How to Set Up Automatic Investing to Save Time and Grow Your Wealth
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I've always been a saver. When I first started working at age 22, I saved a minimum of $100 a month, even though that was quite a struggle at the time. But I haven't always been an investor.
I signed up for a 401K, of course, but whatever investments I made above and beyond that were fairly haphazard, and I frequently let fairly large amounts of money sit in low interest accounts — a big no no. It wasn't until my 30s that I stumbled on the idea of automatic investing as a way to regularly move money from my savings account to my Vanguard funds. Even once I signed up for automatic investing, I didn't really get the real benefit of it: a concept called dollar-cost averaging.
The idea behind dollar-cost averaging is that the market can be pretty volatile — sometimes stocks are up, sometimes they're down. So if you invest your money in regular intervals, you get the benefit of the “sale” days (when prices are low) which helps balance when prices are high.
To be clear: if your emergency fund is fully stocked, you're maxing out your 401K, and you're still sitting on a ton of money to invest, you're probably going to be better served to sit down, do some research, watch the prices over a few days (or weeks, or months) and then make your investments in lump sums.
{related: not sure what to do first/next in your personal finance journey? here's our money roadmap}
But if you say to yourself, “you know, I probably wouldn't miss another $25 every week,” that's a great way to force yourself to save more money — and to reap the benefits of dollar-cost averaging. And then if you find that you frequently have too much money sitting in low interest accounts, you can bump your “contribution” up to $100 a week or more — or you can choose to manually invest your money in a bigger lump sum.
These little sums can add up — $25 a week is $1300 a year; $100 a week is $5200 a year. I've always just put my automatic investments into low-cost funds like index funds and lifecycle funds, but you may choose to do it differently.
It can be somewhat tricky to figure out the logistics of how to set up automatic investing, so I thought I'd spell it out for you for the two online brokers I've used, Vanguard and Charles Schwab (updated as of 2020!):
- In Vanguard's personal investors site, you can click on “My Accounts” at the top, then “Buy & Sell” (near the top right-hand corner of the screen), and then choose “Set up an automatic transaction” from the menu on the bottom of that page.
- In Charles Schwab, you have to go to “Trade” along the top menu, then click “Mutual Funds” from the sub-menu, and then you'll see that you have two options — to trade mutual funds, or another option, “Automatic Investing,” which lets you set up automatic investing instructions for funds that you're already in. (At least, that's what the screen looks like for me.)
I use automatic investing to painlessly augment my existing investments — if you don't already have investments, do note that there can be a minimum, both to open an account and to invest in particular funds.
If you don't have the minimum, you can set up automatic saving with your regular bank, to just move money from your checking to your saving account. It'll be in a low-interest account, but just until you can make the minimum.
Note also that you're probably best advised to max out your tax-friendly investments like 401Ks and IRAs, but considering that saving for your retirement is Really Important, every little bit helps.
Readers, do you use automatic investing to save time? What other ways do you force yourself to save? How regularly do you pay attention to your investments?
These are some of our latest favorite financial books for beginners:
Stock photos via Stencil.
Off topic but have to ask. I am long waisted. I have been reading info on the web re long waisted dressing that says to dress to both elongate your legs and shorted your torso. Aside from the comments re why should we all have to try to achieve a body we don’t have, this info says wear high waisted skirts/pants, high belts, etc. so my question is, is this stuff in style, and should I dress this way even if not technically in style if appropriate for my body type. A related question is does this really look better on long waisted types. Sometimes when I dress this way I feel like it pooches my stomach out and makes me feel pregnant. I got a recommendation from someone on this site for a limited drop waisted dress. Is this a better look. Also, does anyone else find high waisted and high belted clothes terribly uncomfortable because they cinch you at an immaterial place and meet to dig into you to stay up?
Same body type. I like having a long torso – it means I’m at eye level with the men when sitting down in meetings. I don’t particularly try for “leg lengthening” looks because I don’t really care if people don’t think I’m leggy, and because pants that hit between waist and hip are far more comfortable than high-waisted pairs. I do sometimes find it hard to find sheath dresses, because the dress starts tapering “in” below an average torso person’s hips, where on me that part of the dress is still crossing the hips.
Ditto on being tall at seated meetings thanks to my long torso. And thank you for pointing out why sheath dresses are always tight on my hips. Duh. I don’t know why I never realized that.
I work in a casual/jeans setting now, but when I worked in a business/business casual office, I loved wearing pencil skirts & tucking my blouses into them. I have a pretty long torso and found it was very flattering on me, as the look emphasized my waist and made my legs look miles long. The skirts weren’t necessarily high-rise skirts, but the tucking really helped accentuate my waist and visually separate my legs from the rest of my body.
This. I have a long waist and short legs and find tucking can do wonders for creating a more balanced silhouette. I also love wrap dresses and wider leg pants that have a slightly higher rise so that I don’t feel like there are miles between my bust and my hips.
As a short waisted woman, I envy that you can tuck in your tops! I find tucking to look so elegant, but it makes me look really disproportionate.
