MONEY Budgeting

This NFL Millionaire Lives on a $60K Budget to Save for the Future

Detroit Lions wide receiver Ryan Broyles
Tom Williams—CQ-Roll Call/Getty Images Detroit Lions wide receiver Ryan Broyles speaks during an event at 101 Constitution Avenue with the National Bankers Association, Visa, and NFL players, to educate teens about financial responsibility, March 18, 2015. At the event, teens and NFL athletes Heisman Trophy winner and New Orleans Saints running back Mark Ingram and Broyles, played "Financial Football," a free educational video game that incorporates football and questions about money management.

He makes $900,000 a year

Professional athletes are not exactly known for their personal finance acumen. In 2009, Sports Illustrated reported that 78% of NFL players go bankrupt two years off the field. In recent years Curt Schilling, Michael Vick, Mike Tyson, Latrell Sprewell, and Marion Jones (to name a just a few) all ended up in hot water after living far beyond their considerable means. Last week, four-time NBA All-Star Vin Baker made headlines after reports that he was training for a managerial role at a Starbucks outlet.

But while the siren songs of McLaren, Johnnie Walker Blue, Patek Phillippe, and bougie zip codes are as alluring as ever, ESPN’s Michael Rothstein reported that the NFL’s Ryan Broyles is setting himself up to be a personal finance role model.

Over the next four years, the Detroit Lions wide receiver stands to make $3.6 million, or $900,000 per year, but is setting a modest $60,000 annual budget to support himself and his wife and child.

Broyles told Rothstein it was a rookie financial literacy symposium that set him on the path of financial planning and prompted him to study “as much as he could.” After calculating how much money he would need to live comfortably—he and his wife drive Mazdas—Broyles learned how to live with that number and set aside the rest for a rainy day.

With his history of ACL and achilles injuries, there’s a fair chance rain may be in the 27-year-old’s short-term forecast. But Broyles’ financial savvy may contain the seeds of a second career: Since the spring he’s been traveling the country promoting a financial literacy football game to classrooms full of kids.

Read next: 10 Insanely Rich Pro Athletes Humbled by Financial Ruin

MONEY Financial Planning

What’s Your Biggest Money Worry?

Do you worry more about repaying your student loans or saving for retirement?

We asked people in Times Square what’s their biggest money worry. Some said they worried about paying back their student loans–unlike the grads of this university, who got their degree for free–while some worry more about saving for retirement. One man even told us his biggest worry about money is how it can “control your mind.”

Read next: This Worry Keeps 62% of Americans Up at Night

MONEY Retirement

The Right Way to Lower Your Tax Bill on an Inherited IRA

Doing taxes
Getty Images

Q: My dad has a traditional IRA with non-deductible, after-tax contributions. He has to figure out the taxable and non-taxable portion of the distribution every time he withdraws money. I will inherit the IRA when he passes away. As the beneficiary, do I need to do the same thing when I take distributions? – Max Liu, West Hills, Calif.

A: Yes, you will have to do the same thing your father does or you’ll end up paying more taxes than necessary when you take the money out, says Jeffrey Levine, a CPA and IRA technical consultant at IRAHelp.com.

Here’s why: You can’t deduct your IRA contributions on your taxes if you already participate in an employer-sponsored retirement plan such as a 401(k) and earn more than $71,000 as an individual or $118,000 as a married couple. But you can still contribute up to $5,500 a year in 2015 ($6,500 if you’re 50 or older) to a non-deductible IRA.

When you fund a non-deductible IRA, as your dad has done, you have already paid income taxes on that money. Unfortunately, the onus is on you, the account holder, to show the IRS that the taxes have been paid. You do that by filing IRS form 8606 each year you make after-tax IRA contributions. (The institution where you keep your account won’t keep track.)

If you don’t, the IRS has no record that you ever paid taxes on money in your IRA. But even if you do the paperwork properly upfront, you must file form 8606 again when you take withdrawals to prove that you already ponied up to Uncle Sam.

Though many rules are different when you inherit an IRA (more on that later) vs. funding one yourself, in this case the process is very similar for IRA beneficiaries, says Levine.

When you inherit an IRA that holds after-tax contributions, you must also file Form 8606 to claim the non-taxable part of the distribution, even if your dad already did. If you don’t, you’ll essentially be paying taxes on money that’s already been taxed. It’s even more complicated if you also have your own IRA with after-tax funds. You have to file two 8606 forms, one for your own IRA and one for your inherited IRA, says Levine. But it’s worth the effort.

