. Remember that your net worth is simply your assets minus your liabilities. The more you save the higher your net worth will be. Therefore, the first step in increasing your net worth is to budget. I know, the dreaded b-word. Luckily, there are some awesome tools that make budgeting easy and in some cases, dare I say, fun. OK, that was a stretch, maybe enjoyable is a better word.

First is Power Wallet. It’s 100% free and is just plain awesome. I use it myself. Before I found it, I was tracking my net worth through excel spreadsheets. If you find Power Wallet isn’t for you, then I suggest You Need A Budget. This costs some money, but makes you look at your money differently. Definitely one to check out as well.

Once you have the budget in order, it’s time to start investing. Automated is the way to go here, as it takes away your biggest threat to success – your emotions – out of the equation. For investing, I use Betterment. It’s simple and gets the job done. I also encourage you to read my post on becoming a stock market millionaire. It outlines everything you need to know to be successful in the stock market.

Now that you are budgeting and investing your money, your net worth should begin to increase. As you live within your means and pay off your debts, you will begin to see your ratio change so that you aren’t relying on your income as much.

Final Thoughts

I encourage you to sit down annually and determine your ratio and record it. Work to better your ratio each year. It will get you in the habit of trying to save more, which will make your financial future that much brighter.

If you don’t want to manually track your net worth, there is a free solution that will track your net worth for you, along with your spending, saving and investments. It’s called Personal Capital. I’ve been using it for a few months now and am amazed at the graphs and how it encourages me to save more to improve my finances.

How To Save $100,000

how to save 100000

how to save 100000I saw this great article over on Investopedia and thought I would share it my readers. It offers seven tips on how to save $100,000. To some, $100,000 might not seem like much. But to others, $100,000 is a ton of money. Regardless how you view $100,000 know that saving this amount of money can change a lot of things financially for you. Here are the tips for how to save $100,000:

Tips For How To Save $100,000

  • Have The Right Mindset
  • Create Short-Term Savings Goals
  • Save on Taxes
  • Reduce Interest Burden
  • Take Advantage of Employer Benefits
  • Generate Additional Income
  • Keep Costs Low

Have The Right Mindset

I agree with all of the points listed on how to save $100,000. You need the right mindset and have to stay positive, regardless of what is happening in life. I have read studies that if you place two people out in the wilderness, one person with all of the survival skills and a negative attitude and someone else with no survival skills and a positive attitude, the one with a positive attitude will survive.

The point being that you need to stay positive. Life gets tough at times. But learn to see the positives in everything. You’ll be much happier and much more likely to succeed. If you are in debt currently, realize that you didn’t get into debt overnight and you won’t get out of debt tomorrow. But stay in the mindset that you WILL get out of debt.

You have to stay positive and believe that you can overcome your financial troubles. If you doubt yourself from the start, you really have no hope in changing things. Learn to believe in yourself and think positively.

Be sure to read more about thinking positively or learn how to start thinking positively if this is an area where you need help.

Create Short-Term Goals

I follow short-term goal making too. If you have read my monthly goal posts, you will see that I like to focus on goals at 30 day increments. Keeping goals short keeps you interested and more likely to succeed. Succeeding makes you feel good and everything comes full circle.

Of course, there are some goals that are long-term and breaking them down into 30 day increments don’t make much sense, like paying off your mortgage. Even though this is the case, you should still break the goal down into small, more manageable chunks.

If your current balance is $150,000 then make your goal to get your mortgage to $140,000 this year. If you have $25,000 in student loan debt, focus on getting the balance to under $20,000. When you hit these mini-goals along the way, you keep your motivation high and your focus on achieving your goal. After all, seeing your mortgage balance drop from $150,000 to $147,000 in a year when your goal is to have it paid off will cause feelings of doubt. Push through these feelings by making smaller, more attainable mini-goals.

The same idea holds true for saving money as well. Your emergency fund may not look like a lot of money, but over time, a monthly savings into the account will have it grow. Just set up short-term goals to grow the account by. Make it your goal to save $1,000 this year and when you reach $500, have a mini-celebration.

