Why You Should Avoid Acorns (and other expensive investing gimmicks)

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Lately there have been many questions coming my way in regards to the new Acorns Investing App.

“What do you think about Acorns?”

I don’t.

“Do you recommend the Acorns app?”

No.

“Should I…”

No.

No.

No.

Listen folks. We have to stop trying to take the easy way out of things that were a piece of cake to begin.
When we opt for even lazier, we opt for even more expensive.

How expensive?

Lets start from the top:

Acorns is a mobile app that supposedly rounds up your recent spending transactions and invests the rounded up portion.

But for someone to provide this “service”, there is going to be an expense for it. (even though there is no benefit of micro investing in the first place)

The service itself becomes expensive for two reasons: #1 Acorns has to keep track of your spending, calculate the difference and then find someone to pay for this service.

That person is you. This is part of the $1/month fee in addition to .50% of your balance you get to hand over each year.

What does that mean for your money? The below is if someone invested $200/month using www.BKFInvestingSchool.com principals.

no acorns

And below is what happens when you take a seemingly small, yet actually substantial .50% out of someone’s return over long periods of time using “Acorns”:

w acorns

Yes, that is a cold hard $139,824 difference between the first return and the second return.

A straight up $139k taken right out of your pocket.

And it doesn’t even do what you think.

Which brings us to the #2 reason the Acorns service is expensive – starting your investing career off of lies is one of the most harmful things you can do. If you fall for simple tricks, you will fall for larger ones. And they only get more expensive.

If you notice on the Acorns website, the term “virtual” is used to describe this rounding up of transactions. This is because the app doesn’t actually take the rounded up portion of that $3.95 cup of Starbucks you bought. No your checking account nor the transactions you make are not incorporated into to the Acorns app in any way. Its true function is to simply make an automatic transfer from your bank account of whatever dollar amount you want whenever you want. 

Which any person on earth can do, for free.

This means that to achieve the same investment regimen, all you would need to do is schedule an automatic transfer of X amount of money from your checking into your TD Ameritrade brokerage account, use the same commission free ETFs and not pay anyone an additional X amount to do so.

Better yet? Now you’ll be able to actually teach your kids how to invest because you know how, vs depending on some app that may or may not be in business in 5 years to do blind allocations on your behalf. You can not pass on an App to your kids and expect to form a wealthy lineage.

We must do better.

Next thing to understand about just how expensive this app is in other areas, is how psychology affects your investment returns.

Bad psychology

Consider this:

Sam makes a complete financial overhaul and learns to manage his money. After eliminating his liabilities (his consumer debt) and now that he isn’t paying $1,100 in car loans, credit cards and personal loans, he takes half of that amount to add to his investments each month. ($550/month)

Over 40 years, his portfolio becomes worth $2,953,972.

Chris on the other hand likes the easy way out. He never buckles down to learn to manage his money and instead defers to a random app he heard about on the internet that promises to round up his horrible spending habits while charging him for the ability to do so.

Since Chris continually drowns in monthly liabilities & debt payments instead of getting his life and finances together, he only has about $1/day in rounded up change to invest over those 40 years.

Over 40 years, this becomes $142,098 in the bank. 

He blows through this amount with one medical procedure in “retirement”.

Moral of the story: when you’re encouraged to be broke, broke is exactly what you will aim to be.

dontbestupid

But lastly and potentially most detrimental of all?
taxes1


Let me give you a quick overview on how taxes are paid on traditional investments.

If you buy 4 shares of a mutual fund on March 3rd 2014….and you sell those 4 shares on March 30th 2014, you will receive paperwork from your brokerage account indicating you’ve done so. You would then take that information and plug it into Turbotax or provide it to your tax person.

You or they would then do the math and figure out the net gain (or loss) on that transaction (the date you bought the specific number of shares and the date you sold them) so that you can pay taxes based on the amount. (most brokerages don’t provide this last part to you)

And that’s the semi-easy part.

