This is another guest post from JoeTaxpayer. On my blog, I’ve shared several articles that discussed the Roth IRA conversion event of 2010 in great length and detail. While this is can be a great opportunity for many, there are several instances that a conversion does not. I looked to JoeTaxpayer to share some pros and cons of the Roth IRA conversion and for unforeseen consequences that could result.
There’s been much hype regarding the ability for anyone to convert their retire money to Roth regardless of their income. Many professional planners and writers of financial blogs have offered compelling reasons why one should convert. Today, I’d like to share some scenarios where you might regret that decision.
You don’t have a crystal ball
All signs point to higher marginal rates, this is one factor that prompts the advice to convert, but who exactly would that impact, and by how much? Let’s look at the first risk of regret. You are single, and an above average wage earner, just barely in the 28% bracket. (This simply means your taxable income is above $82,400 but less than $171,850, quite a range). Any conversion you make now is taxed at 28%, by definition. You get married, and start a family quickly, your spouse staying home. That same income can easily drop you into the 15% bracket as you now have three exemptions, and instead of a standard deduction, you have a mortgage, property tax and state tax which all put you into Schedule A territory and a taxable income of less than $68,000. Now is when you should use the conversion or Roth deposits to take advantage of that 15% bracket, before your spouse returns to work and you find yourself in the 25 or 28% bracket again. It’s then that you should convert enough (or use Roth in lieu of traditional IRA) to ‘top off’ your current bracket.
Life isn’t linear
It’s human nature to expect the next years to be very similar to the past few. Yet, life doesn’t work quite that way. The person who makes more money year on year, from their first job right through retirement is the exception. For more people, there are layoffs, company closings, major changes in family status, disability, and even death. Except for permanent disability or death, the other situations can be considered opportunities to take advantage of a full or partial Roth conversion. If one should become disabled, the ability to withdraw that pretax money at the lowest rates is certainly preferable to having paid tax on it all at your marginal rate.
Transferring your 401(k)
The Roth conversion is available for holders of 401(k) (and other) retirement accounts as well as holders of traditional IRA accounts. Back in October 07, I cautioned my readers on a somewhat obscure topic they need to be aware of when considering a transfer from the 401(k) to their IRA and the same caution exists for conversion to a Roth. Net Unrealized Appreciation refers to the gains on company stock held within your 401(k). The rules surrounding this allow you to take the stock from the 401(k) and transfer it to a regular brokerage account. Taxes are due only on the cost of that stock, not the current market value. The difference up to the market value at time of sale (thus the term Net Unrealized Appreciation) is treated as a long term capital gain. Current tax law offers a top LT Cap Gain rate of 15%. A loss of 10% or more if you are in the 25% bracket or higher and convert that company stock to a Roth.
Taking Money At Retirement
Given the low saving rate of the past decades, all projections point to fewer than the top 10% of retirees coming close to ‘retiring in a higher bracket.’ Consider how much taxable income it would take to be at the top of the 15% bracket in 2010. For a couple, the taxable income needs to exceed $68,000. Add to this two exemptions, $3,650 ea, and an $11,400 standard deduction. This totals $86,700. Using a 4% withdrawal rate, it would take $2,167,500 in pretax money to generate this annual withdrawal. What a shame it would be to pay tax at 25% to convert only to find yourself with a mix of pre and post-tax money that puts you toward the bottom of that bracket. Whose marginal rates do you believe will rise? Couples making less than $70,000? I doubt it. What’s the risk? That you should be in the 25% bracket at retirement? That’s still break even in the worst scenario.
What About Your Beneficiaries
While a tax-free inheritance might be great for the kids, a properly inherited, properly titled Beneficiary IRA can provide them a lifetime of income. Consider, if you leave a portion of your traditional IRA to your grandchild, a 13 year old, his first year RMD (required minimum distribution) will only be about 1.43% of the account balance. For a $100,000 account left to him, this RMD falls shy of the current $1900/yr limit before he is subject to the kiddie tax. To insure that he doesn’t withdraw the full remaining amount at 18 or 21, consult a trust attorney to set up the right account for this purpose. If left to your own adult children, the advantage can go either way depending on their income and savings level.
Are You a Philanthropist?
If you don’t have individual heirs you wish to leave your assets to, the ultimate poke at Uncle Sam is to leave your money to charity. No taxes at all are due. Leaving Roth money to charity just means that our government already got its piece of the pie.
Avoiding Roth IRA Conversion Regrets
Today, I’ve shared with you some scenarios that are cause for regretting a conversion. As I always caution my readers, your situation may differ from anything I addressed here, and your unique needs are all that matters. If you have any questions on when or if a conversion makes sense for you, post a comment and we’ll be happy to discuss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please see a tax professional before implementing any sort of IRA conversion. Joe TaxPayer is not affiliate or endorse by LPL Financial.
Did the movie “The Big Short” go right over your head? Does Nasdaq sound more like a foreign country than a stock market index? When you hear about bear markets and bull markets, do you envision adorable cartoon mammals browsing for fresh produce at a local farmers market?
You’re not alone.
The stock market can be confusing, and if you’re not a financial wizard in the Wall Street inner circle, you might be tempted not to bother with stock and options trading at all. But you’d be missing out.
That’s where apps like Robinhood come in. In this Robinhood review, we’ll discuss how Penny Hoarders can go from novice traders to expert stock market gurus, no matter how much or how little they have to invest.
What Is Robinhood?
Robinhood offers a unique brokerage account with commission-free investing from your smartphone. Robinhood has been around for the better part of a decade — the company launched April 18, 2013. Its two founders, Vladimir Tenev and Baiju Bhatt, met at Stanford University as roommates and eventually moved to New York City to build finance companies.
Upon seeing firsthand how Wall Street insiders and powerhouse firms paid almost nothing when trading stocks while average Americans had to pay a commission fee for every trade, they instead headed to California to develop a financial product that allowed everyone to trade easily and affordably.
The resulting financial product, of course, was Robinhood. The company today is headquartered in Menlo Park, California.
Robinhood has not been without its challenges. It’s famous for serious outages during market surges in 2020 and its role in the early 2021 market chaos related to the Reddit forum called r/wallstreetbets, where it restricted member access to securities like GameStop, Nokia and AMC. More recently, Robinhood laid off 23% of its staff, just one example of the massive tech industry layoffs in 2022, and also has been in the news for questionable trades.
However, Robinhood’s overall mission to make stock market trading accessible for everyone is admirable, and it is one of many investment and trading tools that seeks to put power back in consumers’ hands to elevate the financial status of the average American.
That’s a product that, even with its flaws, we can get behind.
What Tradable Securities Does Robinhood Offer?
The Robinhood platform is a great solution for free(!) trading of stocks, options, ETFs (exchange-traded funds) and ADRs (American Depositary Receipts), as well as cryptocurrency trading. The trading platform requires no minimum balance, offers fractional shares and includes plenty of educational resources. While Robinhood is most known for trading stocks and crypto, you can also use it for cash management.
Robinhood does not, however, offer access to mutual funds and bonds.
In 2021, Robinhood began to offer IPO access, meaning investors could purchase shares of stock in new companies at the IPO price before they go public. And in 2022, it introduced individual retirement accounts, or IRAs.
What Can You Trade on Robinhood?
U.S. exchange-listed stocks
U.S. exchange-listed ETFs
Options contracts for U.S. exchange-listed stocks and ETFs
ADRs for more than 650 globally listed companies
Cryptocurrency
What Can’t You Trade on Robinhood?
Foreign-domiciled stocks
Select OTC equities
Preferred stocks
Tracking stocks
Stocks that trade on foreign exchanges
Royalty trusts
Units
Closed-end funds
Mutual funds
Bonds
Fixed-income trading
New York registry shares
Limited partnerships
Chinese securities affected by the Nov. 2020 executive order
Spanish ADRs
How to Get Started with Robinhood
To sign up with a Robinhood brokerage account, simply visit the website and press the black “sign up” button.
Hot Tip: Robinhood is currently offering one free fractional share upon signup. There are 20 fractional shares available to choose from. To generate its 20 offers, Robinhood chose the two largest S&P 500 companies within each of the top 10 sectors based on market cap.
To open an account with Robinhood, you have to meet a few individual requirements:
You must be 18 or older.
You need a valid Social Security Number (Note: You may not use a Taxpayer Identification Number).
You must be a legal U.S. citizen, U.S. permanent resident or have a valid U.S. visa and have an address in the 50 states or Puerto Rico (exceptions made for members of the U.S. military stationed outside the country).
The Robinhood trading platform is accessible via the web or app (iOS and Android).
The process of activating your account can take some time. You’ll start by submitting an application. While Robinhood reviews the application, you can queue one deposit to fund your account, but you won’t be able to use that money to make trades until account approval.
Typically, Robinhood will take a few days to either approve your application or request more information. If they request more information or documentation, be prepared to allow five to seven days for review.
How Much Does Robinhood Cost?
Trading with Robinhood is free. That’s the whole reason its founders launched the company: free stock trading for regular people. That means you won’t pay commissions on equity trades or options trades. However, you could wind up having to pay account transfer fees, wire fees, check fees and live broker fees, among others.
In addition, Robinhood Gold allows you to trade on margin at a 7.75% annual rate (11.75% for non-Gold members). It also allows you to make bigger deposits with faster fund access. This fee for the margin account is $5 per month.
Robinhood Gold, Explained
Margin trading means trading with borrowed money. If you invest in a bad stock and lose money on the investment, you’ll owe that money back.
For example, say you borrow $500 to invest in a stock worth $500. But that stock plummets to $100. You will still owe the remaining $400 back to Robinhood. That’s what makes margin trading a little too risky for novice traders.
Not only that, but if you borrow more than $1,000 to trade on margin, you’ll owe 7.75% yearly interest on that borrowed money above that $1,000.
Because Robinhood is targeted at new investors — and margin trading is a risky practice that can break even the savviest stock market gurus — we recommend that you invest with your own money, and make sure it’s money that, if lost, will not financially ruin you.