“Taxes are bad enough to start,” says Levine. “There’s no reason anyone should pay more than they should just because of poor record keeping.”

You might wonder why anyone would make contributions to an IRA when you can’t get a tax break and all that paperwork is involved. After all, even when people qualify for tax breaks, not a lot of money is flowing into IRAs on a regular basis. But making non-deductible contributions still has benefits. Your investment grows without the drag of taxes, and you don’t pay tax on earnings until you withdraw them.

Keep in mind that when you inherit an IRA, a lot is different from when you own an IRA that you opened yourself. You can’t contribute new money to an inherited IRA and you can’t roll it into another IRA. Unlike regular IRA holders, who don’t have to start taking distributions until after age 70½, you generally have to begin taking money from the account the year after you inherit it.

It’s not wise to withdraw the money all at once though, says Levine. “Many people take the money and run. But that money is immediately taxable, and the income could phase you out of other tax breaks.”

You can reduce the tax hit by taking money out over time. The IRS requires you to withdraw a minimum amount based on your age and the year you inherit the money. You can use a calculator like this one to figure out the annual minimum. If you don’t take at least that much, you’ll be hit with a penalty. Plus, the longer you keep money inside the IRA, the more you benefit from the tax-deferred growth, adds Levine.

This can be complicated stuff, so you may want to consult with a tax expert or financial adviser who has experience in this area.

It’s terrific that your father has been diligent about his record keeping and taxes. To make the most of his legacy, you’ll have to be too.

MONEY Savings

Vanguard Founder Jack Bogle’s Surprising Retirement Advice

The one thing you absolutely, without question, unavoidably, simply must not do while saving for retirement.

Don’t you dare open that monthly statement you get about your retirement account, says Jack Bogle, founder of the mutual fund giant Vanguard, which now has about $3 trillion of assets under management. “You’re gonna get a statement every month,” says Bogle. “Don’t open it. Never open it. Don’t peek.” Wait until you actually get to your retirement, then you can open your statement (although, Bogle jokes, you may want to have a cardiologist on hand). Not knowing how much you have growing in a retirement account makes you less likely to want to raid it when your kids go to college or when you want to buy that shiny new car. It also makes you less likely to trade in and out of the market, which can be a fool’s errand.

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MONEY Social Security

What Happens If the Social Security Trust Fund Runs Out in 2034?

coin jar running out of coins
Getty Images

One things for sure: Benefits won't disappear entirely

The trustees of the Social Security system’s finances released their annual report on Wednesday afternoon. They say the combined trust funds that help pay old age and disability benefits are likely to run out by 2034, the year when today’s 48-year-olds reach full retirement age. The trustee’s estimate reflects the latest economic and demographic projections, and it changes a bit most years. Last year’s estimate for trust fund depletion was 2033.

But what does it mean to say the Social Security trust fund has run out?

Let’s be clear: Social Security benefits won’t disappear entirely when that happens. If nothing else changes, the payroll taxes still being paid by younger people in the workforce will be enough to fund about 79% of scheduled benefits, says the report.

That’s because Social Security is by and large a pay-as-you-go system. At the individual level is looks a bit like a savings account, where you contribute money now in order to draw it down after you stop working. But in fact, it’s never been primarily run on saved money. Taxes from today’s workers are used to fund the benefits of today’s retirees.

But after the system was overhauled in 1983 and up until 2010, the amount of payroll tax dollars flowing into the system was higher than the amount of money that was needed to fund benefits. That extra money is in the so-called trust fund, and it’s invested in special, untraded Treasury bonds. Thanks to interest from the Treasuries and taxes on higher-earning beneficiaries, the Social Security system still takes in a bit more money than it pays out each year.

But soon that will flip over and Social Security will have to start eating into its past surplus to pay beneficiaries—and 2034 is the year that the surplus is currently expected to run out.

When that happens, unless Congress intervenes, the Social Security administration will be able to pay only the benefits supported by current Social Security taxes.

The trustees warned that a similar moment of reckoning could be coming much sooner for those who get Social Security disability payments. The trust fund that specifically supports disability insurance is scheduled to run out next year. In the past, Congress has addressed such problems by moving money from the much bigger retirement system into disability, but many Republicans in Congress are saying they want changes to disability-insurance rules before they’ll do this.

