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The following is a sponsored post in collaboration with TIAA.

TIAA is a different kind of financial services company. They help people in the academic, research, medical and governmental fields meet their financial goals.. As a leading financial services provider, they serve over 15,000 institutions and 5 million individuals.

It makes sense that TIAA is a founding member of the Alliance for Lifetime Income, a nonprofit dedicated to educating Americans on the importance of lifetime income.

Lifetime income can be an important factor in having a well-thought out retirement plan. TIAA offers annuities because they believe everyone deserves to have retirement savings they won’t outlive.

Investing in annuities can ensure a guaranteed income stream an individual can’t outlive, typically through annual or monthly payments to supplement income from social security and other savings. An annuity gives contributors financial stability with a “salary” in retirement that can help cover their everyday living expenses and is guaranteed despite stock market ups and downs.

 

As you can see in the image above, many people do not have protected monthly income other than their Social Security. But, many people would likely be interested in having more if they knew what to look for.

TIAA recently helped celebrate Protect Your Retirement Income Day in New York City. The day included events such as a virtual reality truck experience in Times Square, to raise awareness of how annuities help protect lifetime income.  Lori Dickerson Fouché, Senior Executive Vice President and CEO of Retail & Institutional Financial Services at TIAA, said, “TIAA and our Alliance colleagues see too many people approaching their retirement years ‘unprotected’— that is, their retirement savings lack products that can help protect depletion of one’s portfolio from longevity risk, rising healthcare costs and market volatility.”

Saving for retirement can seem confusing or complicated, especially if you are just starting out. Even if you've been investing for years, the different retirement investment options can be difficult to navigate!

TIAA offers great educational tools like Retirement Advisor, Retirement Income Planner, and more to help people understand how lifetime income can help them enjoy a secure financial future.  .

What do you think of lifetime income? Is it a part of your retirement plan?

The post The importance of lifetime income and annuities appeared first on Making Sense Of Cents.

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When you’re ready to begin investing, you usually have to make the choice between a robo advisor and a traditional broker. But what if you could have both? Find out if this robo advisor with a twist is right for you in our M1 Finance review.

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Have you ever found yourself investing with a robo advisor and needing just a little bit more customization?

For example, maybe you just wanted to add one specific stock or ETF to your portfolio, but you couldn’t.

On the other hand, have you ever had an account with a more traditional broker and wished there was some way to add more automation and direction to your portfolio?

I’ve experienced both, which is why I was excited to learn about M1 Finance.

Although you may have never heard of M1 Finance, they’ve been around for about three years now. M1 Finance is a robo advisor with a twist–they offer some of the benefits that a traditional broker does.

Because they fall somewhere between a robo advisor and a traditional online broker, we’ve decided to go more in-depth on the company so you can determine if it’s a good fit for you or not.

In this M1 Finance review, we’ll discuss some of the key features, the pros and cons, some basic pricing information, and who the broker is best suited for. Let’s start with some of the most exciting features M1 offers.

M1 Finance Features

“Pie” Investing

Investment pies are the foundation of how M1 Finance invests your money. These investment portfolios, known simply as “pies”, determine your risk tolerance for investing.

Based on Modern Portfolio Theory, these templates vary in their makeup and you customize your portfolio as much or as little as you’d like. You can choose pre-determined pies or pick your own investments for your pie. It’s basically a simple way of looking at asset allocation.

One of the nicest features in using pies is that M1 will maintain that asset allocation for you until you change it. This is a really nice benefit and avoids you having to constantly check and rebalance your portfolio.

When you sign up for M1 Finance, you’ll be given options to select a pre-built pie with as many as 100 different “slices” (a “slice” is simply a security–i.e., stock or ETF–in your portfolio). But again, you can choose your own investments and fill your pie with as many slices as you’d like (okay, now I’m getting hungry).

On the pre-built side, you can find pies that, for example, target a specific retirement date or focus on socially responsible stocks. If you want to build your own, you can choose from close to 2,000 ETFs or individual stocks.

One thing I found particularly cool is you can actually split your pie up between a pre-built section and a custom section. M1 really lets you get creative with your asset allocation.

M1 Borrow

M1 Finance just released a new feature for their account holders–M1 Borrow. This is a system that allows you to borrow up to 35% of the value of your portfolio at a very low interest rate–4%.

The benefits here are pretty solid. Compared to other types of loans like a HELOC or credit card consolidation loan, the M1 Borrow loan is quick and pretty cheap. There’s also no rigid timeline on when you have to pay it back, as long as you meet the qualifications to have the loan.

Since you’re using your investment portfolio as collateral, M1 won’t do a credit check, involve an application or loan officers, and you won’t be denied. To qualify, though, you need to have a taxable investment account with M1 Finance and have at least $25,000 in the account.

There are risks to taking a loan like this, though. Your loan is based on the value of your portfolio–so if that drops, your ability to borrow may as well. If you’re unfamiliar with investing, that increases the risk. Remember you may have to pay money immediately to get your loan back to that 35% of total value mark if your portfolio balance drops below a certain level.

I would definitely recommend speaking with a financial professional before taking a M1 Borrow loan, but as long as you know what you’re getting into and you can manage the repayment, it’s a great offering and would be an excellent option for consolidating things like student loans, HELOCs, credit cards, or even reinvesting in something.

Automation

Automating your finances is important. We all know that. But automation with investing is something that’s becoming a necessity. M1 Finance does a great job with automation in a few ways:

1. Recurring investments. I love this feature because you can set an auto-deposit to occur whenever you want. That money goes into your M1 Finance account and becomes automatically invested for you, based on your pie.
2. Automatic rebalancing. I mentioned this above, but to go a little further, M1 will make sure your deposits are intelligently allocated to the proper pie slices so you won’t stay out of balance with your targets. In the old days, you had to manually calculate this and determine how much to send to which piece of your portfolio. Now you don’t even have to worry about it–just set it and forget it.
3. Tax efficiency. M1 uses what’s called “Tax Minimization” on all of their accounts by using a lot allocation strategy. What this does is automatically prioritize the sale of a security to be of the most benefit to you, from a tax-perspective. This allows you to reduce the amount you’ll pay in taxes for selling securities (automatically of course).

Is M1 Finance for You?

If you’re someone who is either new to investing or simply don’t have time to track all of your investments and don’t want to worry about every dollar every day, M1 Finance might be a great fit for you.

Because it’s a robo advisor, you deposit money and tell M1 how you want to invest, and they’ll do the rest for you. I see this platform working very well for busy professionals, parents who don’t have the time to manage their portfolios, and people who want to save money by handling their own investments but don’t want the hassle of evaluating individual stocks.