In fact, one of our biggest stock trading tips for beginners is to stay away from margin trading.
So How Else Does Robinhood Make Money?
If Robinhood is commission-free and not everyone uses Robinhood Gold, how does Robinhood make money off you? Robinhood spells this out transparently on its website:
Rebates from market makers and trading venues: Robinhood has developed relationships with market makers and trading venues that pay Robinhood rebates for directing orders to those makers and venues. In the industry, this is known as payment for order flow (PFOF).
Stock loans: Robinhood can loan stocks held in your account to traders and hedge funds for short selling. Robinhood gets to keep the money it makes from this; you as the investor do not share in the wealth.
Income from cash: If you have idle cash sitting uninvested but haven’t moved it into a cash management account, Robinhood earns interest on that cash.
Cash management account: Every time you use the debit card for your cash management account, Sutton Bank (the card issuer) earns a fee, which it shares with Robinhood.
Robinhood Gold: Robinhood makes money off every Gold subscription, both from the monthly fee and from margin interest.
Robinhood Review: Key Features
In this section, we will break down some of the hallmark features of Robinhood.
Robinhood: At a Glance
Feature
Details
More Details
Trading fees
$0
n/a
Account minimum
$0
n/a
Tradable securities
Stock options
ETFs ADRs; crypto
Mobile app rating
4.2 on App Store
4 on Google Play
Customer support
Talk to a live agent 24 hours a day, 7 days a week
30-minute guarantee
Other key features
Fractional shares
IPO access
Beginner perks
Educational resources
Free stock at sign-up
Commission-Free
Robinhood’s schtick has long been that it offers commission-free trading. That means you will spend $0 for stock trading and $0 for options trading. ETFs also are commission-free.
This was the original mission of the founders, but in the time since launching their revolutionary idea, some of the bigger, traditional players, like Fidelity and Charles Schwab, have latched onto the same idea — and are backed by a better customer support system and a better-supported platform.
That has meant the Robinhood trading platform has had to find new ways to differentiate, like cryptocurrency and fractional shares. More on these below.
No Account Minimum
Of course, you will need to put money in your account to invest, but Robinhood does not have an account minimum, nor does it charge you for having a low or zero balance. And with fractional shares being an option, you can get started investing with as little as a dollar in your account.
Note: To purchase a security on margin (through Robinhood Gold), you need to have at least $2,000 in your account. This is not a Robinhood requirement but rather a regulation set by the Financial Industry Regulatory Authority (FINRA).
Cryptocurrency Trading
Cryptocurrency is still a foreign concept to many investors, but just because something is new and scary (also, it’s been around since 2009, so it’s hardly new anymore) doesn’t mean you shouldn’t invest. Not all brokers allow you to buy and sell cryptocurrency, but Robinhood offers support for multiple cryptocurrencies, including Bitcoin, Dogecoin and Ethereum, with Robinhood Crypto (open 24/7).
In keeping with the whole “Robinhood is free” theme, Robinhood charges 0% for crypto exchanges. Some competitors charge up to 4%.
Fees
Not only does Robinhood offer free trades on stocks, options, ETFs and ADRs, it also has no account fees, inactivity fees or ACH transfer fees. Robinhood Gold, as mentioned, currently costs $5 a month.
Mobile App
Robinhood was created in the heart of Silicon Valley in Menlo Park, so, unsurprisingly, its mobile app is streamlined and easy to use. At the time of writing, the Robinhood app had 4.2 stars in the App Store based on more than 4 million reviews.
Its website, too, is streamlined. It doesn’t have a lot of extras, which is great if you are a novice trader. A more senior investor may find the site lacking, however.
Customer Support
While Robinhood offers customer support, this seems to be the biggest issue raised by members. Customer review sites often are littered with complaints that customer service is virtually nonexistent, especially pre- and post-market.
In an effort to improve its relatively low-rated customer support options, Robinhood rolled out a new customer service feature in 2021. This allows customers to request a call back, 24/7. Robinhood promises an agent should call within 30 minutes.
No Mutual Funds and Bonds
While commission-free stocks, options, ETFs and even crypto are a big pro of Robinhood, its lack of mutual funds and bonds can be frustrating for traders who want to diversify. As far as retirement accounts go, mutual funds are a key part of a retirement investment strategy.
Fractional Shares
True to its goal of making growing financial wealth more accessible to average Americans, Robinhood released fractional share options in late 2019. This means, if you can’t afford an expensive stock valued at, say, $1,000, you could instead buy a fraction of the stock, maybe $100 worth of it, or even just $10.
Right now, Robinhood allows you to buy as small as one-millionth of a share. Just like full shares, trading of fractional shares can be done in real time and is commission-free.
Recurring Investments
Another tool that Robinhood has introduced in recent years is recurring investments, which is a nice pairing with a fractional share investment strategy. For example, if Company X’s stock hovers around $200, you can set up a recurring investment in a fractional share at $25/week. Within roughly eight weeks, you could own a full share.
Most brokers structure recurring investments as buying by the share, which typically leaves your account funded with some uninvested cash. But Robinhood’s recurring investments are structured as buying by a dollar amount, which makes the best use of all your invested cash.
IPO Access
New in 2021, Robinhood gave customers access to purchase stocks in upcoming IPOs (initial public offerings) at the IPO price. No minimum account balances or special status requirements are necessary.
Cash Management Account
Another cool feature of Robinhood is the associated cash management account. You can have your paycheck deposited here, use it to pay bills and deposit checks, and, of course, fund your account. Like a proper bank account, this account gives you access to more than 75,000 fee-free ATMs (pretty much everywhere Mastercard is accepted) and comes with a debit card. And the best part: It earns 1.5% APY (4.65% APY for Gold members). For reference, the FDIC says the average interest rate for a savings account is 0.33% APY. And because the account is operated through a network of banks, you’ll get more than the typical $250,000 FDIC insurance; instead, the account is insured up to $1.25 million.
Educational Resources
A lot of now-outdated Robinhood reviews mention the lack of educational resources. We couldn’t find anything to be less true of Robinhood. Perhaps in response to some of those reviews, Robinhood has stepped up its game, with plenty of online resources on the website as well as a daily financial newsletter called Robinhood Snacks. Robinhood markets it as a “3-minute newsletter with fresh takes on the financial news.”
Pro Tip
Serious investors keep up with this kinds of news. It may not have the same appeal as celebrity gossip, but it will help you make wise decisions investments decisions.
Robinhood makes it easy to access news from Reuters, Cheddar, WSJ Markets, etc. Upgrading to Robinhood Gold gets you access to Morningstar, Nasdaq and Nasdaq Totalview Level 2 Market Data.
What Customers Are Saying About Robinhood
Because of Robinhood’s role in the recent GameStop market chaos and following layoffs in 2022, many angry investors and emboldened Redditors spoke their minds online, meaning Robinhood’s current ranking on sites like the Better Business Bureau (BBB) and Google Play is suffering. This is more a reflection of reviewers’ overall criticisms of capitalism, hedge fund managers and the 1% than it is on Robinhood, which, if you take a step back, is really trying to help the average investor.
Pros and Cons of Robinhood
There’s a lot to love about Robinhood, especially if you are a new trader. More experienced traders may prefer a different approach to trading, however. Weigh these pros and cons before deciding on a Robinhood brokerage account.
Pros
The educational content is great if you are new to the stock market and want to learn the language.
The cash management account makes it easy to fund your investments and earns a decent APY.
You can strategize by combining fractional shares and recurring investments to diversify your assets and minimize uninvested cash, no matter how much you have to invest.
The commission-free trading and no account minimum truly make this accessible to anyone who wants to invest.
Robinhood gives you the option of investing in cryptocurrency and access to IPOs.
The mobile app and online trading platform are known for their ease of use.
There are no account or trading fees, nor are there account inactivity or ACH transfer fees
Robinhood is running a promotion wherein you get free fractional share upon signing up.
Cons
The role Robinhood played in limiting investments in squeeze stocks (like GameStop) in early 2021 brought the original mission of the company into question. The 2022 layoffs didn’t help.
Customer support is lacking, especially compared to larger brokers. Robinhood customers complain that customer service is especially challenging pre- and post-market.
Robinhood lacks mutual funds and bonds.
By not charging investors commission, Robinhood instead makes money through the payment for order flow, a common standard among online brokers. Some critics say this is a conflict of interest.
Are There Alternatives to Robinhood?
If you want to stay away from major players like TD Ameritrade and Charles Schwab, Robinhood is arguably the most popular trading tool.
Its most notable competitor is Webull. Both Robinhood and Webull have their advantages; it truly comes down to your personal preferences. But Robinhood and Webull aren’t your only options. In fact, we’ve rounded up the best investment apps currently offered; choosing the right app depends on your own specific needs and investment strategy.
Frequently Asked Questions (FAQs) About Robinhood
Still have questions about opening a Robinhood account? We’ve provided answers to some of the questions our readers are most commonly asking.
Is Robinhood Safe?
Yes, Robinhood is a safe platform for investing. Robinhood is a member of the SIPC (Securities Investor Protection Corporation), meaning your funds are insured up to $500,000. Robinhood also is regulated by the Securities and Exchange Commission (SEC).
Is Robinhood a Brokerage Account?
Yes, Robinhood offers a brokerage account as its key offering, but you can also open a cash management account with Robinhood.
Does Robinhood Pay Dividends?
Robinhood processes your dividends automatically, crediting cash to your account by default.
Is Robinhood Gold Worth It?
Most investors will be fine with Robinhood’s free investing accounts. Being a Robinhood Gold member is ideal for margin trading, but we don’t recommend this unless you are a more seasoned investor.
Timothy Moore covers banking and investing for The Penny Hoarder from his home base in Cincinnati. He has worked in editing and graphic design for a marketing agency, a global research firm and a major print publication. He covers a variety of other topics, including insurance, taxes, retirement and budgeting and has worked in the field since 2012. Freelancer Lauren Richardson contributed to this post.
What to learn how to start investing for beginners? Here’s my tips on where to start investing, even if you have little money.
