Here’s a better idea: Build up a bank account first.
Still trying to get started saving for retirement? Your task just got a little easier.
Online financial adviser Wealthfront is now offering people with as little as $500 to invest a convenient and cheap way to build a portfolio of stocks and bonds. And for accounts up to $10,000, the service is free.
That’s sounds like a great deal, and in some ways it is. Of course, Wealthfront isn’t doing this to just be nice—they’re hoping to turn you into a paying client down the road. And while it’s great to get started on retirement saving early, if all you have to to put away right now is $500, you may have priorities besides putting money in the stock market.
Wealthfront is one of a new breed of web-based financial advisers, often called roboadvisers, who aim to automate work once performed by flesh-and-blood stock brokers and planners. The service, which has grabbed $2.5 billion in assets since it was founded in 2008, helps investors purchase a portfolio of low-cost,exchange-traded index funds. The mix is based on an investor’s age and answers to online questions about risk tolerance.
Wealthfront’s service was already free for investors with less than $10,000. (Investors with more money pay an annual fee based on 0.25% of the amount invested above the $10,000 threshold. All investors pay fees for the underlying funds.) But while it had previously required investors commit at least $5,000, the company on Tuesday lowered that threshold to $500.
Wealthfront isn’t alone. A similar service called Betterment has no minimum, although investors with less than $10,000 pay $3 a month, or 0.35% a year if they sign up to have $100 a month transferred in from a bank account.
Both companies are fighting aggressively to capture young investors, even if those customers don’t pay much at first. Here’s why: Millennials are already the biggest cohort in the workforce. One recent study predicted that as much as $30 trillion in wealthwill trickle from boomers to millennials over the next several decades. Online advisers are looking to sign up young people now with the hope of collecting the real money later as their assets grow.
Wealthfront’s diversified, index-fund based approach is very sensible. But for people just beginning to save, most financial planners suggest your first priority for money outside your 401(k) is to build an emergency savings fund, ideally one large enough to cover six months of living expenses, in case you lose your job or face a health emergency.
That money should be in something safe, like a simple bank account. Banks do have their flaws: Wealthfront chief executive Adam Nash recently wrote an essay on Medium touting his service over checking accounts that slap investors with with fees for overdrafts and account maintenance. But it’s still possible to find a free bank account. Our annual Best Banks feature recommends both checking and savings options.
Investment portfolios are volatile—don’t forget stocks more than lost half their value in the last recession, just as many people lost their jobs. Meanwhile, money in a savings or checking account, while it won’t earn much at today’s interest rates, will always be there when you need it.
The upshot: If you’re financially secure and looking to sock away an extra $500 or $1,000 mostly as a way to build your saving habit, Wealthfront’s new offer is worth considering. If that $500 is really all you’ve got, start with something simple and safer. And then keep going.
I felt calm as I sat on a blue couch for my close encounter with the nascent field of financial therapy. I watched as Joel Reimer, a fit, 50-something man in a golf shirt, put sensors on my thumb and fingers.
I was in the middle of Kansas, in one of the exam rooms at the Financial Therapy Clinic, a counseling and research center run by the Institute of Financial Planning at Kansas State University. The clinic was on Poyntz Avenue, the main street in Manhattan, Kan. The office, like the town, the street and the building, was clean, spare and quiet.
“So I appreciate you coming in today,” Mr. Reimer said. “I’m just going to ask you some questions. Some background questions first and some financial goal-setting questions. Do you have any questions?”
I didn’t. He began by asking about my marital status, children and employment. Then he went into questions about my family’s finances and about our goals.
Which of the following best describes your financial situation at the end of the month: Do you have several unpaid bills, do you break even or do you have some money left over?
We have money left over, I said.
Suppose you were to sell all of your possessions, including your home, so you have turned all your assets into cash and you were going to try to pay off your debt. After doing that, would you be in serious debt, break even or have a lot of money left over?