On the flip-side, if you’re someone with a deep knowledge of investing and you subscribe to stock selection methodologies like value investing, this probably isn’t for you. If you prefer to do deep technical analysis on your stocks and make your own, independent decisions, this probably isn’t for you.

Overall, this is for someone who wants to set it and forget it. If you want to get more involved with analysis and expand your investment options, I would suggest a more traditional online broker.

M1 Finance Pricing

One of the best parts about M1 Finance is that there are no fees when you open an account and meet the minimum qualifications. And those qualifications aren’t steep either–a $100 minimum balance for a taxable account and a $500 minimum balance for a retirement account. This allows you to make trades with no commissions, which is a pretty sweet deal.

The downside to not having fees is limitations to the types of securities you can actually invest in. While you can invest in stocks and ETFs, M1 Finance does not offer options, mutual funds, bonds, CDs, forex, or futures. If that’s important to you, then avoid M1.

Try M1 Finance

M1 Finance Alternatives

To me, the best comparison to M1 Finance is Betterment. Betterment is slightly more expensive (because they do charge minimal fees), but they offer more options. Betterment has licensed advisors on staff for you to speak with if needed, for instance. They also don’t offer as much portfolio customization as M1 does, so that may be a pro for some and a con for others. You can read our full Betterment review to determine which is a better fit.

Final Verdict

M1 Finance is an interesting broker. They are different than many other robo advisors and have some things to offer that others don’t.

If you’re looking for a low-cost way to start investing and you want to at least have the option of customizing your portfolio, M1 Finance is a great option. Make sure you’re okay with not being able to talk to a licensed financial professional, though. Also, due to the lack of investment options, you will be limited to ETFs and stocks (which is fine for some).

Try M1Finance Topics: Investing • Reviews

The post M1 Finance Review – Robo Advisor with a Twist appeared first on The Dough Roller.

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Today, I have a great guest post to share. Here is how this person paid off $65,000 in student loans all while investing at the same time.

Student loans… everyone’s got ‘em everyone wants to get rid of them. This is a story of my battle with student loans and how I found success in the middle of a vicious cycle of urgency to invest, save for a house and pay off debt.

My background on student loans

I went to a fairly large out of state school, which resulted in a huuuuge annual tuition payment along with room and board, food, annual travel expenses, etc. I had to pay for it somehow. Just like everyone else I had to revert to student loans… For all four years. Yikes.

But, that wasn’t all of it. Student loans only covered tuition expenses. I had to work part-time while going through college because I had to pay for food, rent, living expenses and more. Solely on my own. This ended up being a blessing in disguise as I graduated without any credit card debt.

As a finance major throughout college, I always had this fascination with personal finance. I read it during my spare time and always seemed intrigued about how I could better myself for the future.

Upon graduation, I found an extreme urgency to: 1) find a career that was finance related, and 2) use that job to improve my financial future.

This urgency for financial planning lead me to create a wealth strategy roadmap that I could follow, These wealth creation tips would enable me to:

1. Invest;
2. Get rid of student loans; and
3. Save for a house.

I knew I wanted to accomplish all of these at the same time. By creating my financial roadmap, I realized I had to make a lot of sacrifices.

A sense of urgency to pay off student loans, invest AND save for a house

By graduating with a finance major in college, I developed this sense for ‘money optimization’ combined with traditional personal finance thinking.

I incorporated a different approach to student loan repayment because I wanted to invest and save along the way.

Here was my exact roadmap for how I accomplished all three.

 

Step One: Bite the Bullet Early with Investing

Right out of the gate from college, I knew that if I needed to take advantage of the benefits of compound interest and free money such as my 401k match from my employer.

I bit the bullet early. I made the max amount of contributions to my 401k as possible (the full $17,000, which was the max at the time!). Combined with that I made it a point to max out my Roth IRA, which was $5,000 at the time.

Ouch! That hurt initially. My eventual take home pay was basically nothing. I had to scrape by for food while managing rent payments.

However, while it hurt initially. This was one of the greatest things that I have done for my personal financial planning.

I had this sense of confidence that if I bit the bullet early, I would be in great shape. My income will only increase over time (as long as I focus on my career).

I did just that though. While I was at work, I stayed late and got in early. I aimed for early promotions.

I love the upside with investing. My strategy with my 401k and Roth IRA accounts includes investing in low-cost index funds to ensure I’m not eroding too much of my retirement gains on fees.

Investing was my top priority because unlike debt it has unlimited upside (it doesn’t go to 0) and I had a long runway for capital appreciation.

 

Step Two: Quantify My Student Loans

My second step in my debt repayment strategy was to create a table of the weighted average cost of debt.

Nearly all of the personal finance influencers I followed told me that debt is bad. Get rid of all of the debt you have. Immediately.

I took a slightly different approach. I wanted to get rid of all debt that was at a higher interest rate than the long-term average of the returns of the stock market and/or real estate.

Why would I contribute $1 to something that is lower returning, goes to 0 and has no upside? I would rather put that $1 into something that hits on the opposite.

Here is what my student loans situation looked like out of college when I put together my weighted average cost of debt:

Yes, I found out right when I graduated that I had a private loan that had an interest rate of 10.50%! I couldn’t believe it. I was appalled. This loan was actually accruing interest while I was in school. I since have refinanced that student loan.

In this weight average cost of debt scenario, you should pay off the highest interest rate debt first until you reach a threshold below the after-tax returns of the stock market.

The stock market has returned 7%-9% historically on a pre-tax basis, which is conservatively estimated at 4.2%-5.4% on an after-tax basis. This can be much higher as I conservatively assumed a 40% tax rate.

With that being said, I would want to repay any form of debt that is higher than 4.2%-5.4% interest rate. I ended up doing just that.

Here is a snapshot of my current student loans picture. I actually ended up refinancing my ‘Student Loan 1’ to 4.625% interest. I think I could refinance it again with a lower rate. I might end up doing that.

These are the types of personal financial ratios that I love to follow to determine my appropriate financial situation. The numbers never lie.

Any extra income you have should be swept to repay debt with interest rates higher than 4.2%-5.4%. Luckily, I had the extra income to be able to do so.

 

Step 3: Use Side Hustle Income to Fill the Basket Elsewhere

Once I hit below the threshold of 5.4% interest rate, I turned my attention to filling up my other financial goals. For me it wa

s buying a house. However, these goals could include investing more to live off dividends forever (a newfound goal of mine) or index investing. 

However, I was a bit tapped out from my urgency to repay student loans. If you want to invest, but don’t have any money what do you do? You go out and make more money.

I found a few side hustles to increase my income, which included freelance consulting, graphic design and selling photography. This was great because this enabled me to bifurcate my work savings goals and my side hustle income savings goals.

