Tools For Success: Wealthfront and Index Investing

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Investing is a topic that scares many people, and unfortunately it’s the reason so few people start investing when their young. There are a lot of ways to make mistakes when you first start out, so it can be easier to just ignore the issue and tell yourself “I’ll start investing once I have more money”.

Please don’t do this.

There’s a famous quote that says “The best time to start investing was 20 years ago. The second best time is today.”

And this is the premise for my first post in series which I call the “NYPFGuy Tools For Success“. In this post, I’ll break down in what my opinion is the best option for investing in the 21st century, which we can easily start with when we’re young with our meager savings.

And so I introduce to you….

 

Index Fund Investing. What is it?

An Index Fund is a type of mutual fund that is structured to match or track the components of a market index, such as the S&P500 or the Dow Jones Industrial Average. Basically, these mutual funds don’t track a specific company or even industry but the general trends of the stock market and economy.

The benefits of index funds are:

• Low market exposure. This means that index funds are generally lower risk than just about any other investment option. Since it tracks such as large group of companies, bonds, et., one company’s stock price crashing will not rob you of all your money.
• Low costs. Typically index funds are low cost to the holder, with fees of less than 0.5%, which is significantly less compared to the 1-3% or higher management fees charged by some other types of mutual funds

 

The most popular index funds are those offered by Vanguard Investments, which is said to be the company that invented the index fund. If you’re interested, you can simply set up an account with Vanguard and begin purchasing index funds from them for a low 0.15% annual fee.

So now that’s what in index fund is, but now you may be thinking “Okay, that makes sense, but the thought of buying choosing these funds and monitoring my investments seems pretty overwhelming”. If that’s the case, then that’s completely fine because there’s a 21st-century solution to this issue!

 

So What is Wealthfront?

 

 

Wealthfront is an automated investment service that gives you a personalized investment plans, purchases index funds for you and then manages the buying/selling of your funds to ensure you get the best possible performance with minimal losses and taxes. These guys have been operating for 10 years and have over $10 billion under their management, so they’re no small startup that could disappear any day. Their method is tried and true and has some serious financial backers.

A few of the benefits of Wealthfront are:

• They give you a personalized investment recommendation based on your income, age, risk tolerance. They allow you to plan for retirement, college savings, buying a home and more.
• All you have to do is deposit money into your account, and they take care of buying the proper distribution of index funds (typically from Vanguard).
• You can monitor the progress of your investments and savings plans via their user-friendly dashboard
• They only charge a 0.25% advisory fee, which is still significantly lower than the industry average. This is because everything is done by computer algorithms, not by overpaid brokers.

 

How This Can Help You Invest and Grow Your Money

The most important benefit to Wealthfront is that it makes investing easy and attainable to the average person.

You don’t need to understand how to pick which index funds or stocks that are right for you, and you don’t need to open complicated accounts that charge outrageous management fees. You simply sign up, deposit funds and watch them grow with the stock market and economy.

And compared to Vanguard, you also receive the benefit of having some level of management to your money.

With Vanguard, you simply buy the index funds and hold them in your account. With Wealthfront, they pick a specific set of index funds that are right for you, and they will buy/sell them as they deem fit in order to maximize your gains and minimize your tax bill through tax-loss harvesting. Without getting to deep into it, tax-loss harvesting is basically when they sell one fund that is losing you money in order to offset the tax bill due for gains on another index fund.

Investing early is the single most important thing you can do to ensure your financial future after you learn to spend less than you earn. With gains in the stock market averaging 5-10% per year over the course of history, there is significant money to be earned by starting early.

But let’s always remember, there is always some element of risk involved with investing, even investing in index funds. Though index funds are low risk, if we see another economic meltdown similar to 2008, the value of index funds will drop too. Don’t let this deter you, because over the course of history the stock market tends to grow above and beyond the losses suffered from crashes and recessions. Just remember to only invest money that you do not need to access in the next 5-10 years in case there is another market drop.

The gains are worth the temporary dips.

 

How to Set Up an Account

 

Sign up using my referral link https://wlth.fr/2lLtML0 and get your first $5,000 managed for free with Wealthfront!