I asked him what he meant by a lot since that was a relative term. He wouldn’t say, but I chose it anyway, since we would have money left.
When he got to my financial literacy, I gave myself high marks. I took a moderate grade for my willingness to take risk on an investment. And I spoke in detail about our financial goals for the year.
After 30 minutes or so, he unhooked me from the machine. “That’s it for our questions at this point,” said Mr. Reimer, with the same friendly but unreadable expression he had evinced since the start. “We’ll let you go on out and answer some additional questions.”
The written questions should have been easier. They were focused entirely on basic financial concepts, responsibilities and anxieties around money. But they asked for actual numbers, like our monthly housing costs and income after taxes. I had been honest up to this point. But I felt uncomfortable revealing this information, even though Mr. Reimer was a complete stranger.
I shouldn’t have worried. The researchers didn’t care about any of my answers. They cared about my stress level when I answered the questions.
“Do you think you were stressed or not stressed?” asked Sonya Britt, the chairwoman of the personal financial planning department at Kansas State.
“I don’t think I was stressed,” I said. “I think I was cold.”
“Hmmm … you actually were quite stressed,” she said. “It doesn’t matter what the room temperature is. After about two minutes, you should be able to adjust and go back to your homeostasis level. You got more stressed as you went on.”
She then showed me a graph of temperature at my fingertips. It started at 74 degrees and dropped to 72 during the questioning. The ideal temperature, she said, was 92 degrees. Most people who were relaxed were around 82 or higher.
“This has nothing to do with the temperature of the room?” I asked.
“No,” she said. “What’s happening in that situation is your blood is going back to your heart. It’s the fight or flight response. There’s no blood left in your fingers.”
As if that were not bad enough, she added that my “skin conductance level” — science-speak for sweaty fingers — doubled during questioning. I was cold and clammy.
“The purpose of that experiment was to see how people reacted to talking to a financial adviser,” Ms. Britt said. “It is stressful. And it’s more stressful having to answer questions about your goals, which is not that surprising.”
It may not be surprising, but it is problematic. Getting people to be less stressed when thinking, talking and making decisions about money should be any adviser’s focus. In financial therapy, it is the goal, but it can be a tricky sell.
Financial therapy is a lot like what it sounds like, a combination of psychology and financial advice, but centered on people’s relationships to money. Practitioners have to be part therapist and part financial adviser to be successful.
They are not to be confused with accredited financial counselors. While the two fields have overlap, a counselor usually comes in at a point of crisis — like bankruptcy or intractable arguing between spouses. Both financial therapists and counselors are small in the universe of advisers. There are about 250 members of the Financial Therapy Association, formed by Ms. Britt and others in 2010 during a breakaway meeting of the Association for Financial Counseling and Planning Education, which administers the accredited financial counselor designation. That number is a fraction of the 1,100 accredited financial counselors, whose numbers are dwarfed by the more than 71,000 certified financial planners and more than 300,000 advisers in the United States, according to Cerulli Associates.
A financial therapist’s role is to understand the stories we tell ourselves, true or not, about money — or in the parlance of the field, our “money scripts.”
Brad Klontz, a financial psychologist in Hawaii and an associate professor at Kansas State, thought up the phrase. In his research, Mr. Klontz has found four basic scripts: money avoidance, money worship, money status and money vigilance. Each has its own complications.
People with money avoidance tried to distance themselves from money. The result was predictable: They undermined their financial well-being.
Those who worshiped money believed it would cure all their problems, if they only had more of it.
People with a money status script seemed similar to money worshipers, except they connected money to their sense of well-being. Or as Mr. Klontz put it, self-worth was linked to net worth.
The last script was money vigilance. These people did not flaunt what they had; they paid their debts on time and were generally cautious about overspending. If anything, they were the ones who could deprive themselves for no rational reason.
Like mental health problems, these money scripts often existed outside of people’s consciousness and were formed in reaction to events that occurred in their lives.