I am short waisted and I tuck. I often wear a cardigan over the tucked top, which helps with evening things out while still getting that nice neat tucked look.
Plus, sometimes I like accentuating instead of hiding this. I’m not really worried about my legs looking “too long”. :)
I hate high waisted pants, because they are always to short in the stride for my long torso. I’d wear whatever feels comfortable, not not worry about leg lengthening.
I’m slightly long waisted, but I want to address dressing to flatter your body vs what’s in style.
I’m an X shape. The loose, flowy, boxy blouses that are everywhere right now look awful on me because when you lose my waist I look at least 20 lbs heavier. So, even though they are in style, I choose to wear something else that is more flattering on me.
Granted, there are so many things that are opposite but still in style right now that it’s hard to go wrong, but I think you need to decide one or two figure flattery priorities for yourself and then choose to wear clothing that are consistent with your priorities. For me waist definition is number one, and shoulder minimizing is number 2. (Basically anything crew or turtlenecked are out because my shoulders are broad & having a broad expanse of uninterrupted fabric emphasizes that).
My thought is that classics will always be in style even if they aren’t at the forefront of fashion, so I should always be able to wear clothes with waist definition (like a classic sheath dress) and V or scoop neck blouses, or shirts that aren’t buttoned to the top.
This re: classics are always in style! I think the hemlines may change up or down, but waist definition+flattering decollatage are always in style. I don’t think you can go wrong with a classic sheath dress. I’m generally much more classic and much less fashionable, because I rarely feel that I can pull off the fashion trend of the moment.
I’m also long-waisted, and I don’t generally wear high-rise pants, but I do like pencil skirts, and I do generally belt at my natural wait. The pencil skirts have some give to them, and they’re going to have to handle crossing my lap, whether they hit at my hip bones or my natural waist, so that doesn’t bother me. Re: stomach pooching, you might try wearing separates that are more fitted. Another commenter mentioned the pencil skirt+blouse, and I find that this works well on me too, especially with a wide belt around the top of the pencil skirt where the blouse is tucked in. I’ve also done pencil skirts+fitted cardigan+skinny belt at natural waist with great success. I don’t try to look leggy necessarily, but the skirt and belt help to balance the proportions. I actually don’t wear pants that frequently anymore, but when I do, I generally play up the long torso by wearing a longer, untucked shirt or longer cardigan.
If you want some real-woman examples, you can click on the link in my name, and choose the “outfits/workwear” tab on my blog to see some of the items I wear to the office.
I’ve spoken a lot here about my love of Vanguard. It’s a great company.
I’ve “invested automatically” in two ways:
1) Direct deposit to purchase index funds.
2) Direct deposit to money market and later purchase funds.
Both work and I set it up depending on my mood more than anything. I am doing method #2 right now because I bought a house and I’m just feeling more conservative about money.
There are two major considerations when choosing investments.
The first is actively managed fund (broker actively buys and sells from the fund seeking higher return-and charges higher fees) vs passively managed fund (fund managed according to guidelines–less fees). I’ll let people do their own research but I prefer the passive approach. I am just not convinced that active managers are worth the fees they charge.
The second is the ratio of stocks to bonds to “other” (e.g., cash). For example a “60/30/10” fund is a fund that is invested in 60% stock, 30% bonds, and 10% cash (this is actually the ratio I feel most comfortable with for non-retirement savings). The general wisdom is that the higher the stock percentage the greater the risk and rewards. For a 30 or 40 year horizon (e.g., retirement for people in their 20s and 30s), 90/10 (no cash) is usually recommended. For a 5 year horizon, I like 60/40.
The great thing about Vanguard is that they have financial consultants who you can talk to for free. In May, I was sitting pretty cash-heavy and I just needed someone to talk to beyond my grandmother (who introduced me to Vanguard). The consultant was great. We talked for about 45 minutes. We discussed my situation, goals, and risk tolerance. He pointed me to some very good options and was very low pressure–even suggesting I sleep on it.
Lastly, there is no right or wrong way to invest. Determine your objectives, make a plan and stick to it. I invest to try to keep up with inflation and stay with the market–not to get rich or retire when I’m 35. After that, it’s really just a matter of jumping in. After I bought my first $10k in funds as a junior lawyer, I was so nervous and was constantly checking to see if I lost it all. It took about 6 months for me to calm down and realize that the money wasn’t going to disappear overnight. In 2008, I lost half my “money” (like everyone else) but I stuck to my plan of going with the market, didn’t sell, and actually bought funds “on sale” (March of 2009–I thought I was crazy). I still worry about market ups and downs but I trust my plan and trusting my plan is what allows me to sleep at night.
Thank you for the tip on the Vanguard advisors. I have all my non-401k sitting in a (very, very, very) low interest savings account. I’ve talked to a few friends about their financial advisors but I don’t know that I will get $2500 worth of value out of an independent financial advisor, which seems to be about what they want for the first year (one of them $5000!). I need to just buy some freaking index funds already and was planning to use Vanguard anyway.