When it comes to saving for retirement, realize again that it’s a journey. You don’t need the money tomorrow, so don’t get frustrated or discouraged that you “only” have $50,000. Continue to invest and over time, the balance will grow. I started out saving for my retirement with a measly $20 from each paycheck. Close to 15 years later and I’ve cleared six figures and continue to save.

Save on Taxes

It’s a must to keep taxes as low as possible. You don’t need to be CPA or study the IRS rules. At the end of the day, to reduce your taxes the most you should:

  • Contribute as much as you can to your 401(k) plan. Your contributions are taken out of your pay before taxes, making your taxable income lower, meaning less tax paid.
  • Contribute to an HSA account if you have a high deductible insurance plan. If not, contribute for an FSA. Both will reduce your tax burden.
  • Know the difference between a credit and a deduction. Many people confuse the two. A credit is much more valuable to you then a deduction.
  • Invest wisely. Bond interest is taxed at ordinary income rates whereas capital gains and dividends from stocks are taxed at a lower rate. If you hold taxable bonds or bond funds, they should be in your retirement accounts so that you don’t have to pay taxes on the income.
  • Take advantage of tax-loss harvesting. This is where you sell some holdings at a loss if you have already some some investments at a gain. You can offset your gains with the losses, eliminating any tax you owe.
  • Give to charity. You should be giving because it is the right thing to do. But you do get the added benefit of writing off your donations. Keep a detailed list of the donations you made throughout the year – money, clothing, time, travel, etc.
  • Pay attention to the law. I know I said you don’t have to study the IRS rulebook, but you should stay abreast of new tax laws and changes every year. You never know when something will change that will affect you. Just keep your eye out for news stories and read them. If you don’t understand what it is talking about or if it benefits you, ask your CPA.

Reduce Interest Burden

There are a few ways to reduce your interest burden. When talking about credit cards, the solution is to pay off any outstanding balance as quickly as possible. If you are paying 18% interest on your debt, by paying your card off in full you are essentially getting an 18% guaranteed return on your money. You won’t find this kind of return anywhere else.

To pay off your debt, find ways to cut monthly expenses, take a second job, or start a side business for additional income. Understand the wealth equation and learn to increase your income. Apply the savings or extra income to your debt.

Another area where you pay interest is on your mortgage. You can refinance or you can look to pay off your mortgage early. In either case, doing so will save you thousands of dollars in interest.

Employer Benefits

When it comes to employer benefits, the biggie is the retirement plan. If your company offers you one, you need to be investing in it. At the very least, you should be investing up to whatever your company matches you with. So if they offer a 4% match on your contributions, you better be investing 4% of your salary.

But again, that is what you should do at the very least. Ideally, you should be saving between 10-15% of you salary in your 401k. The more the better. I know that money might be tight, but you have to find a way to save now for retirement. You are going to need money to live and it’s not going to magically appear in your account. Take advantage of time and let your money work for you.

For those that can afford to save for retirement but are scared of the stock market, you need to get over your fear. Yes the stock market has been on a roller coaster ride as of late. But there is always short-term volatility in the market. When you look long-term, much of the volatility goes away and the general trend is positive. The stock market is not a game that is rigged and you have no shot at winning. If you play the market and try to chase returns, you will fail miserably. But if you are smart about your investing, you can easily become a stock market millionaire.

Aside from retirement plans, many employers offer other benefits as well. One company I worked for had a discount on cell phones through AT&T. I was able to get a 17% discount on my monthly bill. In addition, they had relationships with all sorts of local companies offering discounts on flowers, golf, car washes and more. Email your benefits team to see if your company has any such benefits.

If not, all hope is not lost. Depending on who your health insurance is through, they might offer you discounts as well. Mine provides a $25 coupon on a bike helmet, a reimbursement for visiting a gym and a free consultation with a nutritionist each year. They even have an 800-number with counselors to help if I am going through a tough time. If you aren’t covered by an employer, shop around for the best health insurance for your money.

Generate Additional Income

Taking a second job or starting a side business is great to help you pay off your credit card debt, but the income from these ventures after paying off the debt goes a long way too.