But now what happens when you buy 4 shares of that same mutual fund on March 4th, 5th, 6th, 7th, 8th, 9th…. and essentially every day of the year? Who calculates and records net profit from these purchases and when you sell them? 

Once it gets too overwhelming for you and/or your tax person on 365 purchases a year, how much will you be charged in addition to your normal fee for having a far more complicated tax return than normal? (they charge upwards of $500 for this managing high numbers of stock transactions)

Even worse? Now that we have a multitude of purchases on the front end, what happens when Acorns does its “automatic re balancing” and dividend reinvesting on your behalf? For re-balancing that means you’re triggering a taxable event by selling portions of your investments when you otherwise might not have. (you should be buying and holding for 5 years minimum vs selling frequently)

And for the over abundance of dividend reinvestment? In conjunction with the re-balancing just mentioned?… lets just put it like this… you will be in one bonafied….

 tax nightmare 2

Don’t do it to yourself.

Investing is simple. Don’t try to make something simple, simpler by taking away hundreds of thousands of dollars in potential return and forcing yourself into the wrong psychology.

And for damn sure don’t place yourself in an un-needed tax war with the IRS for when you never get around to putting together last years tax return after being overwhelmed.

In reality, nobody gets successful in America by being lazy.

                                                                                              -Bruno Tonioli

Learn how to invest the right way, here.

Don’t Get Suckered into “Whole Life” Insurance!

Insurance scam

Lets be clear about a few things:

#1 Whole life insurance is for crazy people. Period.

#2. Whenever these whole life/cash value sales agents try and sell you the tired routine of “its the perfect time to get whole life insurance because you are young and healthy!” its because they see you as a walking commission check. Plus their kid needs a paid for college education

Here’s a general rule in life. Whatever the salesperson DOESN’T make a ton of commission on?

Think about buying that one first.

Heres why….

Whole life vs Renewable Term Example

Whole Life:

• $200 monthly premium paid over 30 years to gain $125k in insurance payout at the time of  death. (remember the actual cash value you paid into is kept by the insurance company upon death)
◦ $125k with over 30 years of inflation will only feel like $53,376.02 to your family.
◦ $200k with over 50 years of inflation will only feel like $16,692.64 to your family.

Renewable Term: 

• $40 monthly premium paid over 30 years to pay out $500k in death benefit.
• The other $160 not paid to the life insurance company can be invested and earn a far greater return. 
◦ Over 30 years, at the market average of 9.7%, that amount becomes $327,374.21
◦ Over 50 years, at the market average of 9.7% that amount becomes $2,085,340.68 (this is even factoring in when your premiums increase because you haven’t passed at the 30 year mark)

Summary:
If you die in 30 years with whole life, your family gets a $125k payout which will feel like $53k due to inflation. Your life insurance keeps the cash portion of your policy.
If you die in 50 years, with whole life, your family gets a $200k payout that will feel like $26,708 due to inflation.

If you die in 30 years with renewable term life insurance, your family gets a life insurance payout of $500k in addition to a personal investment account that has $327,374.21 in it.
If you die in 50 years, with renewable term life insurance, your family gets $1million (or whatever you decide to renew your life insurance policy at) and gets a personal investment account with $2,085,340.68 inside of it.

Net net: by allowing these product salesmen (I don’t call them financial advisors) to collect huge bonuses from selling us whole life insurance, we are costing our families tremendous amounts of money.
And yes your premium will rise once you renew term life at the 30 year mark, but it will be around the same as you’re paying now. Thats how inflation works. Salespeople try to use this to trick/scare people all the time into signing up for whole life insurance.
But think about this – even if your premium doubled in terms of real dollars, it would be a drop in the bucket from what you get as a benefit. Remember, the reason to take out renewable term insurance is so that you can’t be denied due to any medical condition.
More info on the whole life insurance hustle:

http://www.subjectmoney.com/articledisplay.php?title=Beware%20of%20the%20Whole%20Life%20Insurance%20Rip-Off%20and%20Scam:%20Buy%20Term%20Life%20Insurance%20and%20Invest%20the%20Difference

 

The sad part is its always some “friend” or family member that convinces us to sign up for this whole life insurance crap too. Just like the MLM industry.