I always say the first thing you need to do if you want to start investing is to just jump in. However, what if you don’t really even know how to start investing?
In addition to not knowing how to start investing, it can be scary, stressful, and overwhelming to begin.
Even though it can be scary, it will probably be one of the best decisions you make when it comes to being prepared for retirement.
With today’s post, I hope to make it easier than ever with my beginner investing tips so that you can start investing your money and build a retirement fund as soon as possible.
Just as a refresher, you want to invest because:
It can help make sure you aren’t working for the rest of your life.
You can retire sooner rather than later.
You can lead a good life well after you finish working – traveling, pursuing your hobbies, volunteering, or whatever you choose!
Compound interest means the earlier you save the more you earn.
You won’t have to rely on your children or others in order to make ends meet.
Investing is important because it means you are making your money work for you. If you weren’t investing, your money would just be sitting there and not earning a thing.
This is important to note because $100 today will not be worth $100 in the future if you just let it sit under a mattress or in a checking account. However, if you invest, you can actually turn your $100 into something more. Investing for the long term means your money is working for you, potentially earning you an income.
For example: If you put $1,000 into a retirement account that has an annual 8% return, 40 years later that would turn into $21,724. If you started with that same $1,000 and put an extra $1,000 in it for the next 40 years at an annual 8% return, that would then turn into $301,505. If you started with $10,000 and put an extra $10,000 in it for the next 40 years at that same percentage rate, that would then turn into $3,015,055.
Related content:
I’ve talked a lot about savings here on Making Sense of Cents, and in my post 56% Of Americans Have Less Than $10,000 Saved For Retirement, I stated that 56% of Americans have less than an average of $10,000 in retirement savings and 33% have no retirement savings at all. This is something incredibly important to address! And, some of those statistics are because many don’t know how to start investing.
Other interesting statistics mentioned in this article include:
42% of millennials have not begun saving for retirement.
52% of Gen Xers have less than $10,000 in retirement savings.
About 30% of respondents age 55 and over have no retirement savings whatsoever.
Nearly 75% of Americans over 40 are behind on saving for retirement.
One of the biggest reasons I’ve noticed is that people don’t realize that they should be saving more or, like I said, they don’t know how to start investing. Again, investing for beginners can feel daunting, so don’t feel like you are alone. And, the reality is that you don’t need much to get started.
If you have never invested before and are wondering how to start investing, I have broken down the steps to make easy to start investing for beginners, even those who feel like they don’t have much money to invest.
How to start investing for beginners:
1. Start saving your money.
“The best time to invest was yesterday; the second best is today!”
That’s one of my favorite investment quotes, and it explains why starting to save for investing should happen right now.
And, my top investing tip goes right along with it: start setting money aside today.
In order to invest your money, you need to actually set aside money for investing. How much you set aside is entirely up to you, but I think more is always better if you can manage it.
Okay, you may be thinking “How much money should I save if I don’t have much money?!”
The key here is saving as much for investing as you realistically can. This may be nowhere near 20% at first, heck, this might not even be 5%, but any little bit will help. If you are not able to save that much, just save something! Investing for beginners can be as little as $25 a month – seriously, every little bit does help.
Even if it’s just $1 a day, set that amount aside and start saving even more.
You may want to look into Acorns, which is a cell phone app that rounds up your credit card and debit card purchases, and then invests your spare change. Acorns automatically invests for you, and you can get started in under 5 minutes. This app is amazing!
You can always work your way up to saving a higher and higher percentage of your income to put towards investments. Starting small is an easy way for beginners who are wondering how to start investing. I understand that some people have financial situations in which they may not be able to save as much money as they would like. Living paycheck to paycheck, being in medical debt, or having a major unexpected expense can wreck a person’s financial situation and their goals, and I understand that.
However, there are options to getting out of those negative financial situations. Cutting your spending is an obvious one, but you can also find more ways to make extra money. It may be a challenge, but you are worth the work it takes to reach your financial goals.
Even if you are working towards day-to-day financial stability, you can still start investing. Like I said, even the smallest amount of money can be put towards investing. Not only does investing now help you reach retirement sooner, it may help you prevent negative financial situations from happening the in future.
2. Find an online brokerage or an expert to manage your investments.
So, now that you have actually started to set aside money, you will want to decide how you will invest it.
There are two main things you could do with your money. Either invest your money yourself, such as through an online brokerage, or find an expert to manage your investment portfolio. Part of learning how to start investing includes determining the company, platform, or person you will use to invest your first dollar.
There are many online brokers and brokerage accounts for you to choose from. My favorites include:
Ally Invest – This is a full service discount broker that doesn’t have a minimum amount, so you can start investing with them right away.
Betterment – Betterment offers an affordable way to invest your money. They have over 400,000 customers and over $14 billion has been invested through their service. With Betterment, you can invest with as little money as you want each month, which is great for a new investor!
Vanguard – I absolutely love Vanguard, and I recommend that you check them out. This is a great way to introduce both new and old investors to the stock market.
Also, if your employer has a retirement plan, then you will definitely want to look into that as well. If your company offers a retirement plan match, then this is where you will want to start as their retirement match is pretty much free money!
Also, in case you are wondering, a 401(k) is a type of retirement account that you get through an employer.
3. Decide where to put your money.
After you open your brokerage account, you will want to decide how exactly you will invest your money in the stock market. I think this might be one of the biggest hurdles for those wondering how to start investing and how to invest in stocks. There are a lot of what ifs in the investment world, and a good brokerage or expert will help you navigate as you decide where to put your money.
Basically, where you invest your money depends a lot on the level of risk tolerance you are willing to take and the time you have to watch your funds mature. A simple way of explaining this is that more time equals more risk and less time equals less risk.
For example: if you are in your 20’s and are using your investments for retirement, you have 30-40 years worth of investing ahead of you. You will likely be able to make some riskier investments knowing that the market will bounce up and down over time. If you are closer to retirement, you will probably want your funds in something that you are confident will make small but steady gains.
Choosing the stocks, mutual funds, etc. that you invest in is not the easiest thing because no one knows what will happen in the future. This is why it’s important to have a diverse portfolio.
When learning how to start investing for beginners, a professional will help you determine your goals, your risk level and how to diversify your investments in a way that will benefit you.
Even if you do have a professional helping you, it’s always important to do your own research on the types of investments available and which ones interest you.
Please remember that I am not an investment professional and that you should do your research when choosing who/what to invest in.
Related: How To Start An Emergency Fund
4. Monitor your investment portfolio.
So, you finally have invested your money, congrats!
The next step is to regularly track your investments. This is important because you may eventually have to change what you are invested in, put more money towards your investments, and so on.
Now, the key here is to not go crazy, and checking on your portfolio can be an exciting thing when investing for beginners. But, you do not want to become a person who checks their investments every hour of the day. That won’t help you at all as small changes in the stock market most likely won’t matter to you, especially if you are investing for your long-term future.
However, you do want to occasionally check your progress as things may change in the market, your investment interests may change, and you may even alter your goals.
A free tool that I recommend using to monitor your investments is Personal Capital.
You can see your investment portfolio all in one place so that you can easily track your performance, see your investment allocations, and easily analyze everything related to your investments. The Personal Capital Retirement Planner will also tell you if you have saved enough for retirement.
To protect my privacy, this image is not mine – it was provided by Personal Capital.
5. Continue the steps above over and over again.
Learning how to start investing is the first step, but the final one is to continue investing well into the future, and you will want to continue these steps over and over again. Now that you know what steps to take, it only gets easier from here.
The hard part is done!
How much money should a beginner invest for the first time?
Even if you think you don’t have much, you can still start!
If you want to start with just a few dollars, I recommend reading A Beginner’s Guide to Micro-Investing.
How can I start investing with little money?
As a recap, you can start investing with little money by following these tips:
Start saving your money.
Find an online brokerage or an expert to manage your investments.
Decide where to put your money.
Monitor your investment portfolio.
Continue the steps above over and over again.
What questions do you have when it comes to how to start investing for beginners? What investment tips do you have to share?
Webull is an online brokerage that offers commission-free trading on stocks, options, and ETFs. Key features of the platform include real-time market data, advanced charting tools, and a customizable newsfeed.
With most investing apps now offering commission-free trading, online brokers must find more creative ways to stand out. Robinhood, for example, is now offering a 1% match on IRA contributions. Webull, on the other hand, tries to place the focus on the customer by offering free stocks, fractional share investing, a user-friendly trading platform, extended hours trading, and 24/7 support.
But is Webull a suitable platform for beginner investors? In this Webull Review, I cover Webull’s trading platform, key features, pros and cons, and more.
About Webull
Launched in 2017, New York City-based Webull is a self-directed investment platform that offers commission-free trading. You can buy and sell stocks, options, exchange-traded funds (ETFs), and even cryptocurrencies. And unlike many newer online brokers, you can trade over-the-counter (OTC) stocks with Webull.
Webull describes itself as “a financial company with the customer at heart, the Internet as our foundation, and technology as our lifeblood.” The company delivers on this description by providing a user-friendly investment platform, free real-time quotes, multiplatform accessibility, full extended hours trading, and 27/7 online support.
Key Features
Zero Commissions
No deposit minimums
Hold crypto alongside stocks, ETFs, etc.
Taxable or IRA accounts available
Supports margin trading
Paper trading option
Access to initial public offerings (IPOs).
Webull Community allows you to share investment strategies with other investors on the platform.
24/7 online customer support
Free stock bonus, as well as a referral bonus program
Is Webull Legit?
Yes, Webull is 100% legitimate. They are a US-based broker-dealer, and a FINRA, SIPC, NYSE, and NASDAQ member. It’s estimated that Webull has more than 12 million users and over $40 billion in Assets Under Management (AUM).
At the time of this writing, the company has a rating of 4.4 out of five stars from more than 174,000 Android user reviews on Google Play and 4.7 out of five stars among more than 275,000 iOS user reviews on The App Store.
Unfortunately, they rate poorly with other major rating agencies.
Webull has a Better Business Bureau “F,” the lowest rating on a scale of A+ to F. It scores 1.07 out of five stars, though that rating is based on just 54 reviews.
