Finance Challenge 2017 – Week #4

Week #4 is here! Firstly, the budgeting component for the Finance Challenge will need to be delayed for a couple of weeks. As one can imagine, it takes more than one week to test out a budget, especially since it is a monthly budget. Don’t worry though, that write up is definitely coming soon! This is a similar situation to last week, where I racked my brain to see what I could possibly do to positively impact my financial situation with minimal effort on my end. Since last week was about maximizing credit card rewards and cash back, a logical thought to have is, “where do you put the cashback?” This week I’m introducing Acorns!

Acorns is an app designed to increase the amount of money you invest each week. It does this by investing your spare change. How does it determine what spare change to invest? Well, you link your credit and debit cards to the Acorns app, along with a checking account. The app monitors the purchases made on the credit and debit cards. The app rounds of the cents of purchases to the nearest dollar, for example if you bought a $2.95 coffee, then Acorns would record a nickel, rounding the transaction up. At the end of each week, Acorns adds all the transactions up to a sum of money, which is then withdrawn from your checking account. In my experience, this tends to be around $5 to $12 each week that is invested.

In full disclosure, I have had the Acorns app since it’s launch in 2014. I’m including it in this week’s post because I have been neglecting my account for quite some time now. I only have one credit card linked to it, despite having several others that get more use. I now have nearly all of my credit cards linked and changed my checking account to one I use more frequently. I did have an issue trying to link my Capital One and Fidelity credit cards that I will follow back up on after reaching out to the Acorns support team. I would advise against linking the Acorns app to withdraw from a savings account, as discussed in week #2, savings accounts are limited to six withdrawals per month and with four weeks in a month, that’s four of the six allowed.

The money deposited with Acorns is invested in a portfolio of Exchange Traded Funds (ETFs). This is also called a robo-advisor. When you set your account up with Acorns, you’ll need to decide on your investment goals (what the money is for and when do you need it) and whether you are willing to take on high (aggressive), medium (mild), or low (conservative) risk to meet those goals. Acorns does all of the investing for you, so there’s no need to pick individual securities. The robo-advisor technology also re-balances the portfolio back to it’s target allocations of each security you are invested in that is in line with the answers you provided about your risk appetite during account opening. Keep in mind that investments are not FDIC insured and can lose value.

The market has been roaring for the last couple of months. In fact, the Dow Jones Industrial Average just hit an all time record high price of 20,068.51 on January 25th, 2017. To put that in perspective, one year to the date prior, it was 15,5885.22, which is a really tremendous rally. My fellow millennials that will actually chat about investing with me are even more discouraged to invest now, since most fear that a market crash is a certainty. No one wants to invest right at the very top. Unfortunately, no one knows where to top actually is though. I like the Acorns app because it teaches and automates some basic investing fundamentals with very little money at risk. Firstly, the old saying goes, “the best time to plant a tree was 20 years ago, the next best time is now.” The point being that the best time to start is now. Start small and build up gradually, especially if you are skeptical or unsure. It is wise to be cautious of the market, but it’s not wise to be paralyzed with fear. Other than getting comfortable with putting real money at risk for investment profit, Acorns also teaches and automates the process of dollar-cost averaging. In short, this concept constantly puts cash to work by investing no matter what the cost of the instrument, or what the market is doing. That means investing a fixed amount (or very close to fixed) and buying a share of stock when it is priced at $10 or $100, it just means that more shares are purchased at $10 than at $100. This is the coolest part about dollar-cost averaging, in the long run it usually produces the lowest average price paid for your position in an investment. If you’re interested I highly check out the results from a google search of “Dollar-cost Averaging Harmonic Mean.”

On a final note, let’s talk about fees. The good news is that students can use Acorns for free. Hopefully, that will encourage younger people to invest earlier on, (I certainly wish I had started when I was in college). Everyone else will be charged, $1 per month to use the service. Eventually, when you’ve accumulated $5,000 in your Acorns account, you will be switched from the $1 per month fee schedule to a 0.25% fee on the balance of the account. This is the only part of Acorns that I am sour on; until the $5,000 level is reached the $1 per month fee is a large drag on portfolio growth.