One example Mr. Klontz gave was of a family on the verge of losing its house because of past bad decisions. In one case, a grandparent comes in and saves the family. In another, the parents save the house themselves. In a third, the family loses the house.
The precipitating event was the same in all three cases, but how people in those scenarios will feel about money will be quite different. And those different feelings are what make helping people overcome money disorders difficult for advisers.
Edward Horwitz, a former insurance executive who now works as a financial therapist and instructor of financial planning at Creighton University’s Heider College of Business, is consulting with a company that administers employee retirement plans. The company, which did not want to be named because it was in the early stages of the program, has hired Mr. Horwitz to provide financial therapy to plan participants as a way to get more employees saving in their retirement plans but also to distinguish itself in a crowded field.
Mr. Horwitz has eschewed the traditional 401(k) approach of talking about fund choices, contribution limits and income-replacement targets — difficult to imagine for someone thinking 30 years out.
“We’re trying to go in there and work more from the emotional and behavioral aspects to help them first connect emotionally with what their retirement is going to look like,” he said. “I use emotional triggers that tap into the sensory experience that people want to have in retirement. We have them understand retirement with no quantitative aspects involved.”
The experience is not exactly like lying on a couch. But as with traditional psychotherapy, the message is not always what people want to hear, and that is when the real work starts, Mr. Horwitz said.
“When people face the numbers, it may come at a price that is more than they can possibly afford,” he said. “But at least they know that. Then they’ll say, ‘O.K., what can I afford?’ They’ll have a better expectation.”
A big challenge with financial therapy, greater in some ways than financial advice or counseling, is that it lacks formal accreditation, like the certified financial planner or accredited financial counselor designations. (Mr. Horwitz has a doctorate in personal financial planning.)
And that creates the risk that people will just call themselves financial therapists and start delving into someone’s psychological feelings around money by simply offering lessons from their own lives. The results could be far more damaging than underfunding a retirement plan.
“You see a lot of financial planners who say we care about the emotions,” Ms. Britt said. “Are they doing it in a way that is helping the client or a way that is only going to bring up problems later?”
Ms. Britt offered an example in which a man was always trading securities and attributed his appetite for risk to his grandfather, who was a successful risk taker. But then, she said, the adviser asks something about the man’s father and learns that the relationship was an abusive one.
“And do you say, ‘Oh, well, I’m sorry about that,’ and you move on about this day trading business because you think that’s what your competency is?” she said. “Maybe the adviser is the first person this person has disclosed that information too. As a financial therapist, you’d be trained to set up an appropriate referral and address it for the rest of the meeting and get that person to a safe place.”
In private practice, financial therapy is a time-consuming process that can be difficult to charge for. It is far more intensive than a quarterly portfolio review, but when it comes to paying for it, financial therapy is an out-of-pocket expense that can be more difficult for investors to grasp than paying a management commission.
Mr. Horwitz said he charged $200 to $1,000 an hour, but he said not everyone he pitched therapy to understood the value.
Anthony Canale, chairman of the Financial Planning Association of New York, has taken financial therapy courses and has incorporated it into his planning business. He charges about $1,000 to $2,000 for a financial plan and includes therapy, if needed, in the fee.
“I felt financial planning should be available to everyone, but it’s hard to make a living when you work with clients who are of modest means,” he said.
He recalled a case where a woman was playing what he called “credit card roulette” to keep herself afloat but still supporting two sons in their 40s. This was a straightforward case to counsel. But he did not take her on as a paying client when he realized she couldn’t even give him a monthly list of expenses.
Unlike psychotherapy, where determining the effectiveness of the advice is difficult, financial therapists have tried to quantify the impact of their work. In a clinical trial published in The Journal of Psychological Services, Mr. Klontz and four other researchers found that in two key areas — psychological distress around money and ratings of financial health — people who underwent financial therapy maintained the gains three months after treatment ended.