The company doesn’t do much better with Trustpilot, where it rates 1.3 out of five stars, or “Bad”. However, it’s worth noting the Trustpilot rating is based on just 137 reviews.
Webull Account Types
Webull offers two taxable account types: cash and margin. With the cash account, your buying power is limited to the funds you have on deposit. The margin account allows you to use leverage for the purchase of securities in excess of the cash value of your account.
The margin account requires a minimum of $2,000 to be maintained in the account at all times. Since a margin account will involve leverage, you must maintain a minimum account balance of $25,000 for unlimited day trades (see below).
You can also open a Traditional, Rollover, or Roth IRA with Webull. Each user can have one IRA account, but you must have an individual account before you can open an IRA.
Day Trading Rules
According to FINRA rules, you can make no more than 4 day trades in a margin account within five business days; otherwise, you will be flagged as a pattern day trader (PDT). That will trigger the requirement of the $25,000 minimum balance.
Margin accounts are also available for LLCs, C-Corps, and S-Corps with 2X overnight leverage and 4X day trading leverage.
Webull Trading Platform
The platform offers intuitive tools and support for traders and supports extended hours of trading, both before and after the market closes.
You can do the following on the Webull trading platform:
Real-time quotes
Customizable screens
Stock market trading ideas from top traders
Sort stocks between top gainers, top losers, and most active and best-performing industries.
More than 50 technical indicators and 12 charting tools.
Quant Ratings to provide an overall rating for each stock based on objective data.
The ability to analyze your past trading performance to look for areas of improvement.
Real-time stock alerts to notify you of price action and technical conditions.
In addition, you can execute the following orders:
Limit order
Market order
Stop order
Stop-Limit order
Trailing Stop order.
Stop-Loss/Take-Profit orders (Bracket orders)
One-Triggers-the-Other order (OTO)
One-Cancels-the-Other order (OCO)
One-Triggers-a-One-Cancels-the-Other order (OTOCO).
Margin Trading
Webull offers margin trading for both long- and short positions. You must maintain a minimum account balance of $2,000 in your margin account to qualify for margin trading. The account will provide up to 4X buying power per day trades and 2X for overnight trades.
Webull Paper Trading
Webull offers their Paper Trading feature to help you learn how to trade or to become a better trader without risking real money. And unlike some paper trading accounts offered by other brokers, Webull Paper Trading comes with unlimited virtual cash.
You can take advantage of real-time quotes, explore integrated charts with indicators, and set up price alerts, the same as you would with live trading. The feature offers more than 50 technical indicators and 12 charting tools. Paper trading can be used for options trading practice.
Initial Public Offerings (IPOs)
IPOs are when a private corporation offers stock to the public for the first time. The stocks are in registration and awaiting listing on the secondary market. The registration phase allows the issuing company to raise capital from public investors, who will be the first to receive the stock as of the listing date. In theory, it’s an opportunity for investors to get in on a newly listed company as it is going public.
Webull makes IPOs available to investors. You can locate IPOs by going to the Market page, then to the IPO Center for a list of available offerings. You can even subscribe to notifications of upcoming IPOs as they become available.
Cryptocurrency
You can trade cryptocurrency on Webull commission-free. As is the case with most cryptocurrency exchanges, Webull charges a spread of 100 basis points on both the purchase and sale of crypto. You will need a minimum of $1 to begin trading crypto.
Crypto trading requires either a cash or margin account for crypto trading (no IRAs). You can trade 44 cryptos, including Bitcoin, Ethereum, Litecoin, Dogecoin, Stella Lumens, Ethereum Classic, Cardano, Tazos, USD Coin, and many more.
Crypto trading hours are from 5:30 p.m. to 6:30 PM, Eastern time, seven days per week (23 hours per day).
Crypto Wallet. Webull offers a crypto wallet so you can buy, sell, store, and transfer crypto to and from the wallet.
Stock Lending Income Program
This program allows you to earn extra income on fully paid stocks in your account. If you allow Webull to borrow certain stocks, you’ll be paid interest while those stocks are loaned out.
Apex Clearing, Webull’s clearing agency, will identify fully paid stock in your account, which is considered “in demand” based on the market. You will be paid 15% of the interest earned by Apex Clearing on the loaned stock.
For example, if Apex earns 10% per year, you’ll earn 1.5%. Interest earned through the program is credited daily and paid monthly.
Webull Community
Webull adds a social component to its investment platform. You can participate with millions of other Webull investors to discuss market and exchange strategies, and swap ideas with other investors.
How Does Webull Make Money if they Don’t Charge Fees?
Webull charges very few fees, but they do charge some. After all, they can’t stay in business without any revenue. Here is a list of Webull revenue sources:
Payment for Order Flow (PFOF). This is a common practice among commission-free retail brokers. When Webull sends trades to market makers, they receive rebates for the practice. This income flow is part of the reason why brokers can allow commission-free trading.
Securities lending. This is another common practice in the brokerage industry. Webull uses the services of Apex Clearing as their clearing agent. Through the Stock Lending Income Program, Apex can loan out investors’ shares to other investors and institutions, usually for short sales. Those borrowers will pay interest to Apex, a portion of which is rebated to Webull.
Interest on cash balances. Since Webull doesn’t pay interest on uninvested cash held by investors, the company retains any interest earned on those funds from outside sources.
Interest on margin trades. When you use margin to purchase securities, Webull charges interest which represents income to the company.
Deposit and withdrawal fees. Webull charges fees of between $8 and $45 per transfer for both deposits and withdrawals made by wire.
The basis point spread on crypto trades. Webull earns a 100-basis point spread on the purchase and sale of cryptocurrencies.
Other Features
Income Tax Reporting
Webull provides a consolidated Form 1099, which includes reporting information from 1099-B (transactions), 1099-DIV (dividend income), 1099-INT (interest), and 1099-MISC (other income and information). The form can be downloaded from the Webull app.
Account Protection
Webull is a fully regulated broker-dealer, and your account is protected by SIPC insurance for up to $500,000 in cash and securities, including $250,000 in cash. For additional protection, Webull offers two-factor authentication for an added step on accessing your account and to prevent unintended parties from entering your account.
Free Stock Bonus and Referral Bonus
Webull is currently offering a free stock bonus to include free fractional shares in two stocks. The stock will be worth between $3 and $3,000, which could make the bonus as high as $6,000 in total. You must be new to Webull and meet other eligibility requirements.
You can also receive fractional shares in four, eight, or 10 free stocks by depositing any amount into your new account within ten days. Each fractional share will be valued between $3 and $300. That means you can earn up to 12 fractional shares with a total value of as much as $9,000. Stock rewards must be claimed within 30 days, or the offer will expire.
Under the Webull Referral Bonus, refer family and friends to Webull, and you’ll receive three free shares of stock. Refer three friends, and you’ll receive nine shares. Once you’ve received nine shares, each successful referral will provide you with two free stocks. Each share of stock will be worth between $12 and $1,400.
Your referral must use your unique referral link, and the free stock will be issued when the new user opens a brokerage account with an initial deposit of at least $100.
How to Sign Up for a Webull Account
You can sign up for Webull from either the website or the mobile app by clicking “SIGN UP” at the top of the page. You’ll need to enter your phone number and a referral code if you have one.
Webull will require you to supply your name, US residential address, date of birth, taxpayer identification (Social Security number or individual taxpayer ID number), telephone number, and citizenship.
To verify your identity, Webull may ask for copies of your driver’s license, passport, or other information as necessary.
Due to Webull’s review process, it will take a minimum of 24 hours to open your account. More time may be needed if manual verification of information is required. Webull will perform a soft credit check, which will not negatively impact your credit score.
Funding Your Account
You’ll need to connect a bank account to fund your Webull account. Webull will make two micro-deposits to your account to confirm a valid account connection. Once verified, you’ll be able to begin transferring funds to and from Webull.
The easiest way to fund your account is through ACH transfers, which are free to complete. (Note that Webull charges domestic and international wire transfer fees.)
ACH deposits initiated before 4:00 PM Eastern time will give you instant buying power, enabling you to begin trading immediately. However, the instant buying power feature is a provisional credit representing a portion of the deposit. Full ACH deposits are generally available on the fourth or fifth business day after the ACH is initiated.
Alternatively, you can transfer securities from another broker into your Webull account. The transfer securities must match those available through Webull.
Webull Pros and Cons
There’s plenty to like about Webull, but the platform also has limitations. Here’s my list of Webull pros and cons.
Webull Pros:
No minimum initial investment
Commission-free trading
Get free stock when you open an account and make a deposit
Available crypto wallet where you can manage your cryptocurrency holdings
Connect with millions of investors in the Webull Community
24/7 online support
Webull Cons:
No joint taxable accounts, custodial or trust accounts
You can’t invest in mutual funds, penny stocks, or bonds
Must have a taxable account to open an IRA
No dividend reinvesting option
No interest on uninvested cash
Fees for domestic and international wire deposits and withdrawals.
Webull Alternatives
Before signing up with Webull, I recommend checking out these alternatives, which offer many of the same features as Webull.
Robinhood
Robinhood is a popular online brokerage that offers zero-commission trades of stocks, options, ETFs, and cryptocurrency. No minimum deposit requirement exists, but like Webull, Robinhood doesn’t allow bond or mutual fund trades. One very interesting feature: Effective December 2022, Robinhood now offers IRA accounts with a 1% match, the first online brokerage to do so.
According to Robinhood, “the IRA Match is an extra 1% that Robinhood adds to eligible contributions to your IRA. It’s not counted toward your annual contribution limits and is typically available to invest immediately.” For more information, check out our full Robinhood Review.
Public
Public is an easy-to-use trading app that is geared toward new investors. Like Webull and Robinhood, Public doesn’t charge any trading fees. You can also buy fractional shares and connect with other users in the Public social community. That said, intermediate traders will want to steer clear of Public due to their lack of advanced trading options – they don’t offer IRA accounts and have little in the way of market research tools.
Learn more in our Public Review.