I have done this since college. I am always looking for ways to add some extra money to my pocket. The reason is simple: the more money I have saved, the more it can compound upon itself and grow more.

With the proliferation of the internet, you can do all sorts of things to generate additional income. Just figure out what you enjoy doing and then see if there is a way to earn an income from it. When you do this, your “work” never feels like work at all.

Keep Costs Low

Being aware of what you get charged in expenses for mutual funds and ETF’s is a must. There is no point in paying high management fee’s when you can get funds that suit your needs for a fraction of the cost. It is one of the things you can control when you invest. After all, the fees you pay are like being charged twice:

  • You first pay the fee that the investment charges
  • You lose out on the opportunity of that money growing for you

Here is what I mean by this. Let’s say you have an investment that charges you 1% and another that charges you 0.50% and you have $1,000 invested. At the end of the year, with a 1% fee, you paid $10 in fees. With a 0.50% fee, you paid $5 in fees. (This is the first charge.)

Had you not invested in the investment that charges you 1% but only in the fund that charges you 0.50%, you would have $5 more in your account. While this $5 might not seem like a lot, it becomes huge when you take into account the real value of your account and time. (This is the second charge.)

Over the lifetime of investing, you are paying over $75,000 in investment fees! This shouldn’t cause you to rethink if investing in the stock market should be done or not (it should be), it’s just showing you that you have to pay attention to fees.

If you have no idea how much you pay in fees and want to know, you should sign up for a free account with Personal Capital. They have a great tool that looks at your investments and tells you exactly how much you are paying in fees each year. It was truly an eye-opening experience for me.

Final Thoughts

If you can incorporate these tips into your daily financial life, you are going to see a complete change in your finances, and all for the better. You don’t have to use every tip, but the more you do, the better off you will be financially.

While making all of these changes at once might seem overwhelming to you, use the one tip to your advantage right off the bat: create short-term goals. Divvy up these points into manageable pieces and attack them one by one. This will remove the feeling of being overwhelmed and will allow you to take action instead of being paralyzed by seeing too much to do.

What are your thoughts on how to save $100,000? Do you think anything needs to be added or removed?

The Round Table – May 4, 2014

Round TableWelcome to May! April was a great month, but now I am looking forward to all that May has to offer, in particularly, the option of leaving the windows open all night as it won’t get so cold!

A few weeks ago, I had mentioned I had some big news. I’m really to release it now. I bought a personal finance blog! Longtime readers of this site know that I’ve been a staff writer for Penny Thots. Well, things happened and I ended up buying the blog. I’ve spent the past month refreshing the site adding social media accounts, etc. I’ve also written a handful of posts as well. So if you haven’t checked it out yet, be sure to click on the link above! Be sure to follow me on social media too and I’ll be sure to follow back! Also, if anyone wants to “partner up” and cross-share content, be sure to shoot me an email. Onto this weeks awesome blog posts!

Great Blog Posts from Other Bloggers

Personal Finance: Doing What Works For You at Cash Money Life
58 Habits To Increase Wealth at Barbara Friedberg Personal Finance
Beginners Guide To Index Investing at Mom and Dad Money
How Far Should We Go To Help Others Financially at Don’t Quit Your Day Job
Learning To Live With Risk at Five Cent Nickel

Posts MoneySmartGuides Wrote for Other Blogs

Do You Have An Opportunity Fund at Penny Thots
3 Ways To Safely Handle Stock Market Volatility at My Dollar Plan
Learning How To Learn at 20s Finances

Carnivals MoneySmartGuides Appeared In

Carn. of Fin. Camaraderie at Finance with Reason
Carnival of Retirement at Save and Conquer
Lifestyle Carnival at Lisa Vs. The Loans

Betterment Review

betterment review

betterment reviewI talk all of the time about making investing easier, not harder for yourself. Who wants to spend their weekends analyzing stocks, trying to find the next home run when you could be playing with your kids or enjoying your favorite hobby? The sad thing is, many investors do make investing harder for themselves and they never reap the rewards of that hard work. What if I told you that you could reap the rewards without putting in the hard work? You’d probably wonder what I was smoking!