Speaking directly to the non-students, the $1 fee can have a very large impact on the growth of your portfolio.Referring back to the $2.95 coffee example a few paragraphs up, the round up amount is only a nickel ($0.05). If that was the only transaction during that month, you’re technically in the red by $0.95, once the service fee is charged. A higher number of transactions each month would likely produce more round-ups that would sum to an amount greater than $1, but even if you had 100 transactions and each ended in $0.99 (like $4.99, $10.99, etc) that is still only $1 in round-ups, which would then be wiped out by the fee. In reality, both of these scenarios are very unlikely, but they do exist. To match the same fee 0.25% fee that $5,000 accounts are charged would require $400 in round ups invested per month. As I stated above, I averaged about $5 to $12 per month in round-ups that were deposited. That works out to be about 20%-8% fee for a robo-advisor. Unfortunately, there are cheaper robo-advisors out there.

Acorns does allow users to round-up the change of a transaction plus a whole dollar amount, e.g. if set to a whole dollar round up of $1, the coffee example would actually deposit $1.05 (3.00-2.95=0.05, +1.00=$1.05). This may help to minimize the negative effects of the $1 fee on growth, but this will not make the fee or it’s impact go away completely.

In conclusion, Acorns is great for students since the $1 per month fee is waived. At the $400 per month in round-up deposits level, it is on par in cost with competitors like Betterment and Wealthfront, without the minimum balances that these competitors charge. The performance of the actual portfolio was intentionally left out of this post since my crystal ball is no better than anyone else’s at making predictions. Acorns allows us to start investing now and to start investing small, but not without some fees. Besides, what would you have done with that change at the end of the month anyway? Putting it to work is probably a better option than any alternative.

If I haven’t scared you away and you’d like to learn more, you can click the link here for Acorns.

Remember, investments are not FDIC insured and may lose value. Investing involves risk and investments may lose value. Please consider your objectives and Acorns fees before investing. Past performance does not guarantee future results. Investment outcomes and projections are hypothetical in nature.

 

 

 

Finance Challenge 2017 – Week #3

Week #3 is here! Last week I hinted that I would be creating a budget for this week. Unfortunately, I didn’t have sufficient time to test more than one product and in essence more than one strategy at budgeting. I tried to rack my brain for something “quick” that I could use for the challenge. I looked at what I was doing regardless of being on the challenge or not, and the idea of purchasing things really stood out. Think about it, whether this blog benefits you or not, you will still go out and buy things, even if it is just to merely survive another week. How can you save money on the purchases you have to make? Enter credit cards.

According to a recent Market Watch article, debit cards are used twice as often as credit cards here in the USA. What’s great about using a debit card instead of credit card, is that if you don’t have the money, you can’t make the purchase. With a credit card, obviously, you can take on debt and finance a purchase, which might not be necessary.  If you remember from my week #1 post, I mentioned Dave Ramsey and how I don’t always agree with him; credit cards are an issue where we part in thinking. Dave would have everyone buy everything in cash if possible, but a debit card is just as widely accepted. The issue is that credit cards offer a rebate to the purchases you make on them. If you had to buy a new set of boots to get through this winter for $100, you would pay $100 with a debit card. If you made the same purchase with a flat 2% cash back credit card, you would still pay $100, but you would get a whopping $2.00 back, effectively making the purchase $98.00. Imagine for a minute if every purchase you made, even most bills, cost you 2% less, how much could that save you at the end of the year? I can see why debit cards are popular though, because credit cards do have a hellish down side.

Credit cards charge interest that is well beyond the rewards or cashback received. An interest rate of 25% is very common. Make no mistake, if you fail to pay your statement balance each and every time you get your bill, that interest rate charge will wipe out any cost savings and make you regret that purchase, possibly for the rest of your life. The thing to notice though, is that if you do pay your balance off in full each and every month without exception the benefit is two fold. First, you earn rewards or cash back, and second you are getting a short-term interest free loan. The loan component is pretty neat, because it means that the money in your interest earning checking or savings account (like what was mentioned last week) will earn interest, until it leaves your account to pay your bill.

The main argument for debit cards over credit cards is usually the ease of over spending money. I’m not a psychologist, nor do I play one on the internet, but through my anecdotal research it appears that humans will make an unaffordable purchase more frequently with a credit card. But overspending isn’t limited to just credit cards, it is just as easy to spend money with the swipe of a debit card. The difference is knowing what you can and cannot spend each and every time you make a purchase, especially because a credit card will delay the monetary impact until a later date (i.e. your bill at the end of the month) versus a debit card where the impact is within a business day or two. And that ties us back into why having  a budget is so important.