I love side hustles as they feature so many benefits outside of the income component:

1. Side Hustles Create Relationships
2. Side Hustles Diversify Your Income
3. You Can Use Side Hustles to Accelerate Your Personal Finance Goals and Unlock Financial Flexibility
4. By Using Side Hustles, You Learn Every Single Day

You can’t have side hustle income to solely just go out and spend it. I created separate accounts to pour all side hustle income into in order to hit my goal of purchasing a house.

This was relentless and took a lot of discipline, but it is achievable. I suggest you focus on 3-4 side hustles and get very good at them. Be passionate and don’t stop working.

In order to make all three objectives work, you need to sacrifice weekend parties for ‘armchair parties.’

Fast forward four years from graduation, and through these side hustles, I was able to purchase my first home.

 

Lessons learned from repaying student loans and buying two houses

There are so many key takeaways from this journey of being -$65,000 of net worth to a $500,000 net worth. Let me touch on a few that will help my plan become a reality for you:

 

1. Debt is not the devil

There are instances in which debt can be good. Let’s go back to my house purchase. If I would have focused on repaying my 4.625% debt off completely early, I may not have been able to purchase my first home. Thanks to the recent runup in housing prices, I was able to sell my condo 3.5 years later. This resulted in a 3x return on my original downpayment. I was able to roll this into my first single-family home purchase.

Due to savings along the way while I was living in my condo, I am now turning my attention to buying an investment property incrementally to my recent single-family home purchase.

Leverage is good in the right situations. As a private equity investor in my current role, we use debt all the time on our investments. When used appropriately, debt increases your investment returns.

So, be strategic with your debt practices. If you diversify enough, debt can do wonders. Especially when tied to income producing and appreciating assets.

 

2. Flexibility is key, but stick to the plan

Be flexible with your personal financial plan. It is okay to focus on several things at once. However, proper planning upfront pays off big time. If you can maintain the steps along your plan, you will unlock significant value as you overperform your plan.

Remember to diversify your income streams. Not all of them will increase over time, so you need to ensure that you have proper protection in case of a downside situation.

 

3. Start early, work harder

For the younger generations, you need to work as hard as possible and start as early as possible. Make your desk an income producing machine by staying to 11 pm certain nights. Turn your desk into a side hustle project by working on projects after work hours. Invest in yourself by buying a laptop that you can take everyone and work on anything at any given moment.

My favorite types of side hustles are the following:

• Side hustles that rely on no-to-limited equipment
• Side hustles that can be performed anywhere
• Side hustles that are scalable

Work on side hustles, but don’t lose focus on your career. Your career can take you a very long way in your financial freedom goals.

 

4. Find what inspires you

For me, I was inspired by finding an answer to a problem. I was also inspired by the fact that I could achieve a number of things at once if I wanted to… I was able to create my own plan. One little trick that helped me was to print out several quotes about financial freedom and keep them in my wallet.

If you are feeling down, take a read through your favorite financial freedom quotes. These will help you look at the bigger picture and follow the process.

Here is one of my favorites for you to take with you.

“Money speaks one language… If you save me today, I’ll save you tomorrow.”

Your goals are achievable no matter the situation. Remember that personal finance is all relative to your financial situation. It is called personal finance for a reason. Stick to a plan that you are most comfortable with. Only you know your risk tolerance the best.

What will you do to repay your student loans and achieve financial freedom? Please let me know in the comments below. I’d love to hear from you.

Author Bio: Millionaire Mob is where people come together to find the best travel deals and financial advice. We specialize in dividend growth investing, passive income and travel hacking. Our advice has helped others travel the world and achieve financial freedom. Follow me on Instagram or Twitter.

The post How I Repaid $65,000 In Student Loans and Invested at the Same Time appeared first on Making Sense Of Cents.

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Every human being faces the same two-part dilemma in personal financial planning. First, we must figure out how to best utilize our skills and passions to earn a living. Second, we must decide how to best utilize that earned income to build a meaningful lifestyle. Sure, some people earn a lot more money than others, …

Are You Saving Enough to Achieve Financial Freedom? Read More »

The post Are You Saving Enough to Achieve Financial Freedom? appeared first on Cash Cow Couple.

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These last two articles have focused on how common it is for early retirees to continue making money after they say goodbye to the cubicle. I share stories like that because I’ve seen it happen in so many lives, including my own. Plus, if you do it right, work is fun.

But the downside of all this “side hustle” talk is that you can take it too far, and people start to think that early retirement is possible only if you keep making money afterwards. To the point that I’ve now been hearing many thirtysomething millionaires saying things like,

“Sure, the numbers say I’ve easily reached financial independence, but I’m not even going to touch my nest egg until I’m 60.

So these days, I just do a bit of unpleasant consulting work here and there to cover my expenses and to get the employer subsidized health insurance. “

On top of that, it is hard to get mainstream financial advisers to admit that there is such thing as a finite chunk of money that you can live safely on, forever. They say stuff like, “Financial independence is great, but truly retiring from making money? Forget it.”

This is where Mr. Money Mustache puts a stake in the ground.

Because it IS absolutely possible and in fact very easy, to make a chunk of money last through your lifetime. There is no magic or unusual risk or hope involved, it’s just plain math.

Even with all the complexities of the modern financial world with its booms and busts, OPECs and Brexits and the churning sea of changing politicians and dictators, it still all boils down to a really simple number. And we can illustrate it with this really simple example:

Let’s say you want to be able to spend $40,000 per year, for life, and have that spending allowance continue to grow with inflation. And you never want to make another dollar from work in your lifetime.

In this situation, the following three sentences represent the entire universe of probability for you:

• If you retire with $800,000 in investments, you will probably make it through your whole life without running out of money (a 5% withdrawal rate)
• If you start with a $1 million nest egg (a 4% withdrawal rate), you will very likely never run out of money
• If you start with $1.2 million chunk (a 3% withdrawal rate), it is overwhelmingly certain that you’ll have a growing surplus for life.

Now, these statements do all depend on the continued existence of a productive human race which continues to innovate and trade and not destroy its own productive capacity.

But you know what?

• In the event of a global apocalypse, you won’t be thanking yourself for spending those last few years in the office accumulating a few last shares of index funds anyway.
• The strategies described in this blog are designed to shift us all to a more sustainable, healthy, productive economy. So when you live a Mustachian lifestyle, you’re boosting the likelihood of an apocalypse-free future for all of us. Thus, because of you, We are all going to do just fine.

So. A fixed chunk of money is about as safe a retirement strategy as you’ll ever find.

It’s safer than relying on any job, because keeping a steady job depends on the overall economy remaining healthy enough to feed your company, your company remaining solvent, and you remaining productive and useful to that company.

Meanwhile, a good investment portfolio just depends on the world economy in general continuing to exist.

But once you’ve got that chunk, how do actually convert it into a safe stream of lifetime income?