For new car drivers: Leasing is now killing owning

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What they won’t tell you: Leasing car a car is now the smartest car choice for most people

Allow me to explain.

Americans are keeping their cars longer these days – this we know. The average we keep our financed cars before running back to a dealership is going on almost 6 years.

But you know whats also true? A. New cars are getting more expensive and B. we’re taking out longer loans than ever, to pay for them.

This means that those who buy new cars are paying on average $472/month over…you guessed it….72 months. (6 years)

Yes, that car you were so dead set on owning has been going down in value over those same 6 years while newer cars are going up in value every year.

So once its time to trade up, years after your warranty and maintenance plans have expired, the car you trade in is worth less (not “worthless”) and your payments become, again, $472/month. (we’re going to give you the benefit of the doubt and say you aren’t one of the many actually trading up with negative equity in your current car, read about that here –> http://thisiswhyubroke.wordpress.com/2012/01/02/the-lost-decade/ )

Now lets take the average lease for a lower mid priced sedan on the other hand: $270/month (with down and taxes factored in).

Quick math shows us we’re dealing with about a loss of about $200 in cash-flow for “owner” vs the lease.

We’re not factoring in the effect of having a more fuel efficient car every 3 years (data shows autos get more efficient yearly), not factoring in lack of maintenance (this is huge) and not factoring in the intangable mental benefits of mostly always driving a worry free car….

But guess what investment gain that translates into for the lease holder?

**$1,074,171.90 over 40 years.**

Yes, thats a million you’re giving away for listening to what others tell you without doing the math for yourself.

The secret is and always has been monthly cash-flow.

Not necessarily time, but cash-flow.

A couple caveats -

  • As you’ll always hear us say, a creative mix of public transportation is the best transportation.
  • For those who must have cars however, and you are purchasing cars every 6 years, financially you’d be better off leasing. Leasing a car that holds its value is literally whipping that a$$ right now.
  • The best way to lease a car is to pre-pay the lease for those 36 months in advance (commanding a discount and forcing you to only buy what you can afford).
  • You do not need credit cards, mortgage loans or any other tricks for generating a FICO score.
  • Simply do the first lease (which you will pay more initially – you can do as little as 24 months if you like) and the second, third, fourth lease is based on keeping that lease in good standing.
  • If you are paying on student loans consistently and without deferment, then its that much easier for that first lease.
  • Absolute smartest way to lease is through a business entity you operate so its not attached to your name in the first place.
  • None of this applies if you keep your car for 10 -15 years. *But then again, no matter what you say to yourself at the car dealer, the data shows you’re not keeping your cars for 10 -15 years.

    And that is why you’ll find in the title of this post – “most people”.

Now you know.

Introducing the Winner’s Circle Investing School Program (for book owners)!

Attention all BKF Investing School eBook or Hardcopy owners!

You are now eligible to join Our Winner’s Circle Investing School Program ($20/year).

What does it include?

Includes the following 1 on 1 benefits:
– Unlimited questions on investing, directly from J.P. Lynn (using online chat)
– Investment portfolio creation and hand holding.
– Be the first to know when the market is in correction or crash mode to make the most of the BKF market crash strategy.
– Accountability: get harassed at 4 different points during the year to remind you that your quarterly investment contribution is approaching and how to complete it.

Learn why investment accountability is super important here: https://news.fiu.edu/2011/03/second-thoughts-on-the-american-dream-of-home-ownership-study-reveals-that-renting-can-be-a-better-financial-choice/22483

Don’t let the rest of the people in your community become deca-millionaires while you look back on when you started that brokerage account but never made any purchases (or the correct ones).

Visit www.BKFInvestingSchool.com to sign up!

Winners Circle Investing School Program

No, Your Employer Can’t Check Your Credit Score — But Here’s What It Can See

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Business Insider By Libby Kane 18 hours ago

Flickr / Frédéric BISSON

Your three-digit credit score is a go-to indication of your trustworthiness that banks, credit card issuers, and car dealerships all use to help predict the likelihood of you repaying a loan.