So while I am fiddling with a budget, monitoring what exactly can and cannot be spent, I’m also trying to save money or earn more money. What I decided on for week #3 was to maximize my credit card rewards and cash back. This was made unbelievably easy with an app called, Wallaby.

The Wallaby app has a lot of features, but I only use one. It allows you to pick the credit cards you have and it lists off which card to use when making a purchase. As an example, I have the Discover It card, which rotates through categories earn 5% cashback. During Q1 2017 it earns that bonus cashback rate at “Gas Stations, Ground Transportation, and Wholesale Clubs.” Anything outside of those categories, it only earns 1% cashback. If I go to a supermarket and make a purchase, using the Discover It card may not be the best choice if I want to maximize rewards. I can use the Wallaby app and see which card would be the best to use in this situation.

wallaby-app

My goal is to always you the card that will have the highest cash back percentage. I haven’t run any hard figures yet, but saving an average of 2% per transaction for an entire year should at the very least help keep up with the pace of prices increasing for things I buy (see: inflation).

As a word of caution, the reviews for the Wallaby app have been turning negative lately with a lot of the features being packed into the app not working correctly. I haven’t run into any of those issues, because I only use this one feature. I also haven’t given up any of my personal credit card details as I try to keep that information off of third-party servers as much as possible.

As a final reminder, use credit responsibly or not at all. I don’t accept any responsibility for your credit usage.

Until next week!

 

 

 

 

Finance Challenge 2017 – Week #2

Week two is here! On a similar note as last week, I’ve opened another savings account with Synchrony Bank. The rate for the savings account is higher than the average at 1.05%. Unlike the Netspend account I talked about last week, this account does not have a limit on how much I can have deposited. While just opening an account isn’t exactly noteworthy, I have an unorthodox plan for this account. I plan to have my direct deposit sent here, instead of my checking account. I’m going to test the theory that I can earn interest on the idle cash between deposits and bill payments (like rent). If I can have my $1,000 of rent money sit in an account earning 1.05% for the majority of the month, versus 0.01% in a checking account, I should be able to accumulate an additional $10.50 a year. A small victory, but a victory nonetheless! This should be doable, considering that most banks calculate your accumulated interest based on a monthly average balance (e.g. the longer the money for bills sits idle in the account, the better). The only concern that I have with this experiment, is that federal law only allows 6 withdrawals from a savings account per month. This is definitely a problem if each bill is paid individually, since it’s very likely to have more than six bills each month.That leads to another interesting part of this experiment though. If I can only access money six times a month, is there a chance that I will not be tempted to spend the money? I’m very interested to find out!

Some other useful information:

  • Synchrony was formerly GE Capital (General Electric).
  • There’s no minimum balance requirement or monthly service fee.
  • The website is easy to use, but in all honesty it looks a little dated.

This account was found just like the Netspend account from the last post, a quick Google search. There are other HYSAs at the 1.05% rate, but I chose Synchrony for their high reviews on bankrate.com and the fact that I have a credit card with them as well.

The account can be found here. If you’d like to see other options, Bankrate has compiled a pretty comprehensive list here and you can see how the account stacks up against nation wide competition.

Finally, just like with Netspend make sure to thoroughly check the FDIC insurance and fee schedule before, just in case the information provided here is no longer relevant.Also, don’t forget the six withdrawal limit.

Now that I have this account in place, a budget will be more critical than ever. That sounds like a great place to start for week three!

Until next time!

UPDATE: Ensure that your brick and mortar bank originally used for Direct Deposit, does not charge any fees! Most checking accounts now appear to have a maintenance fee that is typically waived by direct deposits during the statement period. Switching to the Savings Account, may eliminate the fee waiver and consequently charge a fee to the checking account. I will be reviewing which accounts do not charge these fees in a future post.

 

Finance Challenge 2017 – Week #1

I’m excited to share the first outcome for the Finance Challenge. I now have a High-Yield Savings Account (or HYSA) funded with $1000 to be used as a bare-bones emergency fund. I decided to go with Netspend, a prepaid debit card issuer, for this account. Netspend has a prepaid debit card that also comes with a savings account that is FDIC insured. Currently the savings account offers 5% on $1000 and a lower rate of 0.49%  on balances above $1000. In full-disclosure, I have had a Netspend account for nearly one year now. But it is now fully funded! This should net me around $50 this year, for basically no effort! So why did I decide to announce this as the first item of the Finance Challenge?