Interactive Brokers
Interactive Brokers (IBKR) is a truly global trading platform offering investors access to 150 markets in 33 countries. You can also trade in more than 24 currencies. Like Webull, there are no commission fees on stock and ETF trades. Interactive Brokers is hands down the more powerful platform for sophisticated traders looking for access to global markets, but it may be overwhelming for new and intermediate investors.
Webull FAQs
Is Webull good for beginners?
Webull is a safe trading platform for new investors. Accounts are protected by SIPC insurance for up to $500,000, and the platform uses numerous security features, including two-factor authentication.
We also like that Webull has no minimum initial investment requirement, though you will need to deposit funds to begin trading. And as a beginning investor, you can certainly benefit from the paper trading account with unlimited virtual cash.
However, other investment brokers may be a better choice for new investors. Webull is designed primarily for active traders and those with at least an intermediate level of experience. Larger brokerage firms will be able to provide higher levels of customer service and a greater variety of account tools and educational services.
What is the minimum deposit for Webull?
There is no minimum deposit requirement for a Webull account, but a $2000 minimum balance is required for all margin accounts.
What is the downside to Webull?
The main drawbacks to Webull include the lack of a dividend reinvestment program and the inability to buy fixed-income and mutual fund investments.
Does Webull work in Canada?
Webull is a US-based online broker. Because it’s not registered in Canada, it’s not available to Canadian citizens.
Final Thoughts on Webull
Webull is an intuitive trading app where you can trade more than 40 cryptocurrencies on the same platform where you hold more traditional investments. They offer plenty of investment tools, including margin trading, day trading, and short sales.
And if you’re new to Webull or have friends to refer, you can take advantage of free stock bonuses.
While Webull is geared more toward intermediate and advanced traders, its intuitive trading platform shouldn’t overwhelm new traders. That said, beginner investors may want to give Robinhood and Public a long look before signing up with Webull.
A cash management account (CMA) combines many of the best aspects of checking and savings accounts. It lets you earn strong interest rates while keeping it easy to access and spend your cash. While CMAs can’t do everything a dedicated checking or savings account can do, many people find CMAs sufficient for their financial needs.
Financial companies target CMAs at consumers who have large cash balances they need to insure. People who want the easy access a checking account provides – without sacrificing the interest rate savings accounts offer – also use them.
But so many companies offer CMAs it can be hard to choose the best one. Which one is right for you depends on how much money you plan to deposit and whether your primary goal is earning interest or easy access to your money.
Best Cash Management Accounts
There are plenty of top options for CMAs to choose from, no matter your financial goals. Many are associated with investment brokerages or robo-advisor platforms, which automatically allocate and manage your funds based on your personal risk tolerance and objectives.
Betterment
Our Rating
Earn up to 4.35% APY and pay no monthly fees on your cash. Plus, get access to Betterment’s low-cost robo-advisor platform with instant transfers between accounts.
Monthly Fee
$0, but Betterment may charge investing fees
Deposit Insurance
Up to $4 million
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Betterment is an automated investing platform with a built-in cash management account (Cash Reserve) that has one of the best yields and highest deposit insurance limits in the space.
Betterment’s yield is comparable to the top high-yield savings accounts, and its FDIC insurance limit is at least eight times the industry standard. Open a joint account with your spouse or domestic partner to double your FDIC insurance coverage.
And if you’re looking for a day-to-day spending account, open a Betterment Checking account. It has a debit card, no monthly maintenance fees or minimum balance requirements, and a direct link to your other Betterment accounts.
Annual percentage yield (variable) is as of 05/08/2023. Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities.
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Wealthfront
Our Rating
Earn 4.55% APY on all balances with no minimums or fees. Plus, enjoy category-leading FDIC deposit insurance coverage up to $5 million.
Monthly Fee
$0, but Wealthfront may charge investment fees
Deposit Insurance
Up to $5 million
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Wealthfront is an automated investing platform that charges a low asset-based fee on all balances (0.25% AUM). Its cash management account, the aptly named Wealthfront Cash Account, charges no fees at all.
The Wealthfront Cash Account has more in common with a checking account than a savings account. Notable features include unlimited withdrawals, a debit card that works at nearly 20,000 ATMs, direct deposit, and integrations with popular peer-to-peer transfer apps like Venmo and PayPal.
The Wealthfront Cash Account’s Self-Driving Money™, feature is even more useful than a standard checking account. It’s a money management automation tool that automatically allocates incoming deposits to cover near-term bills and expenses, add to your emergency savings, fund other savings goals as per your personalized savings plan, and divide the remainder between your investment accounts — all with minimal input from you.
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Empower
Our Rating
Earn 4.25% Interest; No Minimum Balance; No Monthly Fees; Up to $1.5 Million in FDIC Insurance
Monthly Fee
Deposit Insurance
Up to $2 million
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Formerly known as Personal Capital, Empower is a digital financial advisor and wealth manager geared toward affluent younger folks. You don’t need a ton of money to use its Empower Cash cash management solution though — it’s totally free and doesn’t require a separate minimum balance.
Empower Cash stands out for the same reasons many other great cash management accounts do: a high yield, generous FDIC coverage, and no minimums. It adds some more unique benefits too, including direct access to human wealth managers and a sophisticated budgeting tool that securely syncs with your external financial accounts and provides a comprehensive all-in-one view of your finances.
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Aspiration
Our Rating
Earn up to 3.00% APY on the first $10,000 in your Save account. Plus, your deposits never fund fossil fuels.
Up to 3.00% APY
Monthly Fee
$0 to $7.99
Deposit Insurance
Up to $2.25 million
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Aspiration is a socially conscious financial firm that offers retirement, investing, and charitable giving services. Aspiration doesn’t invest customer funds in businesses that pollute the environment. It has a growing lineup of Conscience Coalition partners where purchases earn up to 10% cash back. And it helps you gauge your own social responsibility, giving you a spending-habits report card showing how much you’ve supported green companies.
Aspiration’s cash management solution isn’t as generous as some others, with a lower yield that applies only to the first $10,000 in the account and requires a monthly fee to attain. But if you’re drawn to Aspiration’s mission, you can probably live with the financial drawbacks.
Fidelity
Our Rating
Earn 2.47% APY on all balances with no minimums, no fees, and variable deposit insurance up to multiples of the statutory limit.
Monthly Fee
Deposit Insurance
Variable, but at least $250,000
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Fidelity is a full-service financial firm that offers banking, financial advising, and investment services. It’s fully capable of being your only financial institution, and the Fidelity Cash Management Account is a big reason why.
The Fidelity Cash Management Account is a checking-like platform (complete with a debit card and unlimited ATM fee reimbursements) that offers savings-like yields. It offers a nice blend of old and new too, with free paper checks alongside mobile check deposit and fast person-to-person transfers. And if you’re not ready to branch out into stocks and bonds and all the rest, you don’t have to use Fidelity’s investing platform just because you have a Fidelity Cash Management Account.
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Methodology: How We Select the Best Cash Management Accounts
Our most important considerations when evaluating cash management accounts are:
How much they earn (interest rate)
How much they protect (deposit insurance coverage)
How easy they make it to access your money (linked accounts, debit cards, and so on)
How much they cost (fees and expenses)
How they fit into a larger financial ecosystem (connection to other accounts offered by the same company)
Interest on Balances
“What’s the interest rate?” is the first question most people ask when shopping for cash management accounts. The best accounts pay interest on par with the top high-yield savings accounts, which as of mid-2023 typically yield between 4% and 5% APY.
Deposit Insurance Coverage & Limits
Generous deposit insurance coverage is a defining feature of cash management accounts. The best accounts protect multiples of the standard FDIC deposit insurance limit of $250,000, which is what you get with most ordinary checking, savings, and money market accounts.
Some go up to $5 million or even higher. The higher, the better.
Access to Balances
Cash management accounts are sort of like checking-savings hybrids, but in terms of access to your cash, many are more like savings accounts. They don’t have debit cards, peer-to-peer transfer capabilities, or instant transfers to external accounts.
Good cash management accounts tend to be more liberal on this front. Some even have debit cards that you can use at any merchants that accept Visa or Mastercard.
Fees
The best cash management accounts have no monthly maintenance fees and low (or no) fees otherwise. However, most are associated with investment accounts that do charge management or trading fees. We look for accounts with reasonable fee schedules in any case.
Connection to Investment & Other Account Types
Cash management accounts usually don’t exist by themselves. They’re often associated with investment or wealth management accounts that offer a much broader range of services than standard deposit accounts can. We prefer these types of accounts because they’re more suitable as one-stop shops for banking and investments.
Cash Management Account FAQs
If you understand how checking and savings accounts work, you have a basic understanding of cash management accounts too. But they have a few differences and oddities worth drilling down into.
What Is a Cash Management Account?
A cash management account is a deposit account that blends features of checking and savings accounts.
Like a checking account, a cash management account usually has no limit on withdrawals. Some come with debit cards and other checking-like features, such as instant person-to-person transfers.
Like a savings account, a cash management account typically has a high interest rate on balances. It often has a higher deposit insurance limit as well, a feature it shares with some certificates of deposit.
Is a Cash Management Account a Brokerage Account?
A cash management account is not a brokerage account, but many cash management accounts are associated with brokerage accounts. Either the account is housed within the brokerage account itself and receives proceeds from securities sales through a process known as cash sweeping, or it’s a separate account linked to the brokerage account for speedy transfers.
Are Cash Management Accounts Better Than Savings Accounts?
It depends on your financial situation and what you hope to get out of the account.
If your personal cash reserve is well under the standard FDIC deposit insurance limit, your best bet is to look for the highest possible yield, which you may or may not find in a cash management account. If you have more cash, it might be worth it to use a cash management account with a higher deposit insurance limit, even if its yield isn’t quite on par with the top savings accounts.
If you plan to use your cash (or some of it) to buy stocks or other securities, keeping it in a cash management account is more convenient than a standard savings account not associated with a brokerage account.
What’s the Difference Between a Cash Management Account and a Money Market Account?