But it’s of little use to the company that wants to give you a job.

“That a potential employer can check your credit score is probably the most common myth out there when it comes to credit, and unfortunately, it’s one of the most problematic,” says John Ulzheimer, credit expert at CreditSesame.com. “In my 23-plus years in the credit industry, there has never been a verified example of this happening.” In fact, he says, the three credit agencies have all gone on record saying that they don’t supply a credit score to employers.

Ulzheimer believes this myth is so pervasive for two reasons:

1. People are using “credit score” and “credit report” interchangeably. While your credit score is based on the contents of your credit report — which details your credit activity and history — they are not the same thing. As an illustration of their independence, consider the fact that while you can get your credit score for free at sites like Credit Sesame, you can’t get your report. And while you can get your free report from each bureau once per year from annualcreditreport.com, you must pay for your score.

2. Employers can pull a credit report. But the credit report available to employers is not the same one that your lenders see. “When an employer checks your credit, it’s called an ‘employment screening,’ and the credit bureaus have a separate product available for this purpose,” explains Ulzheimer. “A lot of the data is the same, but not everything. For instance, your date of birth isn’t on it. Plus, when an employer screens your report, not only does the inquiry have no effect at all on your credit score, but you, the consumer, are the only person able to see that it ever happened.”

It’s also worth noting, says Ulzheimer, that a potential employer isn’t going to secretly check your credit behind your back. Unlike with the credit check that comes with applying for a mortgage or car loan, you must give explicit written permission for an employer to check your credit. And it’s not as though it’s your interviewer looking into your credit, he explains. “Normally the employer outsources the process to a third-party company, one that does things like verify your background and education.”

The bottom line is that while employers can check your credit, they can’t see your credit score, their inquiry doesn’t affect it, and the credit report they can pull isn’t the same one used to evaluate your trustworthiness as a borrower. While some states restrict the cases in which an employer can check your credit at all, “certain professions, like law enforcement or other government positions, should expect that credit checks are fair game,” Ulzheimer says. “You should assume a report is going to be pulled.”

http://finance.yahoo.com/news/no-employer-cant-check-credit-194739945.html

 

Your passion or your poison?

Even though the new age American dream is to do what you’re most passionate about for a living, sometimes doing what you’re most passionate about in career form can turn that passion into a hatred.

See, when you’re now forced to do something and put up with certain ancillary things or components of the job, you can quickly find yourself in a worst position & mental state than if you were just doing a menial job to keep busy.

Here’s real talk that no one will tell you: for many many people, the quickest way to turn a passion into something you dread is to force yourself to monetize it.

Now I’m not sayingto ignore what you’re most passionate about. I’m saying in the pursuit of those things, its important you not pursue them like a stalker.

Allow the relationship to blossom by not being so needy. This is one reason why its so important to keep a solid income from some form of legitimate work while you live out your dreams in another area.

Yes you can do this. Don’t let anyone ever tell you differently.

Because when you do this, you take the “I need to make income from this thing I love asap” factor out of the equation and it more times than not allows you to sidestep ruin.

There’s nothing more sad than a person who found their reason to be here and then begins to loathe it due to unnecessary financial and professional strain.

I mean that is your purpose. What else are you doing here? Pretending to be here for other things is just going to turn you into a very miserable person with a poorly created facade.

In the end, doing what you’re passionate about can take many forms. Not everyone has to do what they’re passionate about as a 9-5 job or a business they started. The key for some is to enjoy or at least not loathe whatever they’ve chosen to produce income and do what they’re most passionate about with as few constraints as possible.

This is how art becomes art. How music becomes music. How technology that really helps people is born.

What we teach is hard work up front to get yourself financially in position to not have to depend on anything for an income – let alone those delicate things you’re most passionate about.

This is why we in BKF invest for tomorrow while everyone else parties today.

You’d be straight up amazed at how life changes when you technically don’t ”need” to produce income from anything.