In other words, most of us get to the door of financial independence with something like this:

But what we really want is something like this:

So What Is The Problem?

Most people get stuck on the same three questions:

• What investments do I use to provide a lifetime of income?
• A big chunk of my savings are in 401k or pension, locked up until I’m 59. How do I retire at 35?
• How can I pay for (US) health insurance on a $3300 per month budget, when I’ve heard monthly premiums can exceed $1200 per month for a family of four?

The great news is that there are easy answers for all three. They are just not widely known because true early retirement (with no backup income) is such a rare field that very few people write about it. So let’s bang out those answers right here:

Investments:

As always, I suggest that you only need one thing: a generous bucketload of low-fee index funds. It can even be a single index fund if you want to keep it even simpler: Vanguard’s VTI “Total Stock Market Exchange Traded Fund”

Whether you own these funds through your company’s 401(k) plan, or the brokerage account of your choice, or a Vanguard account, or through an automatic management service like Betterment* as I do, doesn’t matter. What matters is that you are buying pieces of real, profitable companies, which pay dividends and appreciate over time.

Okay, got the funds, Now What?

Okay, you’re 35 years old, you have saved exactly one million dollars, and handed in your resignation.

At this point, you will probably have at least two chunks of money: a normal chunk (also known as a taxable account), and a retirement chunk (perhaps a 401k, IRA, or pension).

Let’s suppose it is divvied up like this:

When you retire early, you Use up your taxable accounts first.

On your first day of freedom, you log into your account, find the option for what to do with dividends, and set those to get automatically deposited into your checking account.

Right now, the VTI fund happens to pay a 1.89% annual dividend, which means that the $500,000  account in that green box above will pay $9000 in annual dividends straight to you.

Then, if you’re shooting for $40,000 of annual spending, simply set up an automatic monthly withdrawal of an additional $31,000 per year ($2583 per month) to be sent to your checking account, which is set to automatically pay off your credit card, which you use to buy your groceries.

But Won’t I Run Out of Money If I Do This!?

That’s the magic of early retirement math – the answer is NOPE! Because check out how this plays out:

• Because of those withdrawals, your account will lose a few shares every year.
• But because of natural stock market growth, your account will be fighting back and each share will be worth a bit more.
• Thus, your money lasts much longer than it would if you were just keeping it all in a checking account or stuffed in your mattress.
• So a quick spreadsheet simulation of this drawdown reveals that your account survives almost 23 years. At which point you are 58 years old – almost eligible for penalty-free withdrawal of your true retirement money.
• BUT, during this whole time, that other $500,000 in your retirement account grew untouched (and untaxed), and it’s now worth about $1.2 million dollars even after accounting for future inflation**. In other words, you have WAY more than enough to live on forever at that point.

If you have a really large locked-up retirement balance and a small taxable account, you might want to tap into the retirement account sooner. There are ways to do that penalty-free too, see this earlier MMM article for a few ideas.

The overall lesson: It doesn’t matter how you have your investments split up between normal investments and retirement accounts. It just matters how much you have in total.

Heck, even if you are stuck with a $1 million house occupying a huge part of your net worth, you can convert that into livable money: sell the house, put the cash into index funds, and use the resulting cash stream to rent a spiffy but reasonably priced house or apartment in the lovely walkable area of your choice.

Okay, What About Health Insurance?

If you are stuck in the world’s most expensive medical care market like I am, the most profitable investment of all may be salads, bikes, and barbells because these virtually eliminate the “lifestyle diseases” that trigger about 75% of US healthcare spending.

But even so, most people choose to insure against surprise medical bills, and people with existing medical needs depend on help with those costs.

The good news is, the politically controversial Affordable Care Act actually handles this much better than most people assume. If I go to healthcare.gov right now (or in my case the Colorado-specific equivalent) and put in a hypothetical 4-person family with a $40,000 annual income in my zip code right now, I see this:

This represents a cost reduction of $830 per month relative to what a high-income person would pay for the same coverage. So in other words, the United States just has a progressive tax bracket system like other rich countries, chopped up a little differently. It’s not great and to be clear, this is shitty health insurance because it has a high deductible. But at least it’s not a retirement-buster.

Other Things You Probably Don’t Need To Worry About But Everybody Does

What if Stocks fall or My Cost of Living Goes Up?

Stock market crashes are never permanent. In the long run, the market always goes up. So all that happens during a crash is that those few shares that you do sell during those brief times when the market is down, will hurt your account balance just a bit more. Within a year or two, the market is back up and your remaining stocks are more valuable than ever. If you want even further reassurance, you could just choose to spend a bit less money during this time.

As for your cost of living going up faster than inflation – it rarely happens. And if it does, you can adjust by spending less in other areas. Most things are in your control, especially if you take a big-picture view. You can shop around, move, and alter your lifestyle in a million different ways, and in fact this is really good for you.

Standard retirement advice is based on protecting people from any form of hardship or change, which is completely counterproductive. In the right quantity, these are the backbone of a good life and the fuel for personal growth. Without them, you will melt into a whining puddle in front of a television that endlessly blares Fox News.

Every Financial Advisor (even Betterment!) Seems to Suggest Lots Of Bonds, – Why Does MMM Only Hold Stocks?

The quick answer is that stocks earn more money on average, especially right now in 2018 with bond yields so low. Sure, stocks are more volatile, but volatility only bothers fearful people who look at the stock market every day and fret when it jumps around. As a Mustachian, you don’t do this. Lower stock prices are simply a temporary sale on stocks.

What About All Sorts of Other Stuff Not Covered in this Article?

The absolute key to success in early retirement, and indeed most areas of life, is to get the big picture approximately right and not sweat the small stuff. And design the big picture with a generous Safety Margin, which allow lots of slop and mistakes in your original forecasts and allows you to still come out with a surplus.

For example, in the story above I assumed a $40,000 annual spending rate, which is way more than almost anyone really needs to live well here in the US, especially once your kids are grown. I completely ignored Social Security, which will benefit most people at a level between $1000 and $2500 per month for a big portion of their older years.  I ignored any incidental income or inheritances or profits you might make on selling your house someday, and the list goes on.

So that’s the line in the sand.

Although I personally think working hard almost every day after your retirement is good for you, it is also completely optional, and you do not have to earn any money at it if you don’t want to.

A chunk of money is a perfectly good retirement plan, and the math doesn’t care if you are retiring at 5 years old or 85. If you get the numbers right, you’re set for life.

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*Betterment, Wealthfront, and Personal Capital are investment management systems known as “Robo-Advisors”, which typically buy shares on your behalf and then add on features like rebalancing, tax loss harvesting and personalized advice. I happen to use Betterment because the I like the interface and benefit from their tax loss harvesting more than pays for their service fees in my own tax situation.