 

If you’re now ready to jump in and start index fund investing with Wealthfront, I’ll walk you through the steps of how to set up an account and use the basic features of the service. You can click on the link above to set up an account.

You don’t need tens of thousands of dollars to invest with Wealthfront either. All you need is their $500 account minimum to get started. Or you can rollover an old 401k or IRA from another provider. But we’ll get to that….

 

Step 1 – Create an Account

 

 

After you’ve had a read through the website, click on the “Invest Now” button.

You’ll be prompted to fill out a questionnaire about some personal information and financial goals. This is simply to help them create your ideal investment plan.

 

Step 2 – Set up the investment accounts that are right for you

 

 

Wealthfront provides a variety of different investment accounts for you to fund depending on your goals and financial plans. You can answer a few questions and they will provide you with a list of recommendations, but I’ll summarize them here:

 

Taxable Accounts

Personal, Joint or Trust – These accounts are where you put money that is not being set aside for retirement. Since this money can be used at anytime, it is required that you pay taxes on all yearly gains to these accounts. Choose one of these after you have already funded all eligible retirement accounts such as IRA’s, 401k’s, etc.

Retirement and Tax-Advantaged Accounts

529 College Savings Plan – Invest savings for a college education and watch the money grow tax-free

Traditional IRA – This account is similar to a 401k that your employer may provide, but it is self-managed. You deposit money up to the yearly maximum ($5,500 in most instances), and your money grows tax-free until you reach the eligible age for withdrawl, at which point you pay taxes on withdrawls. All deposits are tax-deductible, meaning you can deduct your deposits from your taxable income.

Roth IRA – Different from a traditional IRA in that you fund this account and the deposits are not tax-deductible, but the money grows tax-free until the eligible age of withdrawl. The difference is that once you begin withdrawing money then the withdrawls are not taxed. The deposit limits are the same as a traditional IRA in that it’s $5,500 per year (combined limit for traditional and roth IRA’s). Many people will be at a higher tax bracket at 60 than at 25, so it’s better to pay taxes now instead of in the future.

SEP IRA – This is an account that you may be eligible for if you are a sole business owner or independent contractor, or the employee in a profit-sharing business. If this is you, then I would recommend doing more research into this account as I don’t know enough to comment.

Rollover IRA – If you have an IRA or 401k at another provider then you can “rollover” that account into an investment account with Wealthfront. It’s a fairly simple process but will involve you dealing with your employer or financial institution currently holding the account.

 

Step 3 – Link your bank accounts and fund your investments

 

If you are on the “My Path” page, scroll down to where it says “My Accounts” and to the right you should see a button saying “+” Link an Account”. This is how you can link your checking/savings accounts to Wealthfront in order to easily fund your accounts.

Investing regularly, either on a monthly or quarter basis, is a great habit to form early, so it’s best to make it easy to fund your investment accounts.

Once your bank accounts are linked, you should be able to easily fund your Wealthfront accounts and the money will be invested based on your personalized financial plan and risk tolerance.

Once your funds are invested, you can click on each account and see the mix of index funds that Wealthfront has chosen for you.

 

 

Step 4 – Set your goals

 

Lastly, Wealthfront offers some great features that allow you to plan for life milestones such as retirement, buying a home and more. On your “My Path” page, you can click on the “+” next to “Goals and Windfalls” to add a new milestone for which you want to plan.

Simply fill out the required information and answer the questions, and Wealthfront will give you a realistic plan for your future.

 

 

So that is the basic 4-step guide to getting started with Wealthfront. There are some more in-depth tasks they can help you with, but I only wanted to cover the basics in this post.

Remember, the most important take-away from all of this to get started investing early and keep up with regular deposits to your investments accounts. The gains from index fund investment can leave you with substantially more money after 20-30 years than just leaving your money as cash, where inflation will eat away at its value.

 

Question: Have you begun investing your savings, and what service/financial institution do you use? Leave a comment or send me an email!

 

NYPFGuy

 

Sign up using my referral link https://wlth.fr/2lLtML0 and get your first $5,000 managed for free with Wealthfront!