Well, I’m not smoking anything. With Betterment, you can earn the returns you want without putting in all of that time researching investments. Remember, when it comes to investing, risk and rewards are related, time invested researching investments and returns are not.

(Be sure to also check out my other reviews of online brokers, including:

Also, you can get detailed information about all of these in my online broker comparison chart.)

My Betterment Review

What Is Betterment?

Betterment is the most trusted online investment manager and has been around since 2010. Their investment approach is simple: they manage your investments so you don’t have to. And they mean it. They manage everything for you (I’ll talk more about this later).

They do this so that you reach your goals by focusing on the long-term (what successful investors do) and ignore the short-term volatility (what most investors focus on). With Betterment, you are always diversified, balancing risk and reward. And investors are starting to realize this. In 2013 they tripled its assets under management (AUM).

How Betterment Works

To start investing with Betterment, you simply choose your investing goal, risk tolerance and timeline. Betterment makes all of this easy. You can choose pre-selected goals like saving for a house, college or retirement, or you can just invest without picking a specific goal.

Based on what you select, Betterment offers you a pre-selected asset allocation. For most, this allocation will work fine. But, you have the power to tweak the allocation. Do you want 90% stocks and 10% bonds or more of a mix of both? You aren’t left to slaughter here either. They will guide you along the way, letting you know if you are on track to meet your goal or not.

From there, you set up an automatic transfer from your bank account to Betterment and Betterment will invest your money and periodically rebalance your portfolio for you.

Betterment invests your money in one of their index portfolios consisting of ETF’s (see below). Depending on your risk tolerance and your goals, your portfolio will be created with a mix of the stock basket and the bond basket.

betterment investments

These investments are the same investments that anyone could pick from, regardless if they invest with Betterment or not. Betterment does not make money by putting your money into these investments.

Costs and Fees

The fees that Betterment charges are in a tiered system, as seen below:

$0 – $10,000: Management Fee of 0.35%
$10,001 – $100,000: Management Fee of 0.25%
$100,001 or more – Management Fee of 0.15%

Betterment fees

When you are first starting out, Betterment takes a fee of 0.35% to manage your money and that decreases as your account size increases. There are no other fees that they charge. (Note that if you forgo the $100 monthly deposit and have less than $10,000 invested, you will be charged $3 monthly. While this sounds harsh, the goal is to get you to save and invest for your future. By simply saving $100 each month, you are more likely to reach your long-term goals).

Understand that you still pay the management fees of the underlying ETF’s that you invest in. This hold true if you invest in ETFs with any broker. In other words, the ETF fee is one you cannot avoid.

Now, we all know that I’m not a fan of fees. But in the case of Betterment, the fee isn’t an issue. Here is why. The average investor earns 2% annually on their investments. That’s it. A measly 2%. On average, Betterment investors earn 1.25% MORE than the average investor, and this takes into account that miniscule management fee they charge you.

The reason why this is, is simple: the average, non-Betterment investor allows emotion to enter the picture and cloud their judgment. When the market rises they buy and when the market drops, they sell. This is exact opposite of what should be done.

With Betterment, you are buying regardless if the market is up or down. When it is up, you buy fewer shares with your automatic investment. When the market drops, you buy more shares with your automatic investment. You are taking advantage of the stock market when stocks are on sale: you buy more shares at a lower cost and fewer shares at a higher cost.

But that’s not all. With Betterment, you stay invested for the long-term. Your emotions don’t sway you into doing the wrong thing. For me, I honestly forget that I have a Betterment account sometimes because they do everything for me (more on this below). I get an email telling me that my automatic deposit was just invested or that I earned dividends and they are being reinvested. In other words, they don’t allow for my emotions to derail my goals by doing everything for me.

Pro’s And Con’s To Betterment

As with anything in life, there are both pro’s and con’s. Below are what I feel are the pro’s and con’s to Betterment.