Betterment purchases a flat rate advertising banner elsewhere on this site, although I don’t get paid for mentioning them or for any new customers they might get. And blog affiliates/advertisers have no say in what I choose to write.

** For this calculation, I assumed the stock market delivers a 4% rate of return including dividends, after inflation. (or roughly a 6-7% total annual return)

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from Mr. Money Mustache


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Would you bank on Amazon? You can find almost anything on the site and soon you may event be able to find your checking account. Now, the question is, will Amazon offer the best checking account?

Amazon recently slipped the news that it will be offering an online checking account. The company, known for taking over existing businesses and products, looks to be preparing to jump into banking. According to Wall Street Journal, Amazon is talking with various banks, including JP Morgan Chase & Co about creating a branded online checking account.

And why not? It already offers some great credit card options. But will this checking account actually come to fruition? And could it prove to be one of the best online checking accounts available? It all depends.

Amazon Checking Account Won’t Become a Bank

From the online chatter, this Amazon checking account prospect is still pretty vague. But one thing is clear: Amazon doesn’t plan to actually become a bank. It didn’t really become a credit card provider, either, for its branded credit cards. These are managed in partnership with other banks and credit card companies. My own Amazon card is manage by Synchrony Bank, for instance.

Right now, it looks like Amazon is planning to form a similar partnership for an online checking account. Prime contenders appear to be JP Morgan Chase or Capital One. These banks already have offerings in the online checking account space. This project is still fairly new, though, so another bank partner may wind up coming out of left field.

Bottom line: Amazon doesn’t want to be your bank. They just want to sell you all the things you could ever possibly need. Preferably using their branded credit cards and checking accounts.

It Will Further Tie Consumers to Amazon

With that said, you can expect that any Amazon checking account will make it even easier to buy from the company. Their branded credit cards, unsurprisingly, offer the biggest cash back perks for Amazon-related spending. And it could be that a debit card from an Amazon online checking account could do the same thing.

Besides making it easier–and possibly more rewarding–to buy all you need on Amazon, an Amazon checking account would make it easier for Amazon to access customers’ spending data. It’s unclear how much personal data they could gather from a checking account. But they could likely get at least aggregate data on how people are spending money from Amazon checking accounts.

The main advantage for Amazon, though, seems to be that they won’t have to pay processing fees to other banks and credit card holders. If you’re spending on Amazon with their products, Amazon doesn’t have to pay additional payment processing fees. And with the billions of transactions that happen on Amazon, reducing fees on even a fraction of them could stand to save the company a significant amount of money.

Who is the Target Market?

Again, we’ll have to wait for more details here to know exactly what Amazon is planning. But right now it looks like primary target markets will be the unbanked/underbanked and teenagers. It will likely also keep millennials in mind, since they’re already Amazon’s primary target market. Amazon already offers Amazon Cash, a way for people with no debit or credit card to shop at stores in person. But this is kind of a cumbersome way to manage money, and it doesn’t let consumers shop at as many places as a traditional debit or credit card.

With that said, Amazon Cash is already tapping into the unbanked/underbanked/teenage market. And the Amazon online checking account could be expected to do the same. Of course, if they offer a truly great product, they might steal Amazon customers left and right from more traditional banks and financial institutions.

What To Expect

So what should you expect if Amazon does roll out a digital checking account? Well, you can expect it to be pretty easy to set up and even easier to spend on Amazon. You can probably expect very low fees or even no fees on a monthly basis, and likely lower-than-average fees for things like overdraft charges and minimum balances.

Of course, having an Amazon checking account could make shopping on Amazon easier, too. Right now, using a checking account, rather than a debit or credit card, on Amazon can be a bit of a pain. If it’s an Amazon-branded account, this won’t likely be a problem. And you may find that the account even comes with rewards for Amazon-specific spending.

However, we’ll have to wait and see what Amazon has in store as more information about its potential online checking account becomes public.

Will It Work For You?

We can’t really recommend an account without any details on it, of course. But chances are if you’re a frequent Amazon shopper, you may benefit from an Amazon checking account. You’ll just want to be sure that you keep your spending under control with the millions of temptations for overspending on the website. And be sure you check into the privacy fine print on the account. You’re already giving Amazon loads of personal data just by browsing and shopping there. You may not want to turn over even more personal data by signing up for their checking account.

Alternatives to an Amazon checking account

If you’re in the market for a new checking account and don’t want to wait for a possible Amazon roll-out, then maybe one of the following banks would work best for you. HSBC Advance Checking is great if you direct deposit your paychecks. The account is free if you maintain at least a $5,000 balance with recurring deposits from a third party.

Chime is also an excellent choice and offers an easy way to save. When you make purchases with your Chime debit card, the change is rounded up and saved to a Chime savings account with 0.01% APY. That’s not the greatest interest rate but you could always transfer those savings to a high-yield account elsewhere. Even better, there are no monthly fees to maintain the account.

FNBO Direct’s Online Bill Pay account pays 0.65% APY and also comes with no monthly fees. Another free option is Ally Bank. There’s no minimum deposit required to open an account and the interest rate is tiered based on your balance.

Finally, if you can maintain $100,000 in combined personal or commercial deposits or even in investment balances with HSBC, you should look into their Premier Checking account. Of course, what really makes a bank stand out is seeing what they can offer you. We put together a list of best checking and savings account promotions and deals that you’ll want to check out before making a decision. Who knows, maybe one day you’ll see Amazon on that list.

Topics: Banking

The post Will Amazon Offer the Best Checking Account? appeared first on The Dough Roller.

via Finance Xpress

This post is brought to you by Regions Bank, a member of FDIC. While this post is sponsored, all of the opinions expressed here are my own.

As a personal finance blogger, I’ve seen the ways technology is helping more and more people manage their finances in more user friendly ways. And when it comes to banking, it’s great that you can just pick up your phone to check your balance, deposit checks, pay your bills, and more.

But with so many of our day to day tasks happening online these days, there are some times when I still want a little more human interaction, especially since I work online. Also, living on a sailboat means that if you are out sailing, then you might go a few days without seeing a single other person  other than the person you’re sailing with.

This is why I really still value in-person communication– it’s just helps so you don’t go crazy, haha!

So, to help those of us who like technology and those of us who do want more of a personal touch when it comes to visiting a bank branch, Regions Bank is changing their approach to in-person banking.

While Regions already has a great mobile app that lets you make payments, send money to family and friends, deposit checks, and more, they are redesigning their branches to make it even easier and painless to visit the bank.

We all have a mental picture of what a bank branch is like. You walk in, there are ropes around the teller lines, and the bankers are somewhere in the back or to the sides in their offices. That’s not the case anymore with Regions’ new branches. Their new locations feature some of the most advanced banking technology, have a fun modern look, and they make it easy to talk to people when you need one-on-one help.