Alternatively, if there are any DC area peeps happy with their independent financial advisors who do hourly in the $100ish range (possibly more, I don’t know what this service goes for) and would do a 3-4 hour consult I’d love recommendations.
This was a useful post, Kat. Thank you. I like the idea of buying every week or month so that you hit the sales but don’t have to stress about whether this is the absolute lowest it will go or if you should wait.
We really like Thomas Fautrel at Merrill Lynch in Rockville, MD. He’s very on top of our finances and often calls us telling us about new investments, what to sell, what to buy, etc. It gives me a lot of comfort knowing that he’s keeping track of our investments because I’m so bad at doing it myself.
I heart index funds. Less fees and worry for me. And extremely few funds beat the market years and years in a row, so why not just aim to meet the market?!
Also love automatic investing because I have other things I’d rather do than watch stocks. Do what works for you, but doing it through automatic investing is definitely an easy way to get your investment plan moving.
Seconding Vanguard.
90/10 is actually very very aggressive.
Wow…Kat, this post could not have come at a better time for me. Just yesterday I opened a checking account with Charles Schwab to avoid ATM fees, but it comes with a brokerage account. My non-401K savings are all in a pathetically low interest savings account, so I’d like to start some conservative investing.
Karenpadi, thanks so much for this comment. I have NO idea what I’m doing when it comes to stocks, but this helped me understand. I think I’m going to go with 60/40, since I’m looking for a 5-year-ish plan. This makes me feel so much better. I am actually going to print out your comment and take it to the Charles Schwab branch I’m visiting today.
I do automatically invest my money. Currently 15% of pre-tax check goes in to my online savings. At this point it’s really more me building an emergency fund than savings, though.
How do you get pre-tax money into your account?
oh, sorry, I just meant as a reference, that i put ~15% of my pre-tax salary in.
Sorry for the T/J – a while back I had asked if it was okay to take a watch to a non-fancy watch store to change the battery, which was okayed by everyone who responded, so I did and it was great and convenient, but now, 3 weeks later or whatever, I just looked down and my watch is all fogged up from the inside! It’s freaking me out. Any idea what’s going on? Nothing unusual happened. It seems to be working. Should I be worried? I am going to take it to a real watch store after work, but there’s a lot of sentimental value here — do I need to panic and run out now? Thanks!
Argggg!! Wish I had seen your original question- I learned the hard way to never hand over a ‘good’ watch to one of the quick-fix battery places. Same thing happened to my watch when I did that and I had to take it in to a watch repair guy. The cheapo places use batteries that can leak , which is what happened to me. Never again!! But my watch recovered and hasn’t had anymore problems. Good luck!
Eek! I am running to Tourneau as soon as I get out of work. Glad to hear yours recovered though. Thanks!
You are in NYC, right? I recommend Swiss Watch Repair Center in midtown east.
I am, thank you.
I am going to see if I can just get the battery changed at Tourneau as that’s more on my way but I am going to write that place down in case I need it down the line (which I hope I won’t!)
I also wish I would have seen your original post. Apparently if you have a diving/watertight watch, the battery needs to be replaced by an authorized dealer because there is some kind of seal.
I constantly invest in my jewelry business and if I’m ahead I invest in the NY real estate, which to me is the safest investment with great returns ;-)
Except if you have a sudden need for liquidity…sudden meaning anything from urgent to 3-6 months from now….
I invest in my jewelry collection. Boom. Problem solved.
Is this something people recommend doing once your student loans are paid off and you have your emergency fund built up, or to start right away? I’ve got my emergency fund up to to about 4 months current living expenses (although if I lost my job and cut costs, it could last us 6 months), and we’re debating whether to get it up to 6 months full living expenses (since I’m the sole paycheck and we have 2 kids) or start paying down my 6.5 and 7% loans. My firm doesn’t match 401k, so I haven’t been putting all that much in yet. With the economy in its current state, it seems like all extra money should go to those loans before starting to save for retirement, whether via 401k or “automatic investing” like Kat recommends or anything else. Does this seem like a bad strategy?
Personally I save to take advantage of compounding interest. Also it depends on how long it will take to pay off your student loans – mine will be paid off in 7 years; the calculation might change if the loans had 20 years on it, which might be awfully close to retirement age and thus your money wouldn’t have time to grow. Kids didn’t even change the equation for us, but that’s because the student loans will be gone soon and for us, retirement savings is a priority over their college fund; after student loans are paid off we will save more for their college.
Forgot to say – the economy didn’t change my opinion because putting away something now means that there will be a larger chunk of change ready when the economy improves. Of course that depends on the amount of your loan and interest rate. Do the math, it may make the decision easier.
Does compounding interest even do anything with our current interest rates? If we focus primarily on paying off loans, we’ll probably have them done in 4-5 years at the latest, when we would be 35. Is 35 too late to start worrying about retirement?