Returning to the system as whole, obviously a sudden drop to 79% of benefits is no trivial thing. It would be a brutal cut for many retired people who rely on Social Security. The point is that addressing a funding shortfall isn’t as challenging as stopping the system from going all the way to paying zero. All told, the gap between what Social Security promises to pay and what it will collect amounts to about 1.2% of GDP in 2035. That’s serious money, but also a fixable problem (except for the politics). For context, over the next decade, annual spending on everything besides Social Security and health care programs is projected to shrink by 1.7%, according to the Congressional Budget Office.

Proposals to keep Social Security on track for the longer term range from promising to pay less—by further raising the retirement age, or adjusting benefit formulas—to raising taxes on higher earners or wealthier beneficiaries.

Think of 2034 as the rough political deadline for Congress to work that out, although the sooner it does so, the more gradual changes can be for either beneficiaries or taxpayers.

MONEY real estate

Seniors Are Seeking Out States Where Marijuana is Legal

senior woman smoking marijuana pipe
Norma Jean Gargasz—Alamy

The top moving destination in 2014 was Oregon, which voted to legalize marijuana last November.

When choosing retirement locales, a few factors pop to mind: climate, amenities, proximity to grandchildren, access to quality healthcare.

Chris Cooper had something else to consider – marijuana laws.

The investment adviser from Toledo had long struggled with back pain due to a fractured vertebra and crushed disc from a fall. He hated powerful prescription drugs like Vicodin, but one thing did help ease the pain and spasms: marijuana.

So when Cooper, 57, was looking for a place to retire, he ended up in San Diego, since California allows medical marijuana. A growing number of retirees are also factoring in the legalization of pot when choosing where to spend their golden years.

“Stores are packed with every type of person you can imagine,” said Cooper who takes marijuana once or twice a week, often orally. “There are old men in wheelchairs, or women whose hair is falling out from chemotherapy. You see literally everybody.”

Cooper, who figures he spends about $150 on the drug each month, is not alone in retiring to a marijuana-friendly state.

Twenty-three states and the District of Columbia have laws legalizing medical marijuana use. A handful – Colorado, Oregon, Washington, Alaska, and D.C. – allow recreational use as well.

The U.S. legal marijuana market was $2.7 billion in 2014, a figure expected to rise to $3.4 billion this year, according to ArcView Market Research.

Figuring out how many people are retiring to states that let you smoke pot is challenging since retirees do not have to check off a box on a form saying why they chose a particular location to their final years.

But “there is anecdotal evidence that people with health conditions which medical marijuana could help treat, are relocating to states with legalized marijuana,” said Michael Stoll, a professor of public policy at University of California, Los Angeles who studies retiree migration trends.

He cited data from United Van Lines, which show the top U.S. moving destinations in 2014 was Oregon, where marijuana had been expected to be legalized for several years and finally passed a ballot initiative last November.

Two-thirds of moves involving Oregon last year were inbound. That is a 5 percent jump over the previous year, as the state “continues to pull away from the pack,” the moving company said in a report.

The Mountain West – including Colorado, which legalized medical marijuana in 2000, and recreational use in 2012 – boasted the highest percentage of people moving there to retire, United Van Lines said. One-third of movers to the region said they were going there specifically to retire.

Lining Up for Pot

The image of marijuana-using seniors might seem strange, but it is the byproduct of a graying counterculture. Much of the baby boom generation was in college during the 1960s and 70s, and have had much more familiarity with the drug than previous generations.

Many of the health afflictions of older Americans push them to seek out dispensaries for relief.

“A lot of the things marijuana is best at are conditions which become more of an issue as you get older,” said Taylor West, deputy director of the Denver-based National Cannabis Industry Association. “Chronic pain, inflammation, insomnia, loss of appetite: All of those things are widespread among seniors.”

Since those in their 60s and 70s presumably have no desire to be skulking around on the criminal market in states where usage is outlawed, it makes sense they would gravitate to states where marijuana is legal.

“In Colorado, since legalization, many dispensaries have seen the largest portion of sales going to baby boomers and people of retirement age,” West said.

The folks at the sales counters agree: Their clientele has proven to be surprisingly mature.