Their newest innovative branch location– St. Louis!

A big part of the reason I got excited to include this sponsored post on my blog is because the newest of these super modern and friendly branches is in my hometown, St. Louis!

Regions Bank currently has over 1,400 locations across the South, Midwest, and Texas, and this new one is just a few minutes away from where Wes and I used to live.

If you’re in St. Louis, this new branch will be located at 7 South Vandeventer Ave, St. Louis, MO, 63108– just down the street from IKEA and St. Louis University. It opens on December 3, 2018.

In addition to their DepositSmart ATMs that let you make deposits, withdrawals, and cash checks at your convenience in a safe and secure vestibule. This new branch will also feature the following improvements.

No more teller lines

Instead of standing in between those roped-off lines and watching the person in front of you try to dig their driver’s license out of their bag, Regions’ new branches, including this new St. Louis one, are getting rid of teller lines all together.

Now, a Regions Banker will greet you as you enter the branch and have a simple conversation to see how they can help you with your needs. They may direct you to one of their many video teller machines, and I’ll talk about these in a second. But instead of needing to make an appointment to see a separate banker for things like opening a checking or savings account, you can get help with those things as soon as you walk in.

Video Tellers

If you have a simple banking need, like check cashing, withdrawals, etc. Regions Bank is adding video teller machines to their new locations to make this easy and fast.

It’s pretty simple, you just walk up and connect with a Regions Video Banker via a live two-way video. They can help you process those basic banking needs, and they can also help you with any general inquiries.

The really great thing is that you can access these tellers during extended weekday hours as well as weekends and most holidays.

Virtual Concierge

This isn’t just part of their in-person banking services, it is how Regions Bank is trying to personalize your online or mobile banking experience.

Their Virtual Concierge service lets you connect with one of their bankers online and go over any questions you might have, from online banking to remote check deposits. They can also help with some financial planning advice to help keep you on track with your financial goals.

You can access their Virtual Concierge in one of their newly redesigned branches, but you can also connect with them through email, chat, phone, and LinkedIn.

What do you look for in a bank?

The post The Future Of Banking – A Look At Regions’ Innovative New Bank Branches appeared first on Making Sense Of Cents.

from Making Sense Of Cents


via Finance Xpress

The quirky little grocery chain with California roots and German ownership has a lot to teach all of us about choice architecture, efficiency, frugality, collaboration, and team spirit.

Listen and subscribe to our podcast at Apple Podcasts, Stitcher, or elsewhere. Below is a transcript of the episode, edited for readability. For more information on the people and ideas in the episode, see the links at the bottom of this post.

* * *

Michael ROBERTO: Let’s play Shark Tank today. You’re the investors.

Shark Tank, if you don’t know, is the TV show where people pitch business ideas to famous investors.

ROBERTO: You might be Mark Cuban or Mr. Wonderful. You’re trying to decide, would you invest?

And that is Michael Roberto. He’s a business professor at Bryant University, formerly of the Harvard Business School. There’s one lecture he likes to start by giving his students this fictional Shark Tank pitch.

ROBERTO: “I’d like to open a new kind of grocery store. We’re not going to have any branded items. It’s all going to be private label. We’re going to have no television advertising and no social media whatsoever. We’re never going to have anything on sale. We’re not going to accept coupons. We’ll have no loyalty card. We won’t have a circular that appears in the Sunday newspaper. We’ll have no self-checkout. We won’t have wide aisles or big parking lots. Would you invest in my company?”

And of course you’re supposed to think, “There is no way I’d invest in that company. That sounds like the stupidest company ever.”

ROBERTO: And, of course, you get a lot of consternation.

That’s when Roberto reveals that not only does such a grocery store already exist, but they’re crushing the competition.

ROBERTO: They’re at the top by a wide, wide margin. The sales-per-square-footage estimates are unbelievable. I mean, three and four times better than some of the leading players in the industry.

So it sounds like customers love this place. But you might think a store like this would be brutal to work for. And yet: it’s ranked among the 100 best American companies to work for. So what’s it called?

Sheena IYENGAR: I do love Trader Joe’s.

There is a good chance you’ve never shopped at a Trader Joe’s, maybe never even heard of it. It’s got fewer than 500 stores. The big chains like Kroger and Albertson’s have well over 2,000; Walmart sells groceries in more than 4,000 of its stores. And, as Michael Roberto told us, Trader Joe’s doesn’t advertise — or do a lot of things the typical grocery store does.

ROBERTO: A typical grocery store has a SKU count — SKU stands for stock-keeping units, so it’s the number of different items carried in a store — well, typically a grocery store, or a supermarket, might have 35,000 SKUs, right? A tremendous selection and variety. And you go to Trader Joe’s they only have, say, 3,000 stock-keeping units in the typical Trader Joe’s.

The grocery business is famous for low profit margins, lots of competition — and, lately, an even bigger problem: for the first time in history, American consumers are spending more money in restaurants and bars than in grocery stores. Trader Joe’s seems to be bucking this downward trend. It doesn’t just have customers; it has fans:

Kirk DESERMIA: The first thing I do when I know I’m going somewhere is get on the internet and find where the closest Trader Joe’s is.

It’s never been easy to run a grocery chain. But Trader Joe’s makes it look easy — and, weirdly, fun.

IYENGAR: I don’t walk into Trader Joe’s with a strong to-do list. It’s not a chore. When I walk into Trader Joe’s, it’s a variety-seeking exercise.

So how do they do it? That’s the question we’ll try to answer today — a question made more difficult by the fact that Trader Joe’s is a fairly secretive company.

ROBERTO: I think that some of the secrecy is probably due to who owns them.

So we put on our Freakonomics goggles in an attempt to reverse-engineer the secrets of Trader Joe’s. Which, it turns out, are incredibly Freakonomical: things like choice architecture and decision theory. Things like nudging and an embrace of experimentation. In fact, if Freakonomics were a grocery store, it might be a Trader Joe’s, or at least try to be. It’s like a real-life case study of behavioral economics at work. So, here’s the big question: if Trader Joe’s is really so good, should their philosophy be applied elsewhere? Should Trader Joe’s — I can’t believe I’m going to say this, but … should Trader Joe’s be running America?

* * *

I first got interested in Trader Joe’s about 10 years ago. I’d never been to one of their stores, but I had a general impression: cheap and cheerful; relatively laid-back and sort-of groovy, for a grocery store, apparently a reflection of its surfy California roots; also: not aggressively health-conscious, but leaning in that direction.