It is definitely a personal decision about how to balance student loans/retirement savings/other savings or investment goals. I waited until I had paid off my largest student loan, which comprised about 60% of my total loans, before opening a Roth IRA. 35 isn’t too late to start planning for retirement but personally I would feel more comfortable knowing I had at least a solid start to my retirement plan by that age. Just thinking about it is a good first step!
Besides compounding interest, which I think has value even if it doesn’t look like much now, the other thing to keep in mind is that a lot of retirement savings have tax savings and also maximum limits per year – for Roth IRA (post-tax money) the limit is $5,000 (more if you are older – I think 55+?) and I think the limit for 401Ks (pre-tax money) is $17,000. So to me, it’s worthwhile to take advantage of the tax savings of contributing as much as you can each year to these types of retirement savings. There may come a point when you have more money available and are getting closer to retirement, and you may feel limited by these annual limits and have to turn to more expensive investment options.
I should have said that Roth IRAs are not on option once you cross a certain income threshold. Definitely do research or talk to a professional if you have questions.
I’m in the same boat – we’re keeping a minimum emergency expense account, and paying down student loans. I just can’t justify keeping money at current interest rates while we are paying crazy interest amounts on the remaining student loans.
That said, I understand the power of compounding interest and am contributing more to my retirement, even though I have the student loans. I would say that I “believe more” in my retirement savings than my emergency savings fund as an important place to have my money sitting.
Exactly what I was about to say. In my book, getting rid of student loans (along with their compounding interest rates) is far more important than squirreling away retirment into mutual funds (esp if your employer doesn’t do matching 401k). I find it paradoxical to be worried about taking advantage of still relatively low returns 40-years out if one is mired in debt at the present state. YMMV.
We currently do a split, though our situation is a little unique. I’m 10 years younger than my husband, though both of us went to law school at the same time. Currently, we’re both paying more than our minimum payments on our student loans, but he is maxing out his 401K and doing more retirement investing than I am, due to the fact that he’s closer to retirement (and his government job has a forced retirement age that is approximately 21 years away).
For me, I’m making the minimum match contribution to my 401K and aggressively paying down my loans. As my loan balance shrinks, I’ll begin paying more into my 401K and making additional investments. I was uncomfortable leaving the match on the table, even with the student loan debt, but again, YMMV.
Same re: match. My employer matches up to 5%, so I contribute 5% to my 401K and am otherwise aggressively paying down student loans.
I was trying to pay off significant debt, build up an emergency fund, and save for retirement all at the same time. I am 48, so was especially concerned about retirement.
However, it felt too fractured. Finally gave up the multi-pronged approach, harnessed the power of focus, and used Dave Ramsey’s baby steps: 1) kept a small emergency fund (he says $1K but I went to $3K for valid reasons; 2) paid off debt; 3) built big emergency fund of 3-6 mos living expenses (I’m doing 6 because risk-adverse); 4, 5, 6) retirement, kids’ college, pay off house, all to be addressed concurrently per Ramsey.
Yes, there was some compound interest opportunity cost. But having a bigger emergency fund, and contributing to retirement, also sort of implicitely gave me permission to screw around and be slow about paying down debt. Liquidating the e. fund to pay off debt gave me an “oh, $#1t!” moment, and now I’m more interested in an emergency/F you fund than a great bag or pair o’ shoes.
This post is subliminally telling me I need to get off my a$$ and just put my money into a Vanguard money market where I’ll make more than my 0.0001% interest savings account that it is currently sitting in.
I just wanted to post and say thank you to you who responded about my mom break up. My lunch was actually fun and gave me some time to not thing about the whole situation. I’m going to just throw myself into working and try not to constantly check my email/think about what was said/etc.
Y’all are really great for putting things in perspective and I really appreciate having a community like this to get feedback on all types of issues.
I do almost all of my saving/investing through automatic payments.
I am a big fan of Vanguard and their automatic investing option. I would like to second what Kat said about their support team being very helpful and willing to take the time to talk through whatever you need (also, it is available for a surprisingly long window each day).
One piece of advice that I read once was to not worry TOO much about what type of investment you are choosing, but just to get started. Of course, as you learn more you may want to change your initial investment, but it won’t matter if you don’t take that first step. Automating has been wonderful and eliminates one more To Do item off my list each month.
Not trying to take over the comments section but I love personal finance! Kat had asked about other ways to save. I keep my savings in an ING Direct account, which is supposed to be high interest but has steadily decreased below 1%, which is still better than what my bank offers.
Anyway, it is separate from my checking account and it takes a few days to transfer money in or out of the account, which for me is actually a positive. Once I move money in there, I consider it off limits except for the purposes of the accounts (I have multiple accounts with nicknames like “Emergency” and “Auto”). I am less likely to spend it on something frivolous because it is inaccessible and it helps me meet my savings goals each month (of course, life happens so sometimes it doesn’t work out).
This may be a silly question, but what do you use the money you’ve invested for?
Second, how many accounts do you all maintain? When I start thinking about having an emergency fund, checking account, retirement account, savings account, investment account… It all starts to make my head spin, and I feel like it could all get so complicated. Right now I just have a checking account and a savings account (and a 401k at my work). I know there are better ways to maximize my money, but I want to be able to access the money in my savings account for things like vacations and whatever other fun things one would use savings for. Maybe my problem is that I don’t necessarily have (or want) a big goal to save toward?
