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AppNana Review: Get Paid To Download Apps or A Scam?

You probably spend a good portion of your day on your smartphone. But did you know you can get paid downloading apps on your smartphone? ...

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What is a Robo Advisor? | How Do They Work?

This article was reviewed by Robin Hartill, CFP®.

Saving for your retirement at an early age is an important step toward financial freedom in your golden years, but with an alphabet soup of IRA, SEC and 401(k), many younger investors find themselves stumped.

Turning to a human financial advisor used to be the sole way of getting help with an investment portfolio — until the rise of the robot, er, robo-advisor, that is.

A Guide to Understanding Robo-Advisors

Robo-advisors are gaining in popularity because they are cheap and accessible and often have much lower minimum investment requirements than traditional financial services.

In this guide, we cover topics that will help you decide if this investing tactic is right for you.

What Is a Robo-Advisor?

As much as you might like to picture Arnold Schwarzenegger managing your investment portfolio after a long day of hunting down adversaries, robo-advisors aren’t quite like the robots of sci-fi flicks.

Instead, robo-advisors (also sometimes spelled as robo-advisers) utilize computer algorithms to determine how to invest a client’s money. The software that powers robo-advisors is the same software that financial planners have been using for more than two decades, but in 2008, when Betterment stepped onto the scene as the first robo-advisor, access to this unique software began to transition to anyone with a computer.

Robo-advisor is simply a much cooler and catchy term for automated investment services. Among those automated investing services offered are investment selection, retirement planning and tax optimization (also called tax harvesting).

How Do Robo-Advisors Work?

The short version: They use computerized algorithms too complex for us to understand; otherwise, we wouldn’t need to use such services.

The long version: Robo-advisors manage investments using the same technology that human wealth managers and financial advisors have had access to since the early 2000s. This technology utilizes passive indexing strategies, optimized with modern portfolio theory (MPT).

Each company’s algorithms will vary and are, obviously, proprietary. Some companies even offer specialty investment portfolios, like Hallal investing, hedge fund-esque investing (re: high-risk day trading) and socially responsible investing (if you want to make money but be a good person about it).

No matter the algorithm, you can anticipate that a robo-advisor, much like a real-life financial advisor, will diversify funds with your investment money to minimize risk. That means you should expect investments like mutual funds and low-cost index fund exchange-traded funds (ETFs) that invest money in stocks (both in the US and abroad), bonds and even real estate investment trusts (REITs).

A man shakes hands with a robot.

How Do I Get Started with a Robo-Advisor?

So how do robo-advisors know which investments to choose for you, and how do you even get set up with one? Luckily, getting matched with a helpful robo-advisor is much easier than matching your soulmate on Tinder.

Just research and select the online investment service that makes sense for your needs and sign up for an account. Here are our top picks.

At this point, the robo-advisor will typically give you a questionnaire that will ask about your preferred investment strategy. Some of the questions might cover:

  • Your investment timeline
  • Your risk tolerance
  • How much money you have in savings

You’ll also need to give the robo-advisor access to your funds, so be ready and willing to share your personal bank information.

With that, the robo-advisor can get to work, choosing investments for your initial funds. You’ll want to set up regular money transfers into the investment account so that your robot friend can keep investing more money for you.

Over time, the platform will likely rebalance your funds to ensure your investment strategy is still in line with what you envision.

And if at any time, your personal goals change, you can go in and alter them within the platform so that your strategy reflects said changes in investment goals.

How Much Do Robo-Advisors Cost?

Nothing in life is free, and especially not wealth management.*

So what’s the catch? How much do robo-advisors charge you for automated investment management?

Luckily, robots require a lot less food and drink, and they typically aren’t worried about mortgage payments and student loans, so you’ll pay much less for the use of a robo-advisor than an actual human advisor.

While each company has its own pricing structure, in general, you can expect to pay anywhere between 0.25% and 0.50% of assets under management annually. We’re talking less than a penny on the dollar.

If you’ve got a $50,000 account balance, a 0.25% annual fee is just $125. That’s right: $125 for something (er, someone … robots are people too, yeah?) to manage $50,000 in assets and grow that money for you without you having to lift a finger.

*And actually, there are free robo-advisor options, like SoFi Automated Investing. These have much more limited options, however, and are likely not worth the effort when better options are out there for such a low fee.

What Do Robo-Advisors Do?

The full scope of robo-advisors services and features can be broad and varies from company to company. However, there is a typical set of investment services that they offer.

Basic Investing

Just like a real-life financial advisor, robo-advisors will typically target specific mutual funds or ETFs, rather than individual stocks, in an effort to grow your money over time. This can be helpful in building a nest egg for your retirement.