Pro’s

  • No Researching Investments: They have the ETFs they use for investing. All I have to do is pick a goal and set up a monthly transfer and I am done.
  • Solid Principles: Betterment is built on the idea of index investing. It’s been proven time and time again that you can’t consistently beat the market. Betterment knows this and doesn’t engage in it. They also understand that fees and taxes are what really determine performance.
  • Fees: They have to charge a fee for what they offer you, but that fee is more than reasonable.
  • Automatic Rebalancing: Over time, depending on how the stock market performs, your asset allocation can get out of whack. Your 60% stock/40% bond portfolio can turn into a 70% stock/30% bonds portfolio. This is a bad thing. If you become too heavily weighted in stocks, you will be taking on more risk than you would like. On the other side, if your bond holdings become too great, you risk not earning the return you need, thus never reaching your goals. With Betterment, they will keep your portfolio allocation right where it needs to be.
  • Tax Benefits: Tied to the automatic rebalancing above, Betterment makes sure they rebalance in the most tax efficient way possible. This means come tax time, the chance of you owing a large amount of taxes is small.
  • Tax Impact Preview: This new feature lets you see the potential tax impact of selling shares or even changing your allocation. No more tax surprises! You’ll know before you make any trade what the tax impact will me.
  • Free Advice: Betterment has a terrific blog and they offer basic investing advice to their investors free of charge.
  • Fractional Investing: With many brokers, you can only invest in ETFs in whole shares. This means that if you have $100 to invest and the share price is $75, you can buy 1 share. Your remaining $25 will sit in cash, earning you virtually nothing. With Betterment, you can invest in fractional shares, meaning that all of your money is working for you, all of the time.
  • Website Layout: I haven’t really talked about the website, but it is great. You know when you go to some websites and you have to look around for 5-10 minutes trying to figure out where things are or how to do things? Betterment isn’t like that at all. Its layout is clean and easy to navigate. In fact, I would argue it’s probably one of the easiest sites to navigate.
  • Always Adapting: Even though Betterment doesn’t believe in active investing, they are always making enhancements and improvements to the site, service and portfolios. These enhancements result in better efficiency for both Betterment and the user as well as stronger portfolios.
  • Great For Beginners: I know that for many newcomers to investing, investing can be overwhelming. With its simple approach, a beginner will feel at ease from the start and that will translate into long-term investing success.
  • Always Improving: The people at Betterment are just sitting back doing nothing. They are constantly working to make things better. How do I know this? I’ve updated this post at least 3 times since I wrote it because of some new amazing features. While I can’t say they will be offering new features this frequently in the future, I am certain that they will continue to introduce new features in the future.
  • Tools: The site has a lot of tools that you can play around with to help you see where you will be in the future and what you can do to help make your goal more of a reality. This includes playing with the amount you save each month, adding a one time deposit like a tax refund, changing your time horizon or your investment allocation.

bettermnet potential

Con’s

  • Investment Options: There are only a few ETFs upon which your portfolio is built upon. For many, this lack of investment options is a turn-off, which is why I list it as a con. But in reality, this is secretly a pro of the service. See, you don’t need 20,000 investments to build a diversified portfolio. In fact, I would bet that if you looked at all of the holdings in your portfolio right now, you would see a lot of overlap. What I mean by this is that if you own 2 large cap mutual funds or ETFs, chances are, you are holding virtually the same companies, just a different percentage of them in each investment. You don’t need 20,000 investments to be diversified. As I have shown in my model portfolio post, you can get by on just 3 holdings. Don’t fall for the “more is better” trick with investing.
  • Cost of Service: Betterment costs money to use. You can easily learn the basics of investing (I preach them throughout my blog) and do it all yourself. But the fee they charge is small in comparison to what most advisors charge.

Betterment Versus The Competition

Below is a chart that compares Betterment to a traditional financial advisor, mutual funds providers and exchange traded funds providers.

Betterment Comparison Chart

You can read more about this chart on the Betterment Blog.