Cash management accounts have a lot in common with money market accounts, which are also often described as checking-savings hybrids.
The biggest differences: a money market account is more likely to come with core checking features like a debit card and paper checks, and less likely to be directly associated with a brokerage account. Also, money market accounts often (but not always) have lower yields than savings accounts and cash management accounts.
Do You Have to Buy Stocks If You Have a Cash Management Account?
No, you can keep all your money as cash in a cash management account even if the cash management account is directly associated with a brokerage account. If you worry you’ll be tempted to purchase risky securities out of a brokerage-linked cash management account, consider holding your funds in a separate external bank account.
Final Word
Cash management accounts provide a useful mix of savings and checking accounts with the extra perk of huge FDIC insurance limits. If you’re in the market for a CMA, look for the account that offers the level of accessibility you need and the best interest rate possible.
If you don’t need debit card access to your money, you can choose an account with other features that benefit you, like high interest rates or additional FDIC insurance.
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TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he’s not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.
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Retiring at 40 may sound like a pipe dream. But it’s entirely within reach if you save $1 million while working. The key elements for achieving this feat are sticking to a budget and implementing a comprehensive retirement strategy. But with rising expenses, is $1 million enough? To answer this question, you must identify your expenses, including taxes and monthly debt obligations and compare them to your sources of income. Here’s how investing and budgeting can set you on the path to early retirement.
A financial advisor can also work with you to get a realistic estimate of when you may be prepared to retire.
Can I Retire at 40 With $1 Million?
Retiring a quarter-century before the standard retirement age requires careful planning. However, one rule persists for retirement no matter what age it begins: Your savings must generate enough income to cover your living expenses for the rest of your life.
With this principle in mind, retiring at 40 means you can’t rely on traditional retirement vehicles such as individual retirement accounts (IRAs) or 401(k) accounts.
These accounts are not accessible until you reach the age of 59.5. Therefore, you must research alternative retirement savings instruments to create the income you can use once you stop working.
Smartasset’s retirement calculator helps you assess how your financial situation matches your retirement objectives. You’ll enter information such as your rate of return, Social Security benefit and location to evaluate your ability to retire at 40.
How to Determine How Much You Need to Retire
Retirement always requires evaluating how taxes, expenses and income work together for you. Retiring young means having all your ducks in a row to avoid surprises or financial hardships later on. Here’s how to assess how much you need to retire:
Calculate Your Costs in Retirement
Your expenses are an essential piece of information in a retirement plan. In other words, your cost of living provides the necessary context for how you’ll retire. For example, a yacht club membership can significantly alter your budget.
Likewise, your state of residence impacts how far your dollars go each year. For example, a recent study from the U.S. Department of Commerce shows that in Nevada, a popular retirement state, the overall cost of living is 95.5% of the national average.
As a result, retirees will get a discount on living expenses (plus zero state income taxes!) for living in the state. On the other hand, Hawaii’s costs are 113.2% of the national average, meaning that retirement there will cost more.
Determine Your Income
Your tax rate decides how much income stays in your pocket. Retirees often prefer living in a tax-friendly state like Georgia or Florida because of the absence of state income taxes.
That said, your forms of income will also influence your tax status. For example, rental income from real estate incurs regular income taxes, while selling stocks for a profit incurs capital gains taxes.
In addition, healthcare expenses are a growing cost for retirees. Specifically, HealthView Services data reporting shows that a couple retiring at 65 in good health will spend about $662,00 on healthcare throughout their lives.
As a result, it’s best to plan for several hundred thousand dollars of medical expenses during retirement. Furthermore, retiring at 40 means addressing an additional 25 years of medical costs.
To do so, experts advise designating 15% of your annual income for healthcare costs. However, this amount may be higher if you have a chronic health condition.
And having children at home is expensive, whether you’re retired or not. For instance, The Washington Post states the average annual cost of child-rearing is about $17,000 per child. Therefore, it’s crucial to add this item to your budget for an accurate idea of your finances.
Identify Retirement Income Streams
With expenses accurately laid out, you can turn to your income streams. For retirement to be feasible, the $1 million nest egg must return enough income to cover your expenses. So, if you invest $1 million for a 5% return, your annual income is $50,000.
Remember, stocks are riskier than other assets, such as certificates of deposits (CDs), so diversifying your investments is critical. Otherwise, a stock portfolio that is successful this year might tank the next year, leaving you without income. In addition, you have little margin for error with $1 million; every dollar needs to provide a return.
Next, Social Security is a form of income that you’ll encounter a few decades into retirement. Because you won’t collect Social Security benefits until 62 or older, retiring at 40 means waiting 22 years to receive your first check.
So, while Social Security will be a boon in the second half of your retirement, you’ll have to get yourself there with the income you create independently.
Look at the Numbers
So, let’s look at an example combining costs and income streams. Let’s say you want to retire at 40 with one child in the house. Your life expectancy is 80, so you plan a 40-year retirement. In addition, you’ll retire in Nevada, which has no state income taxes. Here are your annual expenses:
$22,000 for housing
$15,000 for healthcare
$5,000 for utilities and property taxes
$7,000 for food
$6,000 for entertainment, phone and internet
$3,000 for auto upkeep and insurance
Your total annual expenses are $58,000, or $4,833 monthly.
To meet these expenses, you collect income from multiple sources: First, you purchase two rental properties for $500,000 total, which generate $4,000 of monthly income ($48,000 per year).
You also have a $250,000 savings account with a 4% interest rate ($10,000 per year) and a $500,000 brokerage account with an average return of 5% ($25,000 per year). So, your investments provide $83,000 of annual income.
Next, your income and single filing status place you in the 12% tax bracket, leaving you with about $51,040 of your real estate and savings account income after taxes. In addition, you’ll pay 15% for long-term capital gains taxes on your brokerage account.
So, your total monthly income after taxes is $72,290 annually. Fortunately, this figure is about $14,300 above your expenses, leaving a margin for when investments underperform or surprise expenses crop up.
That said, your income and expenses won’t remain static throughout retirement. Instead, inflation will drive up your cost of living each year at an average rate of 3%.
The expenses of $58,000 this year will grow by thousands of dollars after five years because of economic trends. Overall, it’s best to sock away surplus income to prepare for higher expenses in the future.
Remember, you’ll age into Social Security at 62 and receive an income bump at that time. For example, the Social Security Administration’s 2022 Statistical Supplement estimates the average 62-year-old’s monthly check to be $2,364.
Depending on your circumstances, you can decide when you reach 62 whether to start collecting this benefit or delay it for higher future income.
How to Boost Your Retirement Income
The example above demonstrates a path for retirement at 40 with $1 million. However, you must adhere to a tight budget to do so. On the other hand, you can give yourself more financial flexibility by increasing your income with these tactics:
Delay Social Security Benefits
Social Security isn’t automatic. Instead, you apply for it when you want to start collecting it. As a result, you can choose any age starting at 62 to begin collecting this benefit.
Increase Your Interest Rate
The interest rates of savings accounts and certificates of deposit (CDs) are constantly shifting to attract customers. For example, the typical high-yield savings account has an interest rate of between 0.5% to 4.15%.
So, moving money out of a conventional savings or checking account can provide more annual income. Plus, your deposits have FDIC insurance up to $250,000, meaning they have shelter from market downturns.
Understand Your Income Tax Implications
Your tax situation is unique to you, and failing to grasp the details can incur additional fees. For instance, say you want to sell some stock through your brokerage account after holding it for 364 days.
Doing so will incur short-term capital gains taxes, which are identical to regular income taxes. On the other hand, waiting a few days will put you in the long-term capital gains timeframe, increasing your taxes by 3%. So, staying on top of these transactions can help lower your tax burden.
How to Make Your Savings Go Further in Retirement
Likewise, you can maximize your savings potential to make early retirement easier. Here’s how to make your savings work for you:
Use a Budget
Although the word ‘budget’ might make your stomach churn, it’s one of your most powerful financial tools. Budgeting helps you gain control of your finances by providing a clear overview of your income and expenses.
Budgeting lets you track where your money is coming from and where it is going, enabling you to make informed decisions about your spending and saving habits.
Additionally, a budget also helps you set financial goals and work towards them. In this case, it’s your roadmap to retiring at 40. So, you can allocate resources wisely and prioritize what matters most.
Choose Low-Fee Investments
Management fees can be the death of otherwise successful portfolios. This characteristic applies to brokerage accounts, which can invest in mutual funds, exchange-traded funds, real estate investment trusts (REITs) and other funds that can have exorbitant administrative fees.
Evaluating an account’s fee structure before investing money is crucial to keeping more of your money.
Care for Your Health
Healthcare is paramount for retirement planning. It’s undeniable that every retiree will require healthcare services at some point in their journey. However, by taking proactive measures, you can determine the timing and way you receive such care.
In particular, regular check-ups and engaging in physical exercise serve as preventive measures that can substantially diminish the frequency of hospital visits, fostering physical well-being and financial stability.
Work Part-Time
Additionally, embracing part-time employment can bolster your finances upon early retirement. Pursuing this option can augment your income and counteract rising inflation. Moreover, this approach possesses the added advantage of enabling a prolonged deferral of Social Security, which ultimately translates into higher benefits later on.
Pay Off Debt
Lastly, it’s critical to recognize the dangerous grip that debt can exert upon your financial liberty. For instance, the burdensome nature of credit card balances and personal loans comes from their exponential interest rates. This predicament imposes sizable obstacles on the path toward retiring at 40.
Remember, the gains from investments seldom surpass the annual percentage yield (APY) that debts impose. Therefore, prioritizing the repayment of high-interest debts promotes financial health, whether during the prime of your career or your golden years.
Bottom Line
Retiring at 40 with $1 million requires a strategic investment approach. Specifically, you must create a well-thought-out plan that includes various types of assets, such as brokerage accounts, savings accounts and real estate.
In addition, calculating your expenses meticulously and ensuring that your income covers them effectively is crucial. In this scenario, $1 million must last for several decades until you become eligible for Social Security. So, thinking creatively about generating income during that time is essential.