Portfolio Rebalancing

An important component of robo-advisors is that they offer portfolio rebalancing. Some do this automatically (in real time) while others do it at set time periods, like once a quarter. Using the algorithm, the robo-advisor will check your investments and make adjustments as needed to better meet your investment goals.

Tax-Loss Harvesting

A type of rebalancing, tax-loss harvesting is a method that financial planners and robo-advisors alike use to help investors avoid capital gains taxes. To offset a capital gains tax for an investor, the robo-advisor will sell off similar securities at a loss.

Note: This only applies to if you have a taxable account.

Financial Planning Tools

Most robo-advisors offer a wealth of financial planning tools to help you make decisions about your future. Retirement calculators are a common tool.

Access to Real Financial Advisors

Sometimes, it’s nice to talk to a real person, especially when you’re making major decisions that affect your wealth. Many robo-advisors do have real people whom you talk to. However, this is typically an additional fee.

Note: Online planning services, like Charles Schwab Intelligent Portfolios Premium, are a hybrid of real-world advisors and robo-advisors, with most things automated but giving you access to a team of professionals as needed. As such, they are typically priced in between the two options.

Couple looking at new orders and bills

Pros and Cons of Robo-Advisors

Thus far, robo-advisors sound like a pretty sweet deal, right? They’re affordable and efficient, and they’re not actually robots who are too busy hunting down Sarah Connor that they have no time to manage your account. (Did I really just make another Terminator joke? Yes, I did.)

And it’s true: There are a lot of benefits to robo-advisors. But they also have their pitfalls. Let’s explore both:

Pros of Robo-Advisors

So what are the top advantages of using an automated brokerage account to manage your portfolio?

  • It’s so cheap. Human financial advisors typically charge 1% to 3% of your portfolio, but robo-advisors can go as low as 0.25%. That makes human advisors 4x to 12x as expensive, and oftentimes, they’re using the same software as robo-advisor platforms!
  • You can’t beat the accessibility. Investment managers are humans. They have families; they go on vacations; they sleep. But robots? They’re ready to chat 24/7. A lot of people enjoy how accessible robo-advisors are. You can literally make changes to your account at 3 a.m. while binge-watching Bridgerton if you want.
  • They typically have a low minimum balance and minimum deposit. To get started with some financial advisors, you may need a lot of dough. Some advisors won’t even start investing for you unless you have $100,000 to play with. But many robo-advisors boast minimum investment requirements as low as $500. Some are even lower. Of course, you’ll eventually want to invest more money to make more money, but the ease of entry is great for people who are just starting their investment journeys!
  • It’s easy as pie. No knowledge about investing? No problem! No time for investing? Still, no problem. Robo-advisors do it all. However, it’s important to increase your financial literacy, so take advantage of your platform’s free educational resources when possible.
  • It’s safe. All robo-advisors are required to register with the US Securities and Exchange Commision (SEC); this means they are beholden to the same legal regulations as human advisory services. And those that offer banking services, like savings accounts, also carry insurance with the FDIC (Federal Deposit Insurance Corporation).

Cons of Robo-Advisors

But of course, there are downsides to using a robo-advisor. Chief among them:

  • Investment options are limited. While their algorithms do yield results specifically for you, robo-advisors often take a more one-size-fits-all approach. You might be able to talk strategies with traditional financial advisors, but unless you speak binary, you won’t get the same financial advice from a robo-advisor.
  • Services are limited as well. Robo-advisors are really meant for basic investments. More complex issues, like estate planning, trust fund administration, saving for a child’s college and even complex tax scenarios, should be reserved for real human advisors. More experienced investors will also find the services limiting.
  • It can perpetuate financial complacency. If you never take the time to learn more about investing, you may wind up leaving a lot of money on the table, just because an app is willing to do the work for you. While the convenience of automated financial planning services is great, prioritize learning so you can become more involved in your own financial future.

Should I Use a Robo-Advisor?

Robo-advisors are excellent tools for entry-level investors. If you are new to investing and want to save money or don’t have much funds to invest right now, most robo-advisors are a great gateway into building your wealth.

However, if you are a more seasoned investor or have a more complicated set of needs (estate or college planning, complex tax scenarios, etc.), you are better off working with a traditional financial advisor for your portfolio management.

Frequently Asked Questions (FAQs)

We’ve compiled all the answers to the most frequently asked questions here in one place.

What Is a Robo-Advisor?

A robo-advisor is an automated investment advisor that uses computerized algorithms to determine how to invest funds on behalf of a customer.

How Does a Robo-Advisor Work?