I use the money I’m saving for some defined goals (e.g., house down payment) and also for “the future”. The “future” money came in handy to buy a new car when I totaled the old one but it’s mostly just sitting there–it’s an “escape from law” fund (also called F- You money).
My accounts are a wee bit more complicated than this but, in an ideal world, I’d have:
1) 1 checking account with a high minimum (e.g., I have a checking account where I need to maintain a balance of $3500 to get any and all ATM fees refunded). I use the “high minimum” as a “local/small emergency savings” account. I do get some interest on the balance but with interest rates so low on savings accounts, I don’t worry about whatever “loss” I’m taking. Even better, I never worry about an overdraft–that’s worth a few dollars a year, right? If I’m “saving” for a vacation or a home improvement project, I let more money sit in there (planning a $4k project now, so my checking account is flush).
2) One Vanguard/investing account. The Vanguard account includes a money market fund (think savings account but not FDIC insured and some other caveats) and investment funds (like stock or bond funds). I have money auto-deposited to the Vanguard account from each paycheck and, if my checking account balance is high after my vacation or home improvement project, I transfer money from checking into there (about 4 times a year).
3) One 401(k) account. Employers decide this. We have no say. I don’t like that.
This is just me, YMMV. I think it’s best to try out a few things and see what works and what doesn’t. Your needs will change too. For example, I used to have an online savings account back when savings was getting 5-6% that I’ve since closed. I also have a second checking account that’s a relic of a rent-paying ex-boyfriend who was living with me when I bought the house. I should close it but I like being a member of a credit union.
The f-you money is a perfect segue into another recommendation, the Mr. Money Mustache blog :) He’s got a post on investing with some spreadsheets and numbers as well: mrmoneymustache [dot] com
I second that recommendation! The book Your Money or Your Life by Vicki Robin & Joe Dominguez is another good choice (and a big influence on MMM).
My grandmother, born in 1901, also called it f- you money.
I’m not the most technically adept at the finances, so take it with a grain of salt, but for us, we basically only have the checking account and our investment accounts. Granted, our investment accounts include 401(k), stocks, bonds, rental properties, IRAs, etc., but we keep track of them in one place, so it’s less overwhelming to think of managing all those accounts. Our savings account is the ability to liquidate stocks in an emergency. Yes, it’s possible that the stocks will be down when we need them, but we’d rather have the earning potential on all of our money vs. keeping it in a very low-yield savings account and not getting any compounding/capital gains/equity in the rental property, etc. We basically only keep enough cash in the checking account to pay the monthly bills. We also do the automatic 401(k) and an auto-draft on the mortgage payment for the rental property.
For us, there’s a difference between “saving for a specific goal” and generally being “financially secure”. We don’t really save for things like vacations, cars, down payments, etc. Either we can afford it, or we can’t. We think of it more as a re-allocation vs. saving in the traditional sense. For example, when we started researching the purchase of our rental property, we didn’t need to save cash to come up with a down-payment, but just re-allocated some of our funds out of stocks. We had about 6 months to plan, so we didn’t have to sell off a bunch of negative-return stocks to accomplish this. When we wanted to go on vacation, we looked at what we could afford in the budget. I know it might just be semantics, but I think changing our mentality about money really helped us figure out the best way to allocate our resources.
Oh, also, we try to do a weekly recap of the finances over Saturday morning coffee. This usually includes looking at the budget for the past week, checking out our investment accounts, and a high-level look at our net worth trending. My husband loves this stuff, so he checks the accounts more like daily, and I come in for the weekly or bi-weekly recaps.
This is a good point. I think I’m too stuck in the mindset of saving with a specific goal in mind.
I am with you on wanting to keep things simple. If you can find a bank that can serve multiple needs, it’s not bad at all. For example, our primary checking (x3: his, hers, ours), savings (x1), investment (x1), and IRA (x2) accounts are all with one bank. We have investment/retirement accounts outside of that bank as well, but I can see the vast majority of what we have by logging into one site, and I can move things between accounts painlessly. Also, because we keep a fair amount of money with them across our various accounts, pretty much everything is free, so that’s a bonus. Even if you can’t find a one-stop shop like this, sites like Mint and LearnVest make it pretty easy to keep track of everything.
Good question. My answer:
My savings account is an emergency fund that just sits, unused. I think of it as a loss of job fund only, and not for short term emergencies like my car breaking down. It has about 12k.
Checking account pays the bills, like mortgage, credit card, groceries, etc. I also use it to fund vacations and xmas shopping. Usually it has a revolving balance of about 3-5k depending on how spendy I’ve been that month.
Employer 401k has about 7k, but I just started working at my current job. Plan to max it out at 16k by the end of the year.
Roth IRA has 16k, contributing 5k per year.
Remaining funds sit in a separate savings account, and I use to to cover spendy months and as a future downpayment on a dream home.