Tips for Retiring at 40 with $1 Million
Investing $1 million for retirement means maximizing the return of every dollar during your career. Working for two decades or less means you can’t afford a mistake when investing. Fortunately, a financial advisor can help you find assets with low fees and substantial returns. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Ideally, retiring at 40 means starting off your golden years while you’re relatively young and healthy. However, your future health is unknown, especially after you become a senior citizen. So, you can prepare for this possibility by budgeting for the cost of independent living.
Ashley Kilroy
Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
Cost of carry refers to any and all ongoing costs that you need to pay in conjunction with holding a given investment. Transaction costs, which are incurred upon the purchase or sale of the asset, are typically not considered a carrying cost.
Cost of carry can come in a variety of different forms — here are a few types of carrying costs that you’ll want to be aware of:
• Storage costs, if you are investing in the futures market for physical goods
• Interest paid on loans used for an investment
• Interest in margin accounts when borrowing to invest in stocks or options
• Costs to insure or transport physical goods
• The opportunity cost of investments
Most if not all investments have carrying costs, and savvy investors will take them into account when deciding whether an investment is worth it. Even if a particular investment doesn’t have obvious carrying costs, there is always the opportunity cost of making one investment over the other.
How Cost of Carry Works
The way that cost of carry works depends on the type of investment that you are considering. If you are investing in the futures markets for tangible goods like coffee, oil, gold, or wheat, you may have carrying costs associated with these physical goods. For example, if you buy a commodity like crude oil, you must pay the costs for transporting, insuring and storing that oil until you sell it.
To accurately calculate your trading profits you must include those carrying costs.
In a purely financial transaction like buying stock or trading options, there can still be carrying costs involved. You may have to pay interest if you are borrowing money with a margin account. You may also incur what are called opportunity costs. Opportunity costs refer to the money you could have made if you had invested your money in other areas.
If you are holding $10,000 in your stock account waiting for an option assignment, you can’t use that $10,000 for other investments.
Which Markets Are Impacted by Cost of Carry?
Cost of carry is a factor in a variety of different types of investments. Options trading has carrying costs from interest costs if you trade in a margin account to holding costs.
Investing in commodities may require a cost of storing, insuring, or transporting your goods. You should be aware that most types of investments also have opportunity costs.
Cost-of-Carry Calculation
The simplest cost-of-carry calculation just includes all of your carrying costs as a factor when you analyze the profitability of a particular investment. So, if
• P = Purchase price of an investment
• S = Sale price of the same investment
• C = carrying costs while holding the investment
The profit of this investment could be expressed as Profit = S – P – C.
Futures Cost of Carry
The futures market has two different prices for each type of commodity. The spot price refers to the price for immediate delivery (i.e. on the spot). A futures price is the price for goods at some specified time in the future. Because most futures contracts of commodities come with non-zero carrying costs, the futures price is usually (but not always) higher than the spot price.
Options Cost of Carry
When trading options the costs of carry fall into a few categories:
• Interest costs – Some investors borrow money to purchase options, i.e. a loan from a friend, a bank loan, or a brokerage margin account.
Whatever the source of the money, the interest paid to service the borrowing is a carrying cost.
• Opportunity costs – You’ve chosen to invest in options. But where else could you have invested that money? Because most alternative investments carry risk, as does investing in options, it’s difficult to make an apples-to-apples comparison.
In finance, we look at risk-free investing rates to assess the opportunity cost. “Risk-free” is defined as the return available by investing in U.S. Treasuries. In the past, 30-year bonds were the standard, but 10-year returns and even the return on short-term Treasury notes may also be used.
• Forgoing Dividends – One of the disadvantages of owning options compared to owning stock, is that you are not eligible for dividends as an option holder. The market makes an effort to price dividends into the option premium, but just as interest rates can fluctuate, so can dividend rates.
Examples of Cost of Carry
Here is a simple example of cost of carry and how it might affect an investment in purchasing Brent Crude Oil.
Say you buy a contract for 1,000 barrels of Brent Crude at $80/barrel. Six months later, the price of oil has gone up to $90/barrel, and you sell. You might think that you have earned a $10,000 profit, but that is not accounting for the cost of carrying the oil.
If it cost you $3,000 to store and insure those barrels of oil for the six months that you owned them, those carrying costs must be subtracted from your profit. You also are liable for delivering the oil, which might cost another $1,000. Considering the cost to carry, your actual profit was only $6,000. While these costs are easiest to understand with physical goods like commodities, most types of investments have carrying costs.
Cash and Carry Arbitrage
Like crypto arbitrage, there sometimes exists a type of arbitrage called cash-and-carry arbitrage. In cash-and-carry arbitrage, an investor will purchase a position in a stock or commodity and simultaneously sell a futures contract for the same stock or commodity.
If the futures price is higher than the combined amount of the stock price plus carrying costs, you can secure a relatively risk-free profit via cash and carry arbitrage.
Cost of Carry and Net Return
As we’ve discussed already, the cost of carry can have an impact on the net return of any investment. When determining your total profit and the return on investment (ROI), you need to account for any and all costs that you incur as part of the investment.
These might include transaction costs like commissions as well as carrying costs. Subtract all such costs from your gross profit to calculate the net return of your investment.
Can You Do Anything About Cost of Carry?
Since the cost of carry directly and negatively affects your total profit, you may be wondering if you can do anything about it. While there are carrying costs with almost every type of investment, one way to minimize the cost of carry is to avoid investments that have significant carrying costs.
On the other hand, if your specific situation allows you to have below market carrying costs, you may be able to earn a profit with cash and carry arbitrage.
The Takeaway
The cost of carry is a term used in options and futures trading that refers to the ongoing costs incurred in an investment while you are holding it.
With physical commodities, the cost of carry refers to storage, insurance, delivery and other costs specific to the fulfillment of your contract.
When applied to options trading the carrying costs are financial in nature, such as, interest costs, opportunity costs, and forgoing dividends.
If you’re ready to try your hand at options trading, you can set up an Active Invest brokerage account and trade trade options from the SoFi mobile app or through the web platform.
And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, and members have access to complimentary financial advice from a professional.
With SoFi, user-friendly options trading is finally here.
FAQ
How can you calculate cost of carry?
The cost of carry refers to any costs that you incur during the course of your investment. In commodities trading, this generally refers to costs like storage, insurance, or delivery of the commodity. In other types of investments, the cost of carry could include interest charges or the opportunity cost of using your money.
Do bonds have a cost of carry?
Yes, nearly all investments, including bonds, have some sort of cost of carry. In the bond market, the cost of carry generally refers to the difference between the face value of the bond plus premiums minus applicable discounts.
How are ordering and carrying costs different?
Ordering costs are the costs that you pay as part of the ordering process. In a stock or option transaction, any broker’s commissions that you pay would be considered ordering costs. While ordering costs are usually incurred only once (at buy and/or sale), carrying costs are the costs that you must pay to hold an investment throughout its duration.
Photo credit: iStock/fizkes
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3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. SOIN0322025
By Peter Anderson5 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited December 21, 2010.
A few weeks ago I published my post called “75 Frugal Gifts You Can Give For Christmas“. The post was an extensive list of frugal gift ideas, gifts that people could buy or make for their loved ones, but not break the bank. One of my favorite gift ideas from the list was one that in my opinion is good for more than just one year, it is the gift that keeps on giving. What was it? The gift of stock.
When I wrote the post I was thinking of somehow buying a single share of stock or giving them a check to open a brokerage account or something along those lines. In the end the idea lacked something because it wasn’t very easy to implement, and it didn’t allow for the type of investing that I would prefer to do, via index funds.
A couple of weeks ago I found the answer to how you can give someone the gift of stock, but a bit easier. And it came from one of my favorite brokerage companies, ING ShareBuilder (review) . They also have one of my favorite bank accounts, ING Direct Online Savings (review)!
ShareBuilder Gift Of Stock
ShareBuilder released something this year actually called the “Gift of Stock“. Basically it’s everything you need to start investing included in the package. Who would this be a good gift for? A friend or family member that might need that boost to start investing, or it can be a great teaching tool to help your kids get interested in saving for the future.
Here are the contents of the package from ING:
$50 ShareBuilder Gift Card. Help friends and family start their own stock portfolio at ShareBuilder or become an investor yourself. The gift card is redeemable when opening a new ShareBuilder Individual, Joint or Custodial account, giving you or the gift recipient the chance to start off with $50 in their account. ShareBuilder has no account minimums.
Five Free Automatic Investment Plan Credits. Free trade credits allow you, friends or family to start building wealth. ShareBuilder’s Automatic Investment Plan allows investors to set up recurring investments with a dollar amount they can afford.
Five-part video series from The Motley Fool. Picking stocks can be easier than you think. The Motley Fool’s How to Buy the Right Stocks for Your Portfolio video series can help you develop the right financial portfolio for your financial goals.
It’s really that easy. When they get the package they can setup a new account at ING ShareBuilder, redeem their gift cards for $50 of stock and 5 free automatic investment plan credits, and start investing!
Gift Of Stock Price Drop!
Originally this gift of stock was retailing for $45 on the ING store, but as of this week the price has dropped to only $25. So get in on this hot deal now! You could even buy it for yourself to get started investing you want to! You’ll get a return for your money right out of the box since you get $50 in ShareBuilder credit for only $25!
Here’s my unboxing video of my own “Gift of Stock” package. Click to watch and see everything that’s included inside.
Want to open your own ShareBuilder account? Open your account here. (Get a $50 account bonus with promo code: 50ws10)
Do you receive a year-end bonus? Lucky you! While you may be tempted to go on a shopping spree or take your gang out to a great dinner, hold on a second. Yes, you can use some for fun, but you might also want to put some of a year-end bonus toward your financial goals.
Smart bonus money moves may include paying down debt, helping to fund a short-term savings goal (such as a downpayment on a house or establishing an emergency fund), as well as investing the money to potentially achieve long-term growth.
There’s no one right formula for spending (or not spending) a bonus: Each person’s financial situation and future goals are entirely unique.