Robo-advisors compile information about the customer, including risk tolerance and financial goals, and determine the proper asset allocation for that customer’s funds, rebalancing it as necessary over time.

What Does a Robo-Advisor Do?

Robo-advisor service offerings typically include basic investment (IRAs, SEPs, etc.), financial portfolio rebalancing, tax-loss harvesting (reducing capital gains tax liability) and financial planning tools.

How Much Do Robo-Advisors Cost?

Companies typically charge a fixed percentage of assets under management. This fee is much lower than what traditional financial professionals charge. You can expect to pay an annual fee of roughly 0.25% to 0.50% of your managed assets.

How Do Robo-Advisors Make Money?

In addition to the flat percentage, robo-advisors look to other revenue streams to increase profitability. Some sell their software to human advisors, and some have added financial services like high-yield savings to their suite of products.

Next in Robo Advisors: 8 Best Robo Advisors of 2021

Timothy Moore covers bank accounts 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.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Le-vel Thrive Review: Another MLM Pyramid Scheme or Legit?

I don't mean to pat myself on the back, but I've been thin most of my life. It's been a gift and curse. Either way, ...

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Budgeting for Beginners: These 5 Steps Will Help You Get Started

Setting up a budget is challenging. Doing it forces you to face your spending habits and then work to change them.

But when you decide to make a budget, it means you’re serious about your money. Maybe you even have some financial goals in mind.

The end result will bring you peace of mind. But if you’re creating a budget for the first time, remember that budgets will vary by individual and family. It’s important to set up a budget that’s a fit for YOU.

Budgeting for Beginners in 5 Painless Steps

Follow these basic steps and tailor them to your needs to create a monthly budget that will set you up for financial success.

Step 1: Set a Financial Goal

First thing’s first: Why do you want a budget?

Your reason will be your anchor and incentive as you create a budget, and it will help you stick to it.

Set a short-term or long-term goal. It can be to pay off debts like student loans, credit cards or a mortgage, or to save for retirement, an emergency fund, a new car, a home down payment or a vacation.

For example, creating a budget is a must for many people trying to buy their first home. But it shouldn’t stop there. Once you’ve bought a home, keep sticking to a budget in order to pay off debt and give yourself some wiggle room for unexpected expenses.

Once one goal is complete, you can move on to another and personalize your budget to fit whatever your needs are.

Step 2: Log Your Income, Expenses and Savings

You’ll want to use a Microsoft Excel spreadsheet or another budget template to track all of your monthly expenses and spending. List out each expense line by line. This list is the foundation for your monthly budget.

Tally Your Monthly Income

Review your pay stubs and determine how much money you and anyone else in your household take home every month. Include any passive income, rental income, child support payments or side gigs.

If your income varies, estimate as best as you can, or use the average of your income for the past three months.

Make a List of Your Mandatory Monthly Expenses

Start with:

  1. Rent or mortgage payment.
  2. Living expenses like utilities (electric, gas and water bills), internet and phone.
  3. Car payment and transportation costs.
  4. Insurance (car, life, health).
  5. Child care.
  6. Groceries.
  7. Debt repayments for things like credit cards, student loans, medical debt, etc.

Anything that will result in a late fee for not paying goes in this category.

List Non-Essential Monthly and Irregular Expenses

Non-essential expenses include entertainment, coffee, subscription and streaming services, memberships, cable TV, gifts, dining out and miscellaneous items.

Don’t forget to account for expenses you don’t incur every month, such as annual fees, taxes, car registration, oil changes and one-time charges. Add them to the month in which they usually occur OR tally up all of your irregular expenses for the year and divide by 12 so you can work them into your monthly budget.

Pro Tip

Review all of your bank account statements for the past 12 months to make sure you don’t miss periodic expenses like quarterly insurance premiums.

A woman with a dog reviews financial docements spread out on the floor.

Don’t Forget Your Savings

Be sure to include a line item for savings in your monthly budget. Use it for those short- or long-term savings goals, building up an emergency fund or investments.

Figure out how much you can afford — no matter how big or small. If you get direct deposit, saving can be simplified with an automated paycheck deduction. Something as little as $10 a week adds up to over $500 in a year.

Step 3: Adjust Your Expenses to Match Your Income

Now, what does your monthly budget look like so far?

Are you living within your income, or spending more money than you make? Either way, it’s time to make some adjustments to meet your goals.

How to Cut Your Expenses

If you are overspending each month, don’t panic. This is a great opportunity to evaluate areas to save money now that you have itemized your spending. Truthfully, this is the exact reason you created a budget!

Here are some ways you can save money each month:

Cut optional outings like happy hours and eating out. Even cutting a $4 daily purchase on weekdays will add up to over $1,000 a year.