And then I read a Wall Street Journal article about a German grocery chain called Aldi that was ramping up its U.S. expansion. Aldi is a super-cheap, super generic grocery store: 95 percent of its products were house brands, and it was beating even Walmart on price. The article said the Aldi chain had two branches back in Germany, separately owned by two wealthy brothers named Albrecht. And that one of those branches also owned Trader Joe’s. I found this fact surprising, only because when I think of German business practices, I don’t think of a groovy, earthy-crunchy, California surfy vibe. But there it was. I also learned that Trader Joe’s stores were much smaller than typical supermarkets, that they had their own way of doing things, and that places without Trader Joe’s often started petitions to bring one to their town. It was the sort of loony devotion usually reserved for sports teams or your favorite band. What kind of grocery store has a following like that?

And then when I learned that Trader Joe’s outsells all other grocery stores per square foot, I really started paying attention. Then: one opened up near my office, here in New York. I started shopping there — and, for the most part, loving it. I realize it’s not for everyone; in fact, part of their strategy is trying not to be for everyone. But I did want to know the secrets to their success. We reached out to the Trader Joe’s headquarters, in Monrovia, Calif., and were politely told to get lost. As we mentioned earlier, the company is known for its secrecy.

ROBERTO: The two brothers who founded Aldi North and Aldi South in Germany have a record of that.

Michael Roberto again.

ROBERTO: That was kind of the family heritage, of really being pretty secretive about their business operations. You couldn’t even find photos of them on the Internet for years. They were very secretive.

It’s a strange combination: a firm that prides itself on user-friendliness while also keeping its distance. Which means that a lot of what’s known about it comes from industry analysts and other secondary sources. But let’s start here: in the very beginning, there really was a Joe behind Trader Joe’s — Joe Coulombe. He opened the first store in 1967, in Pasadena, Calif. He went with a South Seas theme: beachy tchotchkes, Hawaiian shirts, calling employees “captains” and “crew members.”

In 1979, Coulombe sold the chain to one of the secretive Albrecht brothers, Theo. Theo Albrecht was a recluse — perhaps, it was said, because he’d once been kidnapped and held for ransom, for 17 days in Germany. Albrecht died in 2010, but Trader Joe’s remains notoriously press-shy. It’s also a privately held company, so: no earnings calls with investment analysts; no public proclamations of any sort, really, about how it does business. And so: to figure out how it works, we’ll rely on a few people who’ve spent a lot of time thinking about Trader Joe’s. Including: the business-school professor Michael Roberto, whom you’ve already met:

ROBERTO: Correct.

Also, the Columbia Business School professor Sheena Iyengar, whose research specialty is particularly relevant here:

IYENGAR: So I’ve been studying choice — why do we want choice, what are the things that affect how and what we choose, and what are some things we can do to improve our choice-making abilities.

We’ll also talk to a Trader Joe’s super-fan:

Kirk DESERMIA: My name is Kirk DesErmia. I reside in Seward, Alaska.

Seward, by the way, doesn’t have a Trader Joe’s. Nor does the state of Alaska. The closest store from DesErmia’s house is 2,295 miles away by car, in Bellingham, Wash. DesErmia is the guy who we earlier heard say this:

DesERMIA: The first thing I do when I know I’m going somewhere is get on the internet and find where the closest Trader Joe’s is.

And we’ll hear from a spy in the house of Trader Joe’s, a former advertising executive named Mark Gardiner who became obsessed with the chain.

Mark GARDINER: And I just had this thought, “What if I just went and worked there? What would I learn about this company?”

What Gardiner learned about the company is that just about everything Trader Joe’s does, outside of exchanging food for money, is unorthodox for a modern grocery store. There’s a lot to talk about: the products, of course; the economics of their business model; their very home-made, do-it-yourself esthetic, including the hand-painted murals that reflect the neighborhood of every store. But let’s start with one of the first things I noticed when I started shopping there: the employees. Yes, they are friendly, and helpful, and enthusiastic.

ROBERTO: At Trader Joe’s, what they want is employees in the aisles who have sampled the product, who know the product. Who can say, “Have you tried this wine or that cheese?”

But what really caught my eye was the sheer number of employees. There are so many of them! If you go in during a slow time, you can easily be outnumbered by employees, in their TJ’s t-shirts and Hawaiian prints. One reason is that rather than stocking shelves overnight, like most grocery stores, Trader Joe’s stocks them during business hours. Why? As Mark Gardiner learned when he went to work there, the priority is to maximize customer interaction.

GARDINER: So, they would tell us, “You’re going to be looking for customers who seem like they can’t find something that they want or just seem curious about something. You are going to initiate conversations with these people, and we want you to be friendly, we want you to be chatty, we want you to be empathetic. And more than anything else, we want you to do what it takes to make customers feel appreciated and wanted.”

So that explains why there are so many employees in the aisles. But there are also a ton of employees staffing the checkout. On one level, this makes sense: it makes the long checkout line move fast, and the checkout, after all, is where a store takes the customers’ money. Lesson number one in sales: don’t make it hard for people to give you their money!

But Trader Joe’s also has employees directing traffic at the checkout line: one telling you which register to go to, one pulling you out of the big queue and into the final queue; and one or two holding up handmade signs marking the middle of the queue and the beginning. That’s three or four employees to do the job that most stores use zero employees to do, or maybe they use some software.

But Trader Joe’s seems to be aggressively low-tech. No self-checkout aisles. No online ordering and pickup. No customer-loyalty programs — and, apparently, Trader Joe’s gathers no significant data on customers at all. In the modern business world, this is heresy. If you shop at Whole Foods, which is owned by Amazon, you can be sure the company has an algorithmic target on your back. Trader Joe’s, meanwhile?

GARDINER: It really didn’t matter if it was a little old lady that was looking for one $5 bottle of wine, and if the wine shipment had just come in the back, I would go and look through 100 different cases and see if I could find the one that she wanted, and get her that one bottle of wine. If I spent 15 minutes doing that, and that made that customer really happy, then the managers were happy, and the store was happy.

So this is a riddle. Here’s a company that doesn’t harness big data and doesn’t generally seem to embrace a lot of technology. It employs a lot of real, live people — and pays them above the industry standard: as of 2013, full-time Trader Joe’s “crew members” made about $50,000 a year while “captains” made more than $100,000, also with better-than-average benefits.

But this is also a company that sells its products at very low prices. According to one of those investigations comparing a basket of items at a bunch of different grocery stores — this one was done in 2016 by the MarketWatch website in the San Francisco Bay Area — Trader Joe’s was easily the cheapest compared to Safeway, Target, and Whole Foods. It was 32 percent cheaper than Whole Foods.

So how on earth can Trader Joe’s, as Michael Roberto told us, take in the most revenue per square foot in the industry?

ROBERTO: They’re at the top by a wide, wide margin.