But here are some ideas for using your bonus — or any other cash infusion, in fact — that can help improve your financial wellness today and tomorrow.
Allocating Some Money to Fun
You worked hard all year. So it’s totally understandable if you want to put some of your bonus money simply towards a few wants vs. just needs.
With any financial decision, it typically doesn’t have to be all or nothing, and that includes your work bonus. In fact, taking a balanced approach to your money might actually help you to maintain the stamina that financial goals often require.
Although the exact split is ultimately up to you, to avoid overspending, you might want to consider putting roughly 90% of your bonus towards your financial goals, and devoting about 10% to “fun money.”
If you’re getting a $5,000 bonus (after taxes), for example, that means you would have $500 to spend treating yourself. The other $4,500 would then go towards putting a big dent in your money goals.
Recommended: Benefits of Automating Your Finances
Chipping Away at Debt
If you have debt — whether from a student loan, car loan, or credit card debt — a bonus can be a great way to start whittling away at whatever balance you have to contend with, or even wiping it out completely.
Doing this can help you avoid throwing more money away just on interest charges, and if you manage to wipe out debt completely, you’ll have one less financial responsibility to stress about every month.
How much of your recent influx of cash should be directed toward debt reduction is entirely personal, and will depend on your situation.
Some financial planners recommend that people with high-interest debt consider putting around half of their annual bonuses toward paying down that debt. But this decision will depend on your individual circumstances.
Since credit card debt typically costs the most in interest, that can be a great place to start. Many credit cards charge close to 20% interest or higher. So if your goal is to ultimately build wealth, it may be smart to minimize credit card balances or, even better, pay them off completely.
It would be unreasonable to expect that you could out-invest what you are paying out in credit card interest. The same idea goes for any high-interest or emotionally stressful debt on your balance sheet.
Recommended: 5 Reasons to Switch Bank Accounts
Saving for a Short-Term Goal
If you haven’t yet started, or haven’t quite finished, creating an emergency fund, getting a bonus is a great time to beef up that financial cushion.
While many people don’t like to think about the possibility of their car breaking down, a medical emergency, or job loss, should one of these unexpected events occur, it could quickly put you in a difficult financial situation.
Without back-up, you can risk landing in debt should you experience a financial set-back.
How much to sock away for a rainy day is highly personal. But a common rule of thumb is to create an emergency fund that has enough money to cover three to six months of living expenses. You may need more or less, depending on your situation.
If you already have a decent cash cushion, you may next want to think about what large purchases you are hoping to make in the not-too-distant future, say, less than five years.
This could be a downpayment on a home, a renovation project, taking a special family vacation, buying a new car, or any financial step that requires a large infusion of cash.
Then consider using at least some of your bonus check to jump start these savings goals, or add to previously established ones.
It’s a good idea to put money you are saving for a short-term goal (whether it’s a downpayment or an emergency fund) in an account that is safe, earns interest, and will allow you to access it when you need it.
Some options include a savings account at a bank, an online savings account, a checking and savings account, or a certificate of deposit (CD). Keep in mind, though, that with a CD, you typically need to leave the money untouched for a certain period of time.
Ready for a Better Banking Experience?
Open a SoFi Checking and Savings Account and start earning 1% APY on your cash!
Invest for the Future
Bonus money can also help you start investing in longer term goals, such as retirement or paying for a child’s education. Using bonus money to buy investments can help you create additional wealth over time.
For example, a lump sum of cash can work wonders in boosting your retirement savings. Even if you’re technically on track for retirement, adding more money to your IRA or 401(k) today can leave you with a larger income stream when you’re older. If you’re already contributing to these accounts, be aware of the annual limits.
You can contribute to your retirement using your bonus in a couple of ways. Many companies will automatically deduct from your bonus for your 401(k) at the same rate as usual.
You can also ask your company in advance if you can have a special withholding for your bonus. You may be able to fill out a form (or go onto the company portal) to designate up to 100 percent of your bonus to your 401(k).
If you can’t direct that money to your 401(k), and you’re eligible for an IRA, consider maxing that out instead.
Either one can help get you closer to a great retirement–and may also help you save significantly on taxes in the short term.
People who have kids may want to consider putting some bonus money toward starting, or adding to, a college savings account, such as a 529 plan (which in some states can offer tax benefits).
For financial goals outside of retirement, you may want to look into opening a brokerage account.
This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but is much more flexible in terms of when the money can be accessed.
How much of your bonus you should put towards long-term investments is an individual decision that will depend on your current financial circumstances.
The Takeaway
No matter the size of your hard-earned bonus, it’s a good idea to think about how it can best serve you and your goals in both the short and long term. Some smart ways to use bonus money include getting ahead of high-interest debt, setting up or enlarging your emergency fund, saving up for a large purchase (such as a home), as well as beefing up retirement savings and other long-term investments.
You can mix and match smart spending and smart saving to fit your financial situation. One easy way to do this is to sign up for an online bank account from SoFi Checking and Savings. You’ll earn a competitive annual percentage yield, pay no account fees, and you’ll spend and save — all in one convenient place. Whether you’re saving for something specific or storing cash until you’re ready to invest, SoFi Checking and Savings can help you put that year-end bonus to good use.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. SOBK0523026U
I‘ve been looking into the many options available to me lately when it come to discount online brokerages.
It seems like just about everyone has a service that they like best, and that they prefer using. The first one I had heard recommended was OptionsHouse, which I reviewed last time. It had a good mix of research tools, low cost and ease of use. Definitely one to look into, especially for active traders.
Sharebuilder is another one that I had heard good things about, and since I already have a savings account with Capital One 360, I thought I should give it a look.
ShareBuilder By Capital One Background
From Wikipedia:
ShareBuilder (formally ShareBuilder Securities Corporation) is a United States based online brokerage firm founded in 1996 (as NetStock Direct). It encourages recurring, automatic purchases of shares of stock, ING Mutual Funds (Class O) and exchange-traded funds. All transactions occur online and are entirely at the discretion of the account holder, thus it is an execution-only service. The company does not have brokerage sales representatives or advisors. Account holders can use ShareBuilder’s online research tools to investigate stocks, similar to other online brokerages such as Scottrade, TD Ameritrade and Fidelity. In 2005, ShareBuilder began offering 401(k) plans to small businesses. On November 19, 2007, ShareBuilder Corporation was purchased by ING Direct, a subsidiary of ING Group for US $220 million. In June 2009, ShareBuilder moved its headquarters from Bellevue, Washington to 83 King Street, in the Pioneer Square district of Seattle, Washington. In February 2012, Capital One Financial Corporation completed its acquisition of ING Bank, fsb, and its subsidiaries, including ShareBuilder Corporation. ShareBuilder is no longer affiliated with ING Group.
Awards
ShareBuilder has earned a bunch of awards and has been recognized as one of the top online brokers for beginning & long term investors. Among the awards:
Forbes Best-of-the-Web awards in January 2003 and January 2004
Kiplinger’s Personal Finance ranked Sharebuilder #1 in “25 Ways to Invest $1,000.”
ShareBuilder Fees, Commissions And Minimums
Probably one of the most important things to consider when opening an online brokerage account is to consider what fees, commissions and minimums you’ll see when using an account. Here is what you’ll find at ShareBuilder:
UPDATE: As of March 2013 Sharebuilder By Capital One slashed their prices from $9.95 per stock or options trade, to $6.95 per trade. That move makes them one of the most competitive brokerages out there.
Stock Trades
Sharebuilder by Capital One has middle of the road, to expensive, fees when it comes to stock trades. They have $9.95 stock$6.95 stock trades. Compare to some others and they are very competitive.
On the other hand, if you’re less of an active trader and more of a buy and hold investor, their automatic investments may be a good fit for you, and more affordable. Automatic investments, done on Tuesdays, will cost only $4. If you sign up for their Advantage plan, you’ll get 12 per month for free included in the $12/month subscription, and it’s only $1 for each additional. They offer a dollar cost averaging plan as well.
Options Trades
Sharebuilder has a fee for options trades of $9.95$6.95 per online trade, + $1.25 per contract.
Fees And Minimums For An Account
ShareBuilder doesn’t have account maintenance fees, monthly minimums or inactivity fees. All prices are charged on a flat rate, and what you see is what you pay.
There is no minimum account funding level, although if you want to get the $25 bonus mentioned above, you need to fund with at least $25.
Here’s a basic fee comparison with other discount brokerages:
Investment Account Options
ShareBuilder offers a plethora of other investment account options for investors. Among them:
Individual Account
Joint Account
Traditional/Rollover IRA
Roth or Conversion IRA
ShareBuilder ESA (Education Savings Account)
Custodial Account
ShareBuilder Tools & Tutorials
In the past ShareBuilder may have been a bit short when it comes to the research and education departments. Within the last few years, however, ShareBuilder has really built up their library of educational tutorials and investment tools.
They now have a variety of tools including such things as an investment screener, a portfolio builder, fund/stock/ETF selectors, reports, simulators and calculators.
They also have a wide variety of investment information for beginning investors including tutorials and articles in their investor library.
One thing others have noted that is missing, however, is a forum or community of some sort where you can talk with other investors to get advice. Several other online brokers have something like that, and it would be nice to see Capital One add one for ShareBuilder as well.
Easy Linking To Capital One 360 Savings Or Checking
Another thing that I like about ShareBuilder is that you can easily link it to your Capital One 360 Savings or Capital One 360 Checking account if you have them. I personally already have an Capital One 360 Savings account (review here) and being able to easily link the accounts for automatic investments is nice.
Conclusion
When considering an online discount brokerage ShareBuilder is definitely one of the best options out there for long term investors who want to set up automatic investments and do long term dollar cost averaging. If you’re more of an active trader you may want to look elsewhere for a lower cost option, someplace like OptionsHouse. But if you just want a plan that will allow you to automatically invest over the long term, ShareBuilder would be a good place to check out.
Have you used ShareBuilder, or considered using them? What has your experience with them been like? Are you happy with them? Tell us your thoughts in the comments.
Sign Up For Sharebuilder by Capital One
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