Financial therapy is meant to get people thinking about the financial decisions they make — and not about their investment returns. These methods of addressing clients could help give people of various income levels the financial security that only the wealthy enjoy.
And there is an interest in this sort of financial work beyond a small niche. Large financial firms are making a push to talk to clients more explicitly about broader investing biases drawn out in the field of behavioral finance, which looks at the ways predispositions influence and distort financial decisions.
“All of these biases that you find in investors is a direct result of their experiences and their preferences that they’ve had in financial markets,” said Barbara Reinhard, chief investment officer of private banking Americas at Credit Suisse. “Asking ‘What’s your bias?’ doesn’t get you anywhere. It’s, ‘Mr. Smith, tell me, what’s the fear?’ ”
As I sat there that day at Kansas State, I knew if I had answered the questions again, knowing what I now knew, I doubt I could have masked my stress any better. Being open and honest about money, even around complete strangers, is hard.
“My stress isn’t, ‘I’m not going to be able to pay my bills,’ ” I told Ms. Britt and Mr. Reimer. “My stress is, ‘I know how people perceive money.’ It was more stressful filling out the money parts of this survey. …”
“Just divulging the numbers,” Mr. Reimer said.
“Exactly,” I said.
As I was leaving I asked Ms. Britt who had the lowest stress level in this experiment. She turned to Mr. Reimer, and they agreed it was a chatty teacher.
“Basically she had never talked to anyone about her finances before, and she wanted to keep talking,” Ms. Britt said. “We felt bad that we had to move her along.”
Maybe the teacher didn’t know enough to worry. Or maybe she knew that she had a pension, had saved some money and would have no worries. Either way, she was living a financial life with an openness that could be a model to others.
Correction: February 9, 2015
An earlier version of this article misidentified an accrediting organization for financial advisers. It is the Association for Financial Counseling and Planning Education, not the Association of Financial Counseling, Planning and Education.
It’s no secret the best time to overcome a financial crisis is before there is one. It’s also no secret that financial crises can be sparked by any number of reasons including recessions, terrorist attacks, overvalued assets, stock market activity, poor debt management, or regulatory failures.
Some are foreseen, others cannot be predicted. Regardless of the underlying cause, having a reliable sense of your future cash flow and a strategic plan in place can provide the tools to manage or avoid any potential problems.
Karl Hardesty, CEO of Hardesty LLC, a national executive services firm, realizes overcoming a financial crisis has its challenges, but it doesn’t have to be cause for panic. He offers the following steps any organization should implement to prevent or overcome a crisis.
Establish a communications plan. Every organization has a chain of command, but in a crisis, the rules change. Assign a spokesperson to speak with media calling with sensitive questions. Make certain someone is ready to speak for the management team when investors come knocking, and someone is responsible for contacting customers and vendors. Knowing who will carry approved messages to key audiences before a crisis occurs may make the difference between satisfied investors who are well informed of your cash management or disgruntled investors who read misinformation about your business challenges on their Twitter feed.
Develop a 13 week cash flow. The ability to forecast, monitor, and perform in the short term can establish the foundation for a positive outcome during any financial crisis. A 13 week cash flow is an appealing structure because it provides visibility into when cash will come in and what order obligations need to be addressed. Often it can help corporate turnarounds by focusing on short-term liquidity requirements and using weekly tracking to ensure fewer surprises and lower variances. Knowing your cash flow situation can help you get ahead of any issues before they become problems.
Set up a cost reduction plan. There may come a time when cash is short and you’ll need to prioritize quickly. There’s always a lag between execution of a plan and positive impact on cash. Developing a plan after you notice the cash flow shortfall means it’s already too late. Create a line-item specific phased cost reduction plan that can be executed quickly. When doing so, note which vendors will need to be prioritized. Will you freeze disbursements? Will you reduce salaries or institute furloughs? How quickly can you revise payment terms with creditors? Once you’ve realized a cash flow shortage, have answers to those questions in place and move immediately.