Why I Recommend Betterment

To me, it all comes down to what I am getting for my money. I’ve learned that you can’t just look at what something costs you, you have to look at the benefit it provides. For example, you might need surgery on your eye to ensure you won’t go blind. The surgery costs $10,000. Do you just look at the price and scoff, thinking it’s a waste of money? No, you look at the benefit – not going blind – and decide to pay.

The same idea holds true with Betterment. They charge a fee to invest. OK, that stinks. I’ll be the first to admit it. But, look at what you get:

  • Free Trades
  • Free Reinvesting of Dividends
  • Free Rebalancing

These typically cost money with other brokers. But this isn’t that only benefit with Betterment. It’s the fact that everything is automated for you. You never have to think about making it a point to invest for the future. You set up the transfer once and you forget about it.

Automating like this works. If you automate saving money from each paycheck already, you know what I am talking about. But if you don’t, you still experience automation. Do you have any service that automatically renews? That is automation right there. I bet you never think about that. Have your credit card on file with iTunes? That is automation right there. All you have to do is tap the screen and boom, you have a song.

This is why even though Betterment charges a fee, the fee is more than worth it in the long-run. You will stay invested and will be less likely to react based on emotions. Again, this is what defeats the overwhelming majority of investors out there. They allow their emotions to interfere.

Betterment

If you want to reach your financial goals, I urge you to take a look at Betterment. In fact, it won’t even cost you anything to try. If you open an account with less than $5,000 they will give you 1 month free – no management fee. If you open your account with more, you will go longer without paying a management fee.

$1 – $4,999: Receive 1 month free
$5,000 – $24,999: Receive 3 months free
$25,000 – $99,999: Receive 4 months free
$100,000 and above: Receive 6 months free

Therefore, there is no reason not to try it out. Betterment saves you time by automating the entire process and it saves you money in the long-run by keeping you invested and your investments optimized. Give it a try for free for 30 days and relish in the fact that you are making one of the smartest financial moves of your life.

I highly encourage you to take the next 10 minutes and click here (or the picture below) to open your account at Betterment. You can open your account with as little as $25 and then set up a recurring transfer each month after that. You’ve got nothing to lose and everything to gain. By spending 10 minutes and setting up your account, you are taking the first step towards living the financial life you want.

You can’t do anything or have anything in life without taking that first step. I know you will love Betterment and how the service helps you reach your goals.

Full Disclosure: I am not getting paid for this review. I have had a Betterment account for over a year and absolutely love it. If you do click on the link or the picture below and open an account, I will earn a referral fee. (Thank you in advance to those that go this route.) This post was originally published in 2013 but was updated to reflect updated features of Betterment.



How To Save Money

how to save moneyAre you living paycheck to paycheck and want to break the cycle? Do you want to learn how to save money? Then you’ve come to the right place. Many people think that saving money is easy to do. For some, it is. But for others, particularly those that are struggling financially, saving money is indeed very hard. Why is this?

Why Is Saving Money Hard?

When you are struggling financially, you do what humans do best – you focus on how to survive. It’s what humans have always done. When we focus on surviving, we only think about and care about the here and now, the present. We don’t care about next week or next year. We only care about today.

This process encompasses everything about human life. If you are trying to lose weight by not eating (aka starving yourself), you are going to stay overweight. Why is this? Because your body is trying to survive and so it will store fat and use muscle for energy since this is the most efficient thing it can do.

Likewise, when you are living paycheck to paycheck, you aren’t interested in saving for retirement or a vacation next year, you are only concerned with how to pay those bills that are sitting on your desk right now.

The question is how do you balance this inner need for survival while focusing more on the long-term?

How To Save Money

The very first thing you need to do is automate things. It’s simple to set up automation. All you have to do is open up a savings account and then set up an automatic transfer from your checking account to your savings account. I have my automatic transfers set up on the 15th and the 30th of the month since that is when I get paid. This works for me. Choose what dates work best for you.

By automating your savings, you avoid having to focus on the long-term. You can just focus on the here and now and let automation worry about the future.

Once you decide on dates, you need to figure out an amount to transfer. The biggest mistake you can make is transferring too much. You want to transfer as much as you can, without noticing you have less money in your checking account. For many, that might only be $10 twice per month. I know it isn’t a lot, but don’t focus on the amount at this point.