“Our demographic is not punk kids,” added Karl Keich, founder of Seattle Medical Marijuana Association, a collective garden in Washington State. “About half of the people coming into our shop are seniors. It’s a place where your mother or grandmother can come in and feel safe.”

Read next: Can You Buy Marijuana With a Credit Card?

MONEY Kids and Money

Is it Cheaper to Have a Baby When You’re 26 or 36?

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quavondo—Getty Images

The age when you start a family can have a big impact on how much you spend.

“There’s never a good time to have kids—you just have to go for it.”

If you’re contemplating starting a family, chances are you’ve heard this well-intentioned advice by now.

While it’s true that little is predictable when it comes to having children, there’s no denying it’s as much a financial decision as an emotional one.

After all, the average lifetime cost of raising a child exceeds $245,000, according to the U.S. Department of Agriculture.

That’s a price tag that might leave you wondering: Does it make sense to have a baby in your twenties, so you can tackle child-related costs early—or when you’re in your thirties and, hopefully, more financially stable?

Of course, there’s no blanket answer.

But to help make some educated guesses, we took two hypothetical sets of wannabe parents a decade apart in age and tried to compare how their respective finances would be impacted in four major money areas—taxes, retirement, college costs and child care—by bringing home baby.

Meet the Parents-to-Be …

The younger couple, Emma and Tyler, are both 26—the average age at which women have their first baby, according to the Centers for Disease Control and Prevention.

Emma is an executive assistant. Tyler is a junior accountant. Combined, they make $73,000, and are still chipping away at student loans and credit card balances they accrued in college.

Although they spend nearly every penny of their paychecks, they feel emotionally ready to have a child. They’d rather be young parents—and are confident they can make their budget work with a child.

Holly and Brendan, meanwhile, are both 36 and doing well financially. Their income has grown steadily over the past few years—which isn’t surprising since women’s pay peaks at 39 and men’s at 48, based on data from Payscale.

Between Holly’s job as a project manager and Brendan’s as a human-resources manager, they make $120,000 combined. They’re only a few months shy of paying off their student loans, carry little credit card debt and contribute a portion of each paycheck toward retirement.

They purposely put off having children until they reached six figures—and now feel financially ready for parenthood.

Although Holly considers herself healthy, she knows they may have to contend with in vitro fertilization costs—22% of women aged 35 to 39 deal with infertility. In case this happens, the couple has saved up $15,000—enough to cover a round of IVF, which averages $12,400.

So which couple would fare better, financially speaking, if they had a child? We asked financial pros to weigh in.

Let’s Look at Baby’s Impact on Taxes …

When it comes to paying Uncle Sam, it’s not the couples’ ages that make the difference—it’s their income level, says Gail Rosen, a certified public accountant (CPA) and head of her own accounting firm in Martinsville, N.J.

While both parents can take dependent exemptions for their child, only Emma and Tyler’s income qualifies them to take the full child tax credit—up to $1,000 per child for married couples filing jointly.

Holly and Brendan make too much to take full advantage of the tax break.

The child tax credit starts to phase out at $110,000 for couples filing jointly, so “Holly and Brendan may only get a $500 tax credit,” Rosen says. They’ll also likely phase out of qualifying altogether in a few years as their income rises.

So Who Has the Advantage? Although Emma and Tyler make less, they have the advantage because “it’s all about the tax bracket,” Rosen says.

Since they fall into a lower tax bracket and can take full advantage of the child tax credit, they are potentially taking home a larger percentage of their paychecks than Holly and Brendan.

Let’s Look at Baby’s Impact on Retirement …

When it comes to your nest egg savings, the real key is to start socking away money as early as possible.

To that point, having Junior at 26 is more likely to cut into prime saving years because younger couples tend to have tighter budgets and don’t contribute as much to retirement, says Rebecca Kennedy, a Certified Financial Planner (CFP) and founder of Denver-based Kennedy Financial Planning.

Exacerbating the situation is the fact that most people in their twenties don’t think about retirement—baby or no baby. A Principal Financial Group study found that only 30% of Millennials save at least 10% of their income in an employer-sponsored plan.

By the time you hit your mid-thirties, however, “you’re more aware of all your financial obligations, and most of the folks who come to me [at this age] have a pretty good balance,” Kennedy says.