Anyone familiar with personal finance has probably heard of Dave Ramsey and his “baby steps” to financial freedom. Baby step #1 is to have an emergency fund with $1000 in it. While I do not always agree with Dave’s principles, I do agree with this one. The Netspend account maximum for the high yield just happened to correspond with Dave’s first step.

When you sign up for the Netspend prepaid debit card, you are actually signing up for two accounts. One account is linked to a debit card like a regular checking account, which does not earn any interest. The second account is the HYSA. Don’t worry, they are both created automatically. The user interface for the Netspend website is actually really easy to use and looks better than most brick and mortar banks. You can view and transfer money between accounts in the website menu after logging into your account.

Since this is mainly an emergency fund, my top priority was whether I would be able to access my cash quickly. I would most likely use an ACH transfer to my regular bank account if I can afford the 2-3 business days of processing the transfer, but if not it is nice to have a debit card to pull money out of an ATM, even if you have to eat a $2.50 fee, plus the ATM operator fee (usually around $3.00).

Speaking of fees, here are a few more things to note about this account.

  • The pay-as-you go fee plan is the lowest cost fee plan and luckily, it is the default.
  • This account has monthly fees and transaction fees. The fees can be avoided if you do not use the debit card that comes with it for ATM withdrawals and purchases. The full fee schedule is also easy to find on the NetSpend website.
  • There is an inactivity fee. This can be avoided with some sort of transaction monthly. I am using an ACH electronic bank transfer with my brick and mortar bank to deposit and then withdraw $1 every month. This avoids the inactivity fee and is also free to do, unlike using the debit card as stated above.
  • The interest is paid quarterly, not monthly. This lowers the yield to 4.91%. The 4.91% should be used for comparison with other savings accounts and even Certificates of Deposit (CDs). Clearly 4.91% is much higher than the average of 1% available from traditional competitors and online banks.
  • To optimize the higher yield, the interest earned each quarter is probably best to be withdrawn as soon as available, because anything above the $1000 as it will earn at the lower rate. To earn a higher return, this interest should be withdrawn then immediately deposited in a traditional savings account or an investment account.
  • The 5% interest rate has been going on for at least a year now. It is so much better than competitors that I fear it may be lowered in the future. I will be keeping an eye out for any changes in the interest rate.
  • A traditional bank is necessary to have in addition to the Netspend account, in order to transfer funds into and out of the account fee-free. Paypal is also an option; however, I haven’t used Paypal with this account.
  • Again, full-disclosure, there was a small issue when setting up a link between my Netspend account and my traditional bank; however, a call to customer service easily fixed my issue.

For more information, check out the Netspend website here. If you are sure that your situation could benefit with this prepaid debit card and HYSA, I’d like to offer up my referral. You will receive $20 when you activate your Netspend card and deposit $40 or more using this link here. I will also receive $20. Feel free to use whatever link you are comfortable with, my goal is to inform.

I found the account through a quick Google search for High Yield Savings. There are other HYSAs out there, in case you are reading this and it is no longer available.

Finally, make sure to thoroughly check the FDIC insurance and fee schedule before, just in case the information provided here is no longer relevant.

 

Until next time!

 

 

52 Week Finance Challenge 2017

Happy New Year!

Just like many of you I have setup New Years Resolutions for 2017. Most people set financial goals with a set figure for saving or earning in mind. My resolution was to become more financially wise over the coming year. I decided on challenging myself to come up with 52 ways to improve my financial system and situation, one for every week this year. I’ll be sharing what I learn and deploy here on the blog, both good and bad. I’ll also provide updates if anything changes from prior weeks. The guidelines I’ve come up with are as follows:

The change must do one of the following:

  • Help save or invest more money (e.g. cutting costs & tighter budgeting)
  • Help earn more income (e.g. finding higher rates of return)
  • Help automate the process (e.g. setting up automatic transfers between accounts)

To be clear, the current status of my finances is not terrible, but it could always be better and I’m willing to turn over a lot more stones to make improvements. The great thing is that I’ll share what I’m doing and that may help others out there as well. I’m hopeful that the success of this challenge will bring more challenges for productivity and other such topics. Look for the first post this Saturday!