Ins and Outs of Robo-Investing – Interview with Betterment’s Jon Stein – MPSOS196

Interview with Betterment CEO Jon Stein

What are the ins-and-outs of robo-advisors?

Begin playback by clicking here [00:56]

Robo-advisor companies have gotten a lot of flack. Some of it may be justified, but you have to ask yourself if there a place in your portfolio for a simple, easy and rather inexpensive way to invest it he market?

Jon Stein profile pic copyJon Stein is a husband, father, avid biker, he studied neurogenesis at Harvard, consulted for First Manhattan Consulting Group for a number of years before founding a game-changing company called Betterment, a wealth management company that uses a small list of ETF funds to help individuals invest their money quickly, easily, and rather inexpensively.

He joins us to talk about the Betterment and his robo-advisor firm, Betterment.

What you will learn from this episode:

  • What is a robo-advisor?
  • What makes Betterment different than other companies
  • Betterment has a whole host of tax-favored investment options
  • Is having 6 stock ETFs and 7 bond ETFs a bit over-diversified for someone with less than $100,000 under management?
  • Friends of the show Mark and Lauren Greutman from the Simpler Happier Life podcast have used Betterment for their emergency fund. Are there guarantees for things like cash reserves or are all investments subject to market fluctuations?
  • If an individual listening right now wants to start investing outside of their 401(k), what are some of the things (mindset) they should be aware of before funding their Betterment account?

Thank you, Jon Stein, for coming on the MoneyPlan SOS podcast.

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Credit Scores Affect Insurance Premiums

M.J. Cossel send me an email about this article in the Dallas Morning News:

Bad credit score can double insurance premiums in Texas | Article by Terrence Stutz

Credit scores affect insurance premiums

She wanted to know my thoughts…

My response to Bad Credit Score Can Double Insurance Premiums

Begin playback by clicking here [29:14]

Income has nothing to do with this.

Race has nothing to do with this.

Good credit really has nothing to do with this either.

What this article is pointing out is that people with poor credit – or bad credit – are being charged more than people with good credit.

The challenge comes from insurance companies trying to find ways to run their actuarial tables to accurately assess the likelihood that someone is going to file a claim – essentially making good on a policy the insurance company is legally bound to.

My experience with insurance companies is limited – we haven't had a great number of incidents or filings.

We did file for water damage when the 2nd story toilet kept running and overflowed, sending water down the hallway and down to the basement through the furnace vents – causing more damage in the basement than anywhere else. We had a fender-bender once with minimal damage caused by someone else.

And our insurance premiums are low.

  • Are we lucky because we are white?
  • Are we able to avoid catastrophe because we are rich?
  • Are we getting preferential treatment because we are old(er)?

According to the law, insurance companies would get their pants sued off their hips if any one of these were true – and I don't believe any of them to be true anyway.

We are talking about making someone pay a higher premium, based on a credit score, to cover the potential payout by an insurance claim. The actuaries are saying those with poor credit – meaning they have too much debt, are late on payments, or have unpaid debts – are more likely to trigger a claim.

The solution Ms. Beck offered was for “people with low credit scores [should] avoid companies that assign a greater weight to the scores”, which translates into higher premiums.

That’s a good, temporary solution. It is certainly better than not having insurance at all.

However, I have a better solution: Don't have bad debt and pay your debts and bills on time.

That is easier said than done but if you want to set your life on the right path then it only makes sense to

  • Spend less than you make
  • Pay your bills and debts on time
  • Save for emergencies and non-monthly expenses like tires and larger home repair so you don't have to go back into the debt slaughter

One of the best ways to do this, at least that I am aware of, is to give every dollar of income a job and spend your values.

The average American household can survive on $3,500 to $4,000 a month. If you bring that much home and have late payments then you are either

A) Just getting started
B) Not paying attention to your spending

More than 70 percent of Americans are living paycheck-to-paycheck and insurance premiums are on the rise. Health costs are going through the roof and if we don’t get our financial house in order then we will miss out on investing more money in the market or real estate or a new business today.

If you want a sure-fire way to make every dollar work harder then get on a budget

Can I get insurance without a credit score?

I would be remiss if I did not talk about the problem with insurance premiums being determined by credit scores for those who don’t have credit scores.

Let’s say you do what we are now doing: You pay your bills on time. You stop using credit cards and close the accounts. You pay cash for cars – because borrowing $4,000 for a gently used Honda Civic with 120,000 miles that will last for another few years would just be ridiculous.

It is reported that if you do not have any open credit lines, pay off your mortgage, and stop playing the credit card game – you will not have anything for FICO to use in generating a credit score.

In other words, you will have the perfect credit score.

It’s not to small, it’s not too big, it’s not even “just right” – it’s ZERO! No fluctuations, no gaming the system, and anything that pops up on your credit report can be easily disputed because you stopped playing the debt game many years ago.

The problem? Insurance companies don’t know how to handle us. I am certain someday somebody will find a way to write in some sort of exclusion for Debt Freedom Fighters who do not have a credit score, but until then we are at risk of being charged higher premiums when we are in a better financial situation to deal with a $1,200 fender bender or $1,500 toilet overflow cleanup. We have emergency funds to accept the risk of a higher deductible and take care of these situations without a claim.

We have more options and more control of a crisis situation because we have cash. It’s not fair but I would rather accept a higher premium due to my debt freedomness and then reduce the premium by accepting a higher deductible, and not get caught in an argument with a bank who says my payment didn't make it in on time.

Paying less for insurance – whether it be health, auto, or homeowner’s insurance – may never become a flat fee for everybody.

But in the grand scheme of things you will be better off financially if you become financially stable.

Yes. Poor credit scores equal higher insurance premiums – but that’s only one consequence of not paying bills and debts on time. Make it a priority today to get your checkbook balanced, organize your finances, and pay attention – not interest.

Oh, and one more tip to help keep car insurance premiums from going up:

Remember that steering wheels are not hands-free devices.

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