Indeed, an analysis of Employee Benefit Research Institute data that compared the nest egg savings of people in their early thirties versus their late thirties found that IRA balances jumped by more than 60% in this decade.

So Who Has the Advantage? Holly and Brendan. Being able to contribute aggressively to retirement before a baby comes along leaves them better able to take advantage of compound earnings, says Steve Erchul, a CPA with Smith, Schafer & Associates in Edina, Minn. “Their money could grow astronomically because they started early,” he adds.

Let’s assume Holly and Brendan have been able to save aggressively from age 26 to 36, with each of them putting $500 a month into their own retirement accounts, which return a hypothetical 7% a year. By 36, their combined savings are just shy of $174,000.

Even if they never contributed another penny after baby, compound growth would help them reach a total nest egg of $1.4 million by the time they retired at 67.

Meanwhile, if Emma and Tyler put off saving as aggressively until 48, when their kid heads to college—each contributing $1,000 per month to their individual accounts to catch up—they’d end up with less than $950,000 combined at 67.

That’s about $450,000 less than Holly and Brendan.

Let’s Look at Baby’s Impact on College Costs …

In theory, couples can start saving for college even before having a child, but it’s not usually on their radar until Junior arrives, says Kennedy.

So when it comes to the length of time to save, we’ll assume both couples have about 18 years. But one advantage Emma and Tyler have is their potential eligibility for tuition tax credits.

For example, the American Opportunity Tax Credit (AOTC)—which grants up to $2,500 per eligible student—doesn’t start to phase out for married couples until their modified adjusted gross income reaches $160,000, says Erchul.

So if this credit, or a similar one, still existed by the time Emma and Tyler’s child went to college, they could qualify for it—even if their income more than doubled by the time they reached 44.

But the terms of tax credits are hard to predict (the AOTC, for example, has been extended only through 2017 for now), so the real key here is who can contribute the most to a 529 or another type of college savings account.

“From what I’ve observed [of couples in their 20s], there’s not a lot of excess in their cash flow,” Kennedy says. “They’re more in survival mode.”

Holly and Brendan, meanwhile, may have more wiggle room in their budget to contribute monthly to a college savings account.

So Who Has the Advantage? Holly and Brendan. They’re likely to contribute more toward Junior’s college over the next 18 years.

Let’s assume Emma and Tyler put $50 a month into a 529, returning a hypothetical 7% a year. In 18 years, that would grow to a little more than $21,000.

As for Holly and Brendan, if they contributed $100 a month, their college investment could grow to more than $43,000.

Let’s Look at Baby’s Impact on Child Care Costs …

Child care is, without a doubt, one of the heftiest line items in every new parent’s budget.

According to ChildCare Aware of America, the average cost to send one infant to day care eats up anywhere from 7% to 16% of a couple’s income.

With that in mind, Holly and Brendan seem like they’d be better off—with more income to work with, they should be better able to fit this cost into their budget.

But Emma and Tyler may actually be in a better position when it comes to free child care in the form of family help—Grandma and Grandpa may still be spry enough to run after a toddler.

In fact, Child Care Aware found that grandparents were the second most popular form of child care: 32% of those polled take advantage of their own parents’ help. That can be “huge in helping offset some of the cost,” Kennedy says.

Of course, there’s always the option of having one parent stay home. In this scenario, Holly and Brendan have the advantage, since “they’re at a higher pay level, so if they drop down to one income, it’s [still] a good income,” Kennedy says.

The hitch?

Many successful women (yes, it’s still mostly women who off-ramp to raise kids) like Holly have a hard time re-entering the workforce.

The New York Times, for example, reported last year that only 40% of high-achieving professional women who off-ramped for a time were able to find a good full-time job in their desired industry once they returned to the workforce.

So Who Has the Advantage? It’s a draw. Yes, child care is a huge expense that Holly and Brendan may have more breathing room to cover—but factoring in family help and career opportunity costs could tilt the odds toward Emma and Tyler.

Plus, you shouldn’t count out the younger generation’s scrappiness when it comes to making room in a budget, says Michele Clark, a CFP® and owner of Clark Hourly Financial Planning in Chesterfield, Mo.

“I think because [the Millennial] generation saw their parents struggle with the stock market, they have more of that Great Depression mentality,” Clark says. “They shop at thrift stores, cook, and don’t eat at expensive restaurants.”

