Make Money Every Time You Spend a Dollar
I received a great question this week — one that most people struggle with, but we rarely talk about in the Outsider Club.
Hello Mr. Mengel,
I really enjoy your letter and have learned a lot about both life and investing. I had rarely invested before reading it because I have a hard time saving enough money to invest.
Do you have any basic tips for somebody that wants to save up enough money to make use of your stock picks?
Thanks for reading Thomas, and thanks for the question. While saving up some extra cash seems like it would be rather straightforward, it can be really difficult to pull off if you don’t have enough income for the basics: food, clothes, and shelter.
I get similar letters regularly, with the crux being: I wish I had more money to invest in your recommendations.
It’s a classic catch-22. As they say, it takes money to make money…
In fact, the number one reason Americans do not invest in the stock market is exactly that: they don’t feel like they have enough money. A recent survey showed that over half of the country don’t invest at all, simply because they cannot afford to.
I know times can be tough. I know that an extra $50 can sometimes mean the difference between eating a nice, hot meal or existing on bologna sandwiches all week.
But that type of thinking is not only unsustainable — it’s downright dangerous. Even on the smallest budget, there are three things you can do with as little as one dollar that could change your life forever…
Almost half of working households in the country have nothing at all saved for retirement. Zip. Zilch. Nada.
But you need to start investing something — even if it seems like peanuts now, you are most certainly going to need it down the road.
Of course, you can do all of the fundamental things: bring your lunch to work, make your own coffee, cancel your cable, and so on. It’s no fun, but that money does add up pretty quickly — the problem is that even if most people are saving on some things, they tend to spend on others.
I’ve found one great way to do it rather effortlessly and painlessly: it’s a company called Acorn.
Essentially, you connect Acorn to your bank account and it automatically invests one dollar for every purchase you make, regardless of the purchase price. If you buy a coffee, it invests a dollar. If you buy groceries, it invests a dollar. If you fill up your gas tank, another dollar.
Even if you make — for instance — a larger purchase like a riding lawnmower or a pressure washer (two of my recent expensive purchases) it still puts a dollar into your portfolio.
You can even set your investments any way you like: you could simply invest the “change” from a purchase that rounds up from a dollar, so if you buy a coffee for a $1.80, you’ll get a $0.20 investment.
It’s easy to use and customize for your budget. That’s why Acorn works great as a set-it-and-forget-it investment. Even people on the tightest budgets will rarely miss one dollar at a time.
What Acorn does with your money depends on your financial situation. There are five different portfolios you can choose from, depending on your risk tolerance. The funds were built in the model of Harry Markowitz’s modern portfolio theory, which attempts to find the best allocation of stocks to meet your individual preferences for risk, return, and diversification.
Here’s how it shakes out:
- Conservative: 40% stocks / 60% bonds
- Moderately Conservative: 51% stocks / 49% bonds
- Moderate: 61% stocks / 39% bonds
- Moderately Aggressive: 74% stocks / 26% bonds
- Aggressive: 89% stocks / 11% bonds
You fill out your goals and Acorn will make a portfolio based on what you want to accomplish.
The only big drawback in the Acorn accounts is the fees. Just like a money manager, a mutual fund, or an ETF (exchange traded fund), you’ll have to give up some of your capital to fees. With Acorn, those fees may not seem like much — $1 a month up to $5,000.
But if you’re paying $1 in fees for, say, $50 worth of investments a month, that is a 2% hit to your bottom line. In the world of ETFs that is a massive fee.
You can simply buy an index ETF of your choice with smaller fees. The Vanguard 500 (NYSE: VOO), which is one of Acorn’s options, is simple to buy on your own. You can play the entire market in one fell swoop. You could have gained 117% over the last decade without doing anything.
Instead of the 2% or so you’d pay with Acorn, you only pay a tiny 0.05% expense ratio for VOO. It also pays off a 2% dividend yield.
That being said, shares of VOO go for around $198 today, so you have a small barrier to entry, and you don’t have that cheap, invisible saving tool that Acorn provides.
Now, index funds and apps like Acorn are certainly better than doing nothing. You won’t miss that dollar here and it could help you painlessly squirrel away $50 to $100 bucks a month. If that will get you investing then by all means, get started.
But there is a safer, cheaper, and more lucrative way to set it and forget it… you’d simply need to invest that $50 all at one time instead of slowly throughout the month…
Now, for my money, I’d rather set up a dividend reinvestment plan than bother with either Acorn or index funds. When you do have a few bucks to invest, I think it’s the single best way to invest without having to think about it every month. When you have any expendable income, you can just plow it into one of these programs — offered by hundreds of companies — and the account begins to grow from the moment you start it.
It’s a pretty easy formula for long-term investing, and it certainly beats the pants off a savings account, an ETF, or an arrangement like Acorn.
The problem is that most mom-and-pop investors have never heard of it. And that is by design…
For years, brokers have lobbied Washington to shut down dividend reinvestment plans simply because too many folks are getting rich outside of Wall Street. Individuals who sign up for this plan deal directly with the company.
That means that the middlemen — brokers, money managers, and companies like Acorn — can’t sock you with the massive fees they need to keep up their own rich lifestyles.
The best part is, most plans allow you to start with as little as $50. You can also start as high as $100, $500, or with any amount you want to. It really comes down to what you can afford at the time.
They are the single most perfect way for investors with a small nest egg to grow their wealth without having to worry about it — ever. You can just check your account whenever it’s convenient.
I’ve boiled the list down to three companies that you can start an account with today. Not only do they not charge you fees, they’ll actually pay you to invest.
So stop making excuses. Stop chewing your fingernails, waiting for a miracle. Simply put together $50 and get moving on the easiest, most profitable way to start a portfolio for the rest of your life.