I have a checking account, a high-yield savings account, a 401-k type account through work that I put 15% in with 5% match, and a Roth IRA with Schwab (target fund 2040.. it’s their latest date right now) that I only deposit a bit in each moth automatically. I try to keep as little as possible in my checking account at a different bank because I am irrationally (or perhaps rationally?) scared of being held up in DC or abroad at an ATM and someone taking all my savings. It’s pretty easy to manage the multiple accounts… everything is automatic and electronic. Once the transfers are set up, I don’t even think about it.
I’m not as worried about keeping up with the automated accounts as much as figuring out how much to contribute and what kinds of accounts I need. Maybe I need a financial planner?
Nah, no financial planner needed. For kinds of accounts, you need what you desire. If you just want savings and checking, that’s all you need. If you want an IRA or other investments, an investing account ala Vanguard or Schwab or Fidelity or whatever is all that’s really needed. As for contributions, start small–you can always add more or add less or take funds out.
Since this is a ‘money’ post –
Any ideas for financial benchmarks that heirs must meet before receiving an inheritance?
Potential beneficiaries are young adults who are not yet financially responsible. Non-rollover-retirement assets will be held in trust, disbursed at certain ages, provided a certain level of financial responsibility/competence is reached. Question is, how to determine that? The goals:
1. Provide a framework with incentives for wise financial choices, hopefully building a lifetime of fiscal wisdom.
2. Prevent frittering of $100K+ each due to youth, inexperience, and poor examples.
Testatrix and her executor are the only family who exhibit financial wisdom. Other family members would encourage spending sprees. College is provided for separately.
I’m thinking along the lines of “no consumer debt” and “savings of X% of salary” (waived by job loss? stepped up as years out of school increases?). Perhaps “completion of Dave Ramsey’s course or other personal finance course.”
Other ideas? (BTW, the heirs in question know conditions will be in place and so far are grateful for the boundaries.)
A credit score of x.
Submission of a budget prior to draws.
I don’t think credit score should be the only criterion–one can fritter away money and still have a good score.
How about “x months living expenses saved”? This way, they get the money when they save and when they’ve demonstrated that they can contain expenses. Make it high enough where they’ll have to have good habits in place for a good amount of time before accessing the money.
Steady employment of X months?
No consumer debt is a good one, and automatic savings from paychecks for any periods of employment.
Maybe a written monthly budget, with proof of how they follow it and adjust it over the course of several months?
If the religion aspect of Dave Ramsey isn’t a turnoff, then that would be a great course – they may not “need” it from drowning in debt, but it can be powerful to hear the stories and the experiences of other people’s experiences.
Another idea would be to require them to start planning for how to use the money 3-6 months before dates of disbursements (either with you or with a financial advisor). That way, when it arrives, they have had time to think about what they really want to do with it instead of just general lifestyle inflation.
The problem with the savings condition is that it could legitimately mean that the heirs end up in a crisis situation through no fault of their own and then the resources to address that exist and are tied up. If it’s possible to set it up so that a trustee can waive the provision or something like that, that might be preferable.
Can you tie it to higher education as well? This is a concern for me, as college is not a given in my family.
Child one will graduate from college next June. I have hopes that child two will go to college, but for now is about to complete a two-year tech program that should ensure steady, fairly lucrative, employment. Bright kid, likes working with his hands, would go insane chained to a desk for a job.
Matching funds for whatever the heirs earn. Contribution toward down payment for a house or startup funds for business (must have business plan!). Other distributions in trustees’ discretion.
The key to this is to have a trustee that the donor trusts and who will be firm about saying “no” to the beneficiaries if required.
Also, in general, trustee discretion is the #1 thing you want in a trust. that way emergencies will always be covered and beneficiaries can’t complain re withholding distributions. I would put the conditions not in the trust doc itself, but in a side letter.
Savings of x% of salary seems so restrictive, and having no consumer debt? if they have a $1000 on credit cards because they work as a barista because the economy is terrible, they don’t deserve an inheritance?
It seems wrong to control adult children from beyond the grave so intensely. If college is already paid for, just make the funds inaccessible until 30 or 35 (like many trusts do) and allow the executor to remove funds early for certain things, like grad school, buying a house, medical emergency, etc. Then trust that adults will grow up and if they don’t, they can learn from their own mistakes.
This. At some point, ya just gotta stop with the micromanaging. At the very least, make sure there’s some way to override any requirements in case somebody ends up in dire straits through no fault of his or her own.
They’ll get the inheritance regardless at 35. The question is whether to release extra funds early based on specific benchmarks of financial wisdom. Education, etc., is handled separately.
The heirs in question are actually on board with this. They are both impulsive, want to be better with money, and are a bit afraid of blowing an inheritance that could amount to several years’ salary.
The other way to think about this is whether you want to protect the heirs from poor youthful decisions over spouses, business partners or creditors, all of whom will be able to claim against any funds released to the heirs, but probably not against a properly-secured trust.