Encourage customers to pay faster. A payment acceleration plan can boost cash flow immediately. Initiate customer discounts or a rewards plan to encourage swift payment of receivables. Consider offering discounts to liquidate excess inventory. An example of companies that do this are discount wireless providers, who offer customers “shrinking payment” discounts for consistent early or on-time payments. Utility companies often allow lower payments for customers who pay early. Some businesses enter customers into contests for monthly cash or gift card giveaways for on-time payments. There’s no reason your business can’t apply a similar model that works for you.
Keep your reorganization options open. Sometimes, cash flow issues unveil deeper problems in your business, and a reorganization becomes necessary. Perhaps no one is accountable for business performance. Maybe your structure drives up payroll costs even when revenue generation is at a standstill. It may be best to bring in outside management with experience in your industry to allow them to evaluate cost structure versus incoming cash.
A debt collector must identify himself. During all communications,collectors must state they are debt collectors and any information they collect could be used to recover the debt.
A debt collector may not harass you. For example, a debt collector may not use profanity or abusive language.
A debt collector may not make false threats. A debt collector is barred from making threats about what will happen to you if you don’t pay up unless he or she has the legal authority and intent to proceed with the action. In fact, the Federal Trade Commission recently shut down a collection agency that lied to customers and told some of them they wouldhave their children taken away if they failed to pay their debts. If you receive a threat like this, report it immediately.
A debt collector cannot request an amount that is different from what is legally required. For example, a debt collector cannot lie about or misrepresent the amount you owe. The CFPB noted that many consumers had complained about attempts to collect a debt that had been discharged in bankruptcy.
A debt collector cannot request an amount that is not clearly authorized by your debt agreement.The CFPB says consumers shouldbeware of a collector requesting interest, fees, or expenses that were not owed, such as unauthorized collection fees.
You must receive written notice of your debt. Debt collectors are required to send a notice of your debt amount as well as the name of the creditor who is owed the debt. They must also state they will obtain verification of your debt and mail it to you if you happen to dispute the debt in writing within 30 days of receiving the notice.
Now that you know what is and is not acceptable behavior for debt collectors, make sure to take action if a collector violates your rights under the Fair Debt Collection Practices Act.
For more consumer tips, check out @sheiresango on Twitter.
Jason Young, an African-American founder and CEO of Mindblown Labs, an Oakland, CA based education technology start-up, knows first-hand how financial literacy or lack thereof can impact the African-American community.
Through his own personal experiences he learned very quickly that financial literacy is essential for everyone so he created a mobile app called Mindblown Life.
Mindblown Life is a mobile, social game that combines life-simulation elements and edgy humor to help young adults develop money management and financial literacy skills.
The game uses Facebook integration and push notifications to create a rich, in-game life filled with meaningful social experiences: in Mindblown Life, you can attend your friends’ concerts, take them on a dinner date, play mini-games with them, or crash on their couches, if you’re having a particularly rough month. Random events make sure that your Mindblown Life reflects the spontaneity of your real one.
With comparisons to the popular game The Sims, Mindblown Life puts players at the heart of the game. They create a customizable avatar, choose their career, and perform reflex-based mini-games at work to earn “Money,” “Skill,” and “Reputation” points.
“Although Mindblown Life incorporates experiential learning and popular game mechanics, similar to those found in The Sims and games by PopCap, it stands out because Mindblown Life gives young adults a platform to master the basic financial concepts that impact all of our lives,” Young says.
The desire to impact countless lives made Young explore digital initiatives to reach young adults.
“Millions of students are leaving high school and college without gaining a basic level of financial literacy,” Young says. “These same young adults are hyper-connected, constantly interacting with friends, and using the Internet and smart-phones to discover new things. Mindblown Life enables us to reach people where they are.”