Holly and Brendan, meanwhile, are in a demographic that can be susceptible to lifestyle inflation because people their age are used to a comfortable life—and it may only get worse once toddler classes and day camps come into play.

“They’ll have to fight the spending creep of keeping up with the Joneses,” Clark says.

Ultimately, though, having a child isn’t all about pinpointing the opportune time. It’s also about knowing how to prepare yourself in heart, mind and wallet—no matter where you think you are financially.

“I’ve had people come to me because they have six-figure student loan debt from law school, but they want to have their second baby,” Clark says. “Because of that, they look at every penny … and identify for themselves costs to cut [to reach that goal].”

Read next: 37% of Parents Are Making This Financial Mistake

More From LearnVest:

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MONEY Personal Finance

6 Crucial Life (and Money) Lessons I Learned Playing in the World Series of Poker

Players compete during the main event at the World Series of Poker Wednesday, July 8, 2015, in Las Vegas.
John Locher—AP Players compete during the main event at the World Series of Poker Wednesday, July 8, 2015, in Las Vegas.

Add these poker lessons to a long list of tips for personal and professional success, thanks to the biggest game of all.

I’m not the kind of person that can’t sleep. But at the World Series of Poker last week I found myself up both early and late, a nervous energy stealing my natural sense of calm. That’s ok. My adrenaline would sustain me—and this is just one of the things I learned playing in the biggest game of them all.

Much has been written about the life, business, and investing lessons you can learn at a poker table. The game trains you to read body language and spot opportunity; to lose with grace and focus on decisions, not outcomes; to choose battles wisely and be aware of what others see when they look at you.

It’s all true, valuable, and widely applicable. I’ve even suggested that kids take up poker (with age appropriate stakes, of course). It can help youngsters strengthen memory, improve math skills, learn to consider risks, and practice money management. Playing for the first time in the Main Event in Las Vegas, an elimination tournament with more than 6,400 entrants, I discovered still more ways this game teaches success.

  1. Passion is everything Isaac Newton’s mother had to remind him to eat because he was so busy discovering the laws of gravity that he might go days forgetting he was hungry. Newton did pretty well for himself. For me, losing sleep to thoughts of strategy and analysis reinforced that I was doing something I find exhilarating. Sleep is important. The mind must rest. But in the short run the thrill of passion more than compensates. Tournament poker is just a game, and because I enjoy it I am consumed by improvement. But the same principle applies in other endeavors. I apply it in my day job too. When you love what you do, you keep doing it better—an important ingredient of success. So do what you love, not what others expect of you.
  2. Nice guys finish last…or first You meet all kinds of people around a poker table. Some yak incessantly and others remain stone faced for hours; some are unassuming and engaging and others snarl and trash talk. None of it matters. What counts is focus. The two nicest guys at my first table went opposite ways, one to an early exit and the other to the next stage as a chip leader. Heck, I’d have a beer with either of them, and both were solid players. The only real difference was that one paid attention to the table all the time; the other only while in a hand. Guess who advanced? In life, career, or at the poker table, the things you learn while others are taking it easy give you an edge. Smiles and snarls are immaterial if you stay focused.
  3. Down is not out In 1997, a little computer company named Apple was floundering, having lost money for 12 consecutive years. But Steve Jobs returned to the company he had founded, struck gold with the iPod and by 2011 Apple had become the most valuable company in the world. At my table on the second day, the guy that started with the fewest chips kept fighting. He didn’t panic. He kept his wits. Like Jobs, he never gave up. This player, after hours on the brink, finally began to rake some pots and later advanced deep into the tournament. In any pursuit, you may fail or get bested. So you try again. You are only out when you quit.
  4. Your comfort zone should make you uncomfortable People who challenge themselves tend to rise to the occasion, psychologists have found. Children are fearless. They try anything. That’s how they grow. But most adults have tasted enough failure that they tend to avoid difficult situations, which leaves them trapped within personal and professional boundaries. Fear of failure is a powerful obstacle to growth. “There is no learning without some difficulty and fumbling,” John Gardner writes in Self-Renewal. “If you want to keep on learning, you must keep on risking failure—all your life. It’s as simple as that.” At the poker table, you can play safe a long time before your chips run out. But they will run out—unless you get out of your comfort zone and make the occasional bet that scares you half to death.
  5. There is no such thing as house money The economist Richard Thaler pioneered the notion of mental accounting, where individuals treat money gained in different ways with more or less care. You are more likely to spend $20 that you found on the sidewalk than $20 you earned at your job. Why is that? Simple: The money you stumbled into on the sidewalk was found money; you are no worse off when it is gone. Similarly, a gambler on a roll might raise the stakes, reasoning that since he is wagering only money he has won—house money—he can’t really lose. And yet $20 is $20, no matter how you got it. When you spend or lose it, you have less money than before and have missed a chance to improve your financial security. The most impressive player at my table on the second day was a guy with a bunch of chips who remained true to his game. Despite his bountiful resources, he kept methodically building a bigger pile, avoiding the trap of taking unnecessary risks with his “house” money.
  6. Sometimes you have to wing it Most information is imperfect. When you invest in a stock, you know what the company has done in the past. You think you understand how it will do in the future. But you cannot be sure. You gather as much information as possible and buy when you sense opportunity. You might be wrong. Warren Buffett bought shares of ConocoPhillips just before oil prices unexpectedly tanked a few years ago and he lost $1 billion. My tournament ended late on the second day—after 21 hours of card playing—when I bet all my chips at a time when, using the best table information I could gather, I sensed opportunity. It turned out the guy to my left was holding two aces and, alas, I had essentially bought ConocoPhillips ahead of plunging oil prices. That really hurt. But I can live with the Buffett comparison.