Consider pulling the plug on cable TV or a subscription service. The average cost of cable is $1,284 a year, so if you cut the cord and switch to a streaming service, you could save at least $50 a month.

Fine-tune your grocery bill and practice meal prepping. You’ll save money by planning and prepping recipes for the week that use many of the same ingredients. Use the circulars to see what’s on sale, and plan your meals around those sales.

Make homemade gifts for family and friends. Special occasions and holidays happen constantly and can get expensive. Honing in on thoughtful and homemade gifts like framed pictures, magnets and ornaments costs more time and less money.

Consolidate credit cards or transfer high-interest balances. You can consolidate multiple credit card payments into one and lower the amount of interest you’re paying every month by applying for a debt consolidation loan or by taking advantage of a 0% balance-transfer credit card offer. The sooner you pay off that principal balance, the sooner you’ll be out of debt.

Refinance loans. Refinancing your mortgage, student loan or car loan can lower your interest rates and cut your monthly payments. You could save significantly if you’ve improved your credit since you got the original loan.

Get a new quote for car insurance to lower monthly payments. Use a free online service to shop around for new quotes based on your needs. A $20 savings every month is $20 that can go toward savings or debt repayments.

Start small and see how big of a wave it makes.

Oh, and don’t forget to remind yourself of your financial goal when you’re craving Starbucks at 3 p.m. But remember that it’s OK to treat yourself — occasionally.

A couple organize tax-related paperwork.

What to Do With Your Extra Cash

If you have money left over after paying for your monthly expenses, prioritize building an emergency fund if you don’t have one.

Having an emergency fund is often what makes it possible to stick to a budget. Because when an unexpected expense crops up, like a broken appliance or a big car repair, you won’t have to borrow money to cover it.

When you do dip into that emergency fund, immediately start building it up again.

Otherwise, you can use any extra money outside your expenses to reach your financial goals.

Here are four questions to ask yourself before dipping into your emergency fund..

Step 4: Choose a Budgeting Method

You have your income, expenses and spending spelled out in a monthly budget, but how do you act on it? Trying out a budgeting method helps manage your money and accommodates your lifestyle.

Living on a budget doesn’t mean you can’t have fun or splurges, and fortunately many budgeting methods account for those things. Here are a few to consider:

  • The Envelope System is a cash-based budgeting system that works well for overspenders. It curbs excess spending on debit and credit cards because you’re forced to withdraw cash and place it into pre-labeled envelopes for your variable expenses (like groceries and clothing) instead of pulling out that plastic. 
  • The 50/20/30 Method is for those with more financial flexibility and who can pay all their bills with 50% of their income. You apply 50% of your income to living expenses, 20% toward savings and/or debt reduction, and 30% to personal spending (vacations, coffee, entertainment). This way, you can have fun and save at the same time. Because your basic needs can only account for 50% of your income, it’s typically not a good fit for those living paycheck to paycheck.
  • The 60/20/20 Budget uses the same concept as the 50/20/30, except you apply 60% of your income to living expenses, 20% toward savings and/or debt reduction, and 20% to personal spending. It’s a good fit for fans of the 50/20/30 Method who need to devote more of their incomes to living costs.
  • The Zero-Based Budget makes you account for all of your income. You budget for your expenses and bills, and then assign any extra money toward your goals. The strict system is good for people trying to pay off debt as fast as possible. It’s also beneficial for those living to paycheck to paycheck.
A hand writes financial-related labels on envelopes.

Budgeting Apps

Another money management option is to use a budgeting app. Apps can help you organize and access your personal finances on the go and can alert you of finance charges, late fees and bill payment due dates. Many also offer free credit score monitoring.


Step 5: Follow Through

Budgeting becomes super easy once you get in the groove, but you can’t set it and forget it. You should review your budget monthly to monitor your expenses and spending and adjust accordingly. Review checking and savings account statements for any irregularities even if you set bills to autopay.

Even if your income increases, try to prioritize saving the extra money. That will help you avoid lifestyle inflation, which happens when your spending increases as your income rises.

The thrill of being debt-free or finally having enough money to travel might even inspire you to seek out other financial opportunities or advice. For example, if you’re looking for professional help, set up a consultation with a certified financial planner who can assist you with long-term goals like retirement and savings plans.

Related: How to Budget: The Ultimate Guide

Stephanie Bolling is a former staff writer at The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

BerryCart App Review: Legit Rewards App or Scam?

If you're anything like me, making healthier eating choices can be hard and expensive lol! But apps like BerryCart claim they can give you cashback ...

Read moreBerryCart App Review: Legit Rewards App or Scam?

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