I would strongly encourage re-thinking the ‘framework for incentives’ and replacing it with education for the heirs and their ongoing involvement in the management of the intended nest egg. The heirs should start to form their own sense of how much risk feels comfortable, their own financial goals (home ownership, education etc) and perhaps a sustainable ‘spend’ rate ie. how much can be sensibly extracted as annual income while leaving the capital intact or capable of generating higher returns in the future.
Otherwise I’d suggest simply setting a hard target for disbursement eg. 35th birthday. A ‘framework of incentives’ can feel very controlling and risks failure to recognise a young person’s financial opportunities (post-graduate study, relocation) and challenges (hard to save in the years of establishing their first household).
I’m maxing out my 401K, all other debt is paid down, and I’ve put a healthy chunk into a Vanguard index fund. I’m happy with all that, but now I’m trying to decide what to do with a chunk of savings that I may want to use for a down payment on a house in the next few years, and possibly a new-for-me car that I would pay cash for.
Vanguard seems great for 5+ year investments — although I’ve gained on it, it hasn’t been much at all and it’s not really a gain until it’s realized — I’m risk adverse enough that putting mid-term savings, like a down payment, into the stock market makes me nervous.
My ING savings account, which is where it is now, has such a low interest rate that I am losing money when inflation is taking into account.
I suppose the best thing to do is realistically decide when I’d want to make a down payment and then talk to someone at Vanguard, however any suggestions are most welcome — even if it is ‘be less risk adverse and put it in Vanguard’.
Vanguard has funds that are less risky, like a 20/80 fund or a 100% bond fund. They are used mostly by people already in retirement but they are also good for short-term savings.
And as a related question – Like Amoneymous, I’ve maxed out my 401(k) and my Roth IRA options (all index funds, appropriately spread out over domestic and foreign stocks, bonds, REITs, etc.). I am fortunate enough to have paid off all my loans early on, so now I’m sitting on a chunk of change that I’d really like to invest – but I have no idea what to do after all of the tax-advantaged retirement options are taken care of. It seems from the above that a financial adviser might be helpful, if only because the one thing I have not been able to educate myself about is the tax consequences of investing outside of these retirement options. Any suggestions, ladies? Good books, whether it is best to go with a financial adviser in this situation, etc.? I feel so guilty not doing anything with the money, and the low interest rates at ING are killing me!
I took a 6-week, once per week, adult education course (it was like $45) through a community center–something like “Personal Finance for Women”. It was taught by a Merrill Lynch Adviser and covered the basics and the vocabulary. No homework. The book we used was:
http://www.amazon.com/Womans-Guide-Investing-Virginia-Morris/dp/1933569018
Bond funds are a terrible idea in a rising interest rate economy, particularly because bonds are not held to maturity by fund managers. For bond funds, their price goes down (e.g. you would be selling into a bad market) when interest rates go up. That’s not a good place to be, unless you are holding to maturity, which, managed bond funds, by definition (whether active or passive) do not.
If you have enough for a house down payment, you might want to buy some TIPS direct from the US government. There’s no interest-rate risk because they are inflation linked.
This is why I don’t have any money in lifecycle funds right now. Yes, you get principal protection in bonds, but you are not safe from price erosion. Interest rates are so low that they will have nowhere to go but up in the next few years, regardless of EuroCrises.
Ally Bank has a 5 year CD that offers 1.69% interest. The penalty for early withdrawal is only 60 days worth of interest, so if you’re not sure what to do and want to get a little more return while you figure it out, I think this is a good bet. The NY Times You Money blog mentioned this last week.
Thanks for the kick in the booty, ladies. Just opened a Vanguard account, bought the 500 Index fund, and set up automatic investment. As long as they can beat the 0.55% interest return my credit union is paying me, I’m ahead.
congrats! That first “buy” is the hardest part!
Nice! Can I ask what the minimum was for the account? I was taking a look at the website, but didn’t see it posted.
Thanks for the props, karenpadi. I am stoked to have finally done it. It doesn’t really solve my problem because I have an irrational need to have a giant lump of cash on hand and so my investment is still majorly dwarfed by my savings account. But baby steps, right?
312–The minimum was $3000 for that fund. In the account-setting-up process you can arrange the funds by the minimum required. I wanted an index fund, and both the general index funds have the same minimum investment, unfortunately.
Slapdash, baby steps are great.
If it makes you feel better, I started with the same irrational need, got more comfortable, and got over it. Then I bought a house and had the same irrational need all over again. It took 16 months post house-purchase (and a re-fi) to get to the point where my irrational need for cash is starting to fade. So don’t be too hard on yourself!
One word of caution: if you investing for long-term and you don’t immediately need the money in stocks, don’t sell the stocks. To sate my renewed irrational need, I made all subsequent deposits to my money market fund.
Eh, I’m not sure I buy into this.
I scrimped to fund my 403(b) from 2003-2005 and after almost 10 years I have LESS than my initial contributions. I am invested in 3 of Vanguard’s biggest funds.
Right now, in my TDAmeritrade account, I have a small net loss to show after 4 years.