 

 

MONEY Millennials

If You Have $500, You Can Start Investing. But Should You?

woman counting her savings
Getty Images

Here's better idea: Build up a bank account first.

Still trying to get started saving for retirement? Your task just got a little easier.

Online financial adviser Wealthfront is now offering people with as little as $500 to invest a convenient and cheap way to build a portfolio of stocks and bonds. And for accounts up to $10,000, the service is free.

That’s sounds like a great deal, and in some ways it is. Of course, Wealthfront isn’t doing this to just be nice—they’re hoping to turn you into a paying client down the road. And while it’s great to get started on retirement saving early, if all you have to to put away right now is $500, you may have priorities besides putting money in the stock market.

Wealthfront is one of a new breed of web-based financial advisers, often called roboadvisers, who aim to automate work once performed by flesh-and-blood stock brokers and planners. The service, which has grabbed $2.5 billion in assets since it was founded in 2008, helps investors purchase a portfolio of low-cost, exchange-traded index funds. The mix is based on an investor’s age and answers to online questions about risk tolerance.

Wealthfront’s service was already free for investors with less than $10,000. (Investors with more money pay an annual fee based on 0.25% of the amount invested above the $10,000 threshold. All investors pay fees for the underlying funds.) But while it had previously required investors commit at least $5,000, the company on Tuesday lowered that threshold to $500.

Wealthfront isn’t alone. A similar service called Betterment has no minimum, although investors with less than $10,000 pay $3 a month, or 0.35% a year if they sign up to have $100 a month transferred in from a bank account.

Both companies are fighting aggressively to capture young investors, even if those customers don’t pay much at first. Here’s why: Millennials are already the biggest cohort in the workforce. One recent study predicted that as much as $30 trillion in wealth will trickle from boomers to millennials over the next several decades. Online advisers are looking to sign up young people now with the hope of collecting the real money later as their assets grow.

Wealthfront’s diversified, index-fund based approach is very sensible. But for people just beginning to save, most financial planners suggest your first priority for money outside your 401(k) is to build an emergency savings fund, ideally one large enough to cover six months of living expenses, in case you lose your job or face a health emergency.

That money should be in something safe, like a simple bank account. Banks do have their flaws: Wealthfront chief executive Adam Nash recently wrote an essay on Medium touting his service over checking accounts that slap investors with with fees for overdrafts and account maintenance. But it’s still possible to find a free bank account. Our annual Best Banks feature recommends both checking and savings options.

Investment portfolios are volatile—don’t forget stocks more than lost half their value in the last recession, just as many people lost their jobs. Meanwhile, money in a savings or checking account, while it won’t earn much at today’s interest rates, will always be there when you need it.

The upshot: If you’re financially secure and looking to sock away an extra $500 or $1,000 mostly as a way to build your saving habit, Wealthfront’s new offer is worth considering. If that $500 is really all you’ve got, start with something simple and safer. And then keep going.

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