In efforts to officially launch Mindblown Life the company launched a Kickstarter campaign at the beginning of the month with hopes of reaching $60,000. With a week left Mindblown Labs has come extremely close to their goal having raised $54,661 to date.
Mindblown Life is currently in private beta and will launch on iOS in the beginning of 2013.
The Kickstarter campaign ends Nov 1., to contribute and find out more information about this project visit www.mindblownlabs.com/ks.
New Automobile Sharing/Renting Programs a Gamble, Says Asset Protection Specialist
If parents loan the family car to their child, they can be sued if an accident occurs. The same goes for anyone who loans a car to a friend in need. So, what happens when a third party like RelayRides is involved?
RelayRides is a peer-to-peer car rental or car-sharing service that went nationwide in March this year after launching in Boston in 2010. Many participants loan their cars as a good deed to open up parking along busy urban streets, promote environmentally sound habits or simply to help those in need of a ride. Most, however, opt to rent their vehicles for a variable rate – usually about $10 per hour.
“Every car loaned or rented through the program gets $1 million in liability insurance coverage from RelayRides, but even that may not be enough,” says Hillel L. Presser, a lawyer specializing in asset protection planning and author of Financial Self-Defense (www.assetprotectionattorneys.com).
“When there’s an accident involving serious injuries, the victims simply have no choice but to sue for at least $1 million, and often more. If you rented the car and you have assets, you could become a target.”
Earlier this year, a man who rented a car through the program was killed in an accident while driving the wrong way on a highway, Presser says, citing a New York Times report. Four people in the car he hit were seriously injured.
“Medical expenses are expected to exceed RelayRides’ insurance coverage,” Presser says. “The owner of the car is a part-time Google systems administrator – which means she probably makes good money. Who will pay the overage, and who might be sued, is still yet to be determined.”
In today’s world, lawyers have gotten very creative in what they’ll go after, which is why comprehensive protection of assets is absolutely crucial, he says.
Presser offers the following tips:
• Account for ALL of your assets: Not sure of what you have? Don’t wait for a plaintiff’s lawyer to tell you exactly what that is before he or she takes it from you. Take stock of valuable domain names, telephone numbers, intellectual property, potential inheritances, and other non-liquid assets.
• Liability insurance is no guarantee: Buy as much insurance as you can; it’s cheap and it helps you sleep at night. But realize that 70 percent of claims will not be covered. Your coverage may be inadequate for a particular suit, and your insurance company may go bankrupt. Having insurance and an asset protection plan is the belt-and-suspenders approach for hanging onto your pants.
• Convert non-exempt assets into exempt assets: State laws protect some personal assets from lawsuits and creditors. Those assets typically include your primary residence; personal items such as furniture and clothing; pensions and retirement funds; and life insurance. Find out the exemptions for your state and convert non-exempt assets, such as cash, into exempt assets, such as life insurance.
• Transfer your assets to a protective entity: The key to asset protection is to own nothing while controlling everything. Transfer any non-exempt assets out of your name to protective entities such as trusts, limited liability companies, limited partnerships and others.
• Don’t loan out your car – even to your kid: If your children are going to drive, they should drive cars titled in their name alone. And if they pay for the cars themselves, you add another layer of protection. Courts may find that parents who are obviously paying for their children’s cars liable to some degree, even if the car title is in the child’s name.
“While everyone can take well-informed steps to further protect their wealth, there is no substitute for having an experienced legal professional review an estate – all of it,” Presser says.
About Hillel L. Presser
Hillel L. Presser’s firm, The Presser Law Firm, P.A., represents individuals and businesses in establishing comprehensive asset protection plans. He is a graduate of Syracuse University’s School of Management and Nova Southeastern University’s law school, and serves on Nova’s President’s Advisory Council. He also serves on the boards of several non-profit organizations for his professional athlete clients. He is a former adjunct faculty member for law at Lynn University. Free copies of Financial Self-Defense are available through AssetProtectionAttorneys.com.