At 31, I am feeling that I had better buy a house soon so I have a backyard to bury my money in.
The size of the fund doesn’t mean it’s an appropriate investment for you. Though, I am surprised to hear you have less than the initial contributions, especially with market rebound 2009/2010.
While they may beating your credit union’s rates, as long as you’re trailing inflation (~3%) you’re still losing money.
This was for The Slapdash Sewist above…
Ha, true, but maybe I’ll lose less? I figure a baby step is better than nothing. I have tried several times and methods to really understand investing so I can make savvy decisions, but from what I’ve read in the end rare is the stock investor who beats the market. Real estate is another matter, but that is majorly illiquid and I’m not quite ready to go there.
The first step is absolutely the best step, and honestly – except in a downturned market I can’t imagine a S&P 500 Index fund trailing inflation – Good Luck and congratulations!
I have to say that all of this is like treading new waters for me. I am thankful for the information that you have shared.
First of all I have to say I love the personal finance threads. Over the past year or so I’ve tried to understand more about investments, personal finance, etc. One thing that I’ve done that I’ve found somewhat helpful is to subscribe to Kiplingers Personal Finance. Money magazine is also a good option. The magazines don’t necessarily give you a high level-only picture of what you should do – but if you take the time to read the magazine each month I think you’ll get a better sense of your options. I also bought on Amazon one of John Bogle’s books (founder and former CEO of Vanguard). Lastly – I have most of my money in a fidelity account (mostly because my 401Ks have always been through Fidelity). Vanguard, and a few other brokerage firms are great options too. I also keep my short term savings/emergency savings in ING accounts – I love that you can nickname accounts for different purposes. I have an emergency fund, travel fund and downpayment fund. You can also, through ING, use sharebuilder which allows you to invest directly in stocks without having to buy whole shares. I have about 250 dollars each month automatically transferred to a few blue chip companies. I think of this as long-term savings, and don’t plan to withdrawal the money any time soon or experiment too much with smaller companies. I’m a big fan of dividend paying stocks. Anyway– just wanted to share my own bit of experience, I get way too excited about these things. Now if I could just stop spending so much money on Ruelala and at Nordstroms…
**last bit of advice, I promise. I’d personally suggest staying away from any financial advisors who are commission based or who are affiliated with insurance companies. I’ve met with a few and spoken with quite a few over the phone, they are more focused on selling their product than telling you what is ideal for your particular situation. I don’t even pick up the phone anymore when I don’t recognize the number – it’s either a financial advisor trying to get me to meet with them or a recruiter (which I can’t complain about). I think that fee-based advisors are definitely the way to go, assuming you get a good one/get recommendations.
I love this blog and have been reading it for quite a while. But sometimes I just get so depressed with these posts.
I’m 35. I work in NYC. I commute 3+ (or +++) hours a day to and from work because I can’t afford to live closer. I have an MA from a good school and I am barely earning 26k after taxes. I get paid once a month and by the end of the month I have maybe $5 or $10 to spare. I vacation once every 3-4 years. I never go on weekend trips. I bring my own lunch. I go out drinking maybe once or twice a month. I keep my clothing budget quite small etc. Unfortunately, I end up having $300-$500 a month of out of pocket medical costs, but that’s my only real ‘splurge.’
I have put nothing into a 401k. My savings is laughable. I have no debt (I paid it all off), but no assets either.
I read these posts and I want to do the right thing, but I just don’t know what more I can do to save money.
Sorry- just really wanted to vent!
Try to get into your 401(k) right away! Even just 1 or 2% can make a huge difference down the road, and since it’s pre-tax there may not be much effect on your takehome pay. Sites like Paycheckcity . com should be able to help you figure out what changes you might be able to make, and how painful / painless they will be.
I love threads on personal finance! I am only 24, but my degree is in finance and I work at a mid-sized regional firm that provides a full spectrum of financial servies so it’s clearly a topic of interest for me.
Personally, I think it’s a good idea to start saving for retirement ASAP. From day one, I have been socking away 10% of my income into a ROTH 401k – GREAT option if you’re in a very low tax bracket now, because since the contributions are post-tax and growth is tax deferred, there are no taxes ever on the withdrawls – and you’ll likely be at a higher income level (ie higher tax bracket) later in life. 401ks aren’t always your best option, because sometimes they have limited investment options, but being at a financial firm we have a great 401k plan. I have student loans that I pay extra towards every month, but the reality of things is that saving for retirement right away makes a HUGE difference over a 40 year time horizon; even just a few thousand per year.
I also recently started focusing on building up an emergency savings account. I set up automatic transfers from my checking to my savings that correspond with payday – that way the transfer happens right away, and I hardly even notice the “missing” money from my checking account. I think having an emergency savings account is vital, regardless of the economic state. Medical situations, car breaking down, moving, etc. can all happen any time, and having a savings account built up mitigates the stress that comes with things like that.
For my last $0.02, I think it’s important for women take an active role in their finances! I see clients all the time where their husband is the only one who has any idea what’s going on – BAD!