A quick story about me, when I graduated and finally found a job, I was contributing a cool $20 per paycheck into my 401k account. It’s all I could afford with the credit card debt I had and my student loans. I was OK with this amount though because I understood the power of compound interest. That was 10 years ago. While over time I did increase my contribution amounts, I have turned those $20 bi-weekly contributions into close to 6 figures. You can do this too.

If that story doesn’t sway you, I have one more example for you. Think about how you are marketed to. Many times you are getting something free for 30 days and then you start paying. Why is this? It’s because of everything I talked about in the beginning of this post. You are going to buy this product or service because it is free now – the part you are focused on, the now – and the payments start later, where you aren’t focused, the future. Automating your savings is the same thing. You get to focus on today, the automation focuses on the future for you.

Set up automatic transfers, start off small and slowly build up over time. Many times though, people fail to increase their savings as time goes on. Luckily, we can help with that as well.

Increasing Savings Over Time

OK, so you have set up your automatic transfers but you need to figure out how to increase the amount you are saving over time. Welcome FutureMe.org. This is a free website that lets you email yourself at a future time. Before we go any further, it doesn’t work in reverse and let you know who wins the Super Bowl in 2018 so you can bet the house and strike it rich.

FutureMe.org works like this: you write an email to yourself and then decide when to have it sent. On that day in the future you will receive the email from yourself. In a nutshell, it’s a reminder for the 22nd century.  You might be wondering how this will help you save more. Here’s how.

Write an email to yourself to be delivered to you in one year. Make sure the email is honest and heartfelt – remember you are the only one reading it. Say something like:

Hey You,

Remember last year when you read that great blog post on MoneySmartGuides about how to save money? Well the future is here and it’s reminding you to increase the amount you are saving. I know, you think you can’t spare another $20 but you really can. Think about how great it feels now looking at your savings account with all of that money in it and how much greater it will feel when you see a lot more money in there. You can do this. It’s $20 a month! Is being depressed and unable to afford anything in the future worth $20 to you?

It’s that simple. In fact, you can even take this one step further. Maybe you get a tax refund every year in April. Send yourself a future email reminding you to take just 10% of that refund and save it instead of spending it. Or maybe you get a nice bonus during the holidays where you can do the same thing and save 10%.

Or better yet, maybe you can send yourself an email in December reminding you that the credit card debt from buying too many Christmas gifts isn’t worth it and that will help you to keep your spending in check over the holidays. The choices are endless.

The reason the future email works is because it is a reminder. Studies have shown that you are more likely to reach a goal when you are reminded of that goal. Think of how often you decide to do something and then fail 6 months later. Why is this? You aren’t reminded of your goal. If you don’t remind yourself to increase your savings amount, you are most likely not going to do it.

How To Save Money – Your Action Steps

To recap everything we went over, if you want to learn how to save money, you need to:

Automate Savings and Start Small: Open up a savings account. I personally use Capital One 360 (formerly ING Direct) and love it. In fact, if you open a savings account using my referral link and deposit $250, you’ll get a $25 bonus. That’s a 10% bonus for opening a new account! You don’t even need to change your checking account either.

Once your account is open, set up the automatic transfer to savings. Remember to start small. I can’t stress that enough. Decide how much you think you can save each month without noticing a change to your lifestyle. Even if it is $10 twice per month, it’s better than nothing.

Increase Your Saving Amount Annually: Go to FutureMe.org and set up an email to yourself as a reminder to increase your savings amount next year. Make sure you also add in to increase the amount you are saving in your retirement plan at work as well in the email.

Final Thoughts

Learning how to save money isn’t something many of us think we need to learn how to do, but in fact we do need to learn how to save money. If you take the steps I’ve outlined above, you will set yourself on a path to creating wealth in your life. Lastly, if you need help cutting expenses from your budget so that you can save even more, be sure to read my book, Spare Change: Adding It Up Can Change Your Life.

Readers, what are your thoughts the difficulty of how to save money?