A 2012 analysis estimated that Trader Joe’s sells just over $2,000 of groceries per square foot. Whole Foods? About $1,200. Walmart? $600. How is this happening? We should probably start with the products that Trader Joe’s sells. Here, let me read off some of what they says are their most popular items. Spatchcocked lemon-rosemary chicken and carne asada autentica. Kohlrabi salad blend and cold-pressed matcha green tea lemonade. Sea-salt-and-turbinado sugar-chocolate almonds and gochujang almonds; peanut butter-filled pretzels and five-seed almond bars. From the freezer section: chicken tikka masala and gluten-free cheese pizza with a cauliflower crust.

These are the sort of foods that light up Instagram accounts and Facebook pages; that inspire fanatical devotion even among people who don’t have a Trader Joe’s within 2,300 miles — like Kirk DesErmia, who works as a facilities manager for the National Park Service in Alaska.

DesERMIA: Whenever I leave the state, I usually buy a couple of hundred dollars worth of goods, and I have an extra suitcase or a duffel bag with me in my luggage.

DesErmia and his duffel bag have been all over.

DesERMIA: I’ve been, I know, to some in Portland, Oregon; Reno, Nevada. all over Southern California, there’s a number of them. My wife is from Kentucky, they have one in Louisville now, as well as Indianapolis. I go to D.C. about once a year for work, and love to go to the Trader Joe’s in Georgetown.

What is it about Trader Joe’s foods that creates such a lust? Let’s put aside for a moment the question of how good their food is, especially since taste is subjective, at least to some degree. But there are a few things to say about how Trader Joe’s is at least different from a typical grocery store. First, there is a sense of globe-trotting adventure — the tikka masala, the carne asada, the gochujang almonds. That’s why Sheena Iyengar thinks of shopping there as a variety-seeking exercise.

IYENGAR: “Oh, let’s see what kind of candy bars they have. They usually have cool candy bars. Let’s see what kind of deals they might have on wines or cheeses, or their prepared-foods section is kind of cool. What might they have that could add some more variety to the house?”

They also offer a rather unsubtle blend of healthy, or at least healthy-seeming, and hedonistic. Yes, you can buy kohlrabi salad and cauliflower-crust pizza. But you’ve also got your peanut-butter-filled pretzels and sea-salt-and-turbinado-sugar chocolate almonds. Speaking of which: turbinado sugar — also known as natural brown sugar. But still: sugar. Why add the “turbinado”? I have a few guesses. One: to say you’re just adding “sugar” to your already chocolate-covered almonds doesn’t sound very healthy. But “turbinado sugar”? Hmm … intriguing! Possibly even … sophisticated! Additionally: Trader Joe’s seems to understand what everyone in sales understands, especially real-estate agents: adjectives are inexpensive and often useful, especially when the actual virtues are limited. A “charming” house is often, in fact, a small house.

Trader Joe’s reportedly puts a great deal of effort into scouting, sourcing, and producing food that their customers truly love; but they also pay a lot of attention to package design and descriptive salesmanship. Their marketing director is called “Director of Words & Phrases & Clauses.” They publish an old-fashioned newsprint bulletin, The Fearless Flyer, with in-depth descriptions of new products. When you walk into a Trader Joe’s, there’s a playful vibe, as if to say, “Hey, you’re just buying food; food is delicious, so enjoy yourself.” There’s also an artsy vibe, a writerly vibe — more so, oddly enough, than in a typical bookstore.

These details, as casual as they might seem, would also appear to be strategic. In a 2011 interview with the L.A. Times, Joe Coulombe said when he started Trader Joe’s in the 1960’s, he was inspired by an article he read in Scientific American about the huge spike in Americans attending college. “I felt this newly educated … class of people would want something different,” he recalled, “and that was the genesis of Trader Joe’s.” Why’d he choose Pasadena as the first store location? “Because,” he said, “Pasadena is the epitome of a well-educated town. …Trader Joe’s is for overeducated and underpaid people, for all the classical musicians, museum curators” and, um, “journalists,” he said. This suggests that from the very beginning, Trader Joe’s understood cream-skimming — targeting a certain kind of customer and letting the rest slide by.

As for the “underpaid” part of Coulombe’s equation? That would appear to be outdated: an analysis by the research firm AggData found that Trader Joe’s stores today are located in counties with higher household median income than any other grocery chain, including Whole Foods, and about $10,000 higher than the U.S. median income. But — and this seems to be another key component of Trader Joe’s success — they also value frugality. As Michael Roberto found, they usually set up shop in the cheaper parts of the expensive areas.

ROBERTO: Frankly in many cases, they’re in sort of old strip malls, so they’ve saved money on the real estate.

The real-estate firm Zillow found that homes near Trader Joe’s stores “appreciate more quickly than homes in the city as a whole,” concluding that either Trader Joe’s is really good at picking areas that are on the rise or that they are in part causing the rise. So how about a new store in Seward, Alaska? That is Kirk DesErmia’s dream.

DesERMIA: So, I started a Facebook page called “Bring Trader Joe’s to Alaska.”

This was in 2012.

DesERMIA: I thought, “Man, these guys, maybe they just don’t know what they’re missing yet. And if I can create this Facebook page and I can get people around the state to start liking it and sending Trader Joe’s an email to say, “Hey, we would really love to see your store here,” then maybe Trader Joe’s will actually listen to us.

So after one of his out-of-town Trader Joe’s shopping binges …

DesERMIA: When I come home with a suitcase full, I like to throw it on the kitchen table and take a picture of it and put it out there, hopefully to motivate people to send that email to Trader Joe’s and let them know we’re out here.

His Facebook page got some traction: about 1,200 likes.

DesERMIA: I would say most of my friends in Seward are aware that this is something that I would like to see happen.

And, lest you think DesErmia is one of those guys who makes a Facebook page for everything:

DesERMIA: No. Some of my friends might say I’m fairly politically active, but I honestly I can’t think of any other store that I might think to start a page to bring up here.

Seward, Alaska, does have a relatively high median household income. But the population is a problem: fewer than 3,000 people. DesErmia concedes that Anchorage, a few hours away, would be a more sensible site for the first Trader Joe’s in Alaska. And he’d happily make the drive. He just really wants a Trader Joe’s.

DesERMIA: Every time I go to a Trader Joe’s in the lower 48, they always look sideways at me when I’m getting two to three hundred dollars’ worth of goods. But I tell them, “It’s because we live in Alaska and we can’t get you guys to come up here.” Since I started this page in 2012, and they’ve never responded to a single email, it seems a little unlikely. But hopefully, they’re going to listen to this interview and then my percentage will go up.

* * *

Of all the mysteries concerning the success of Trader Joe’s, here’s what strikes me as the most interesting one. Their stores, as we’ve learned, are generally quite small, roughly a third the size of a typical supermarket. Michael Roberto again:

ROBERTO: We’re all acclimated to every other supermarket looks the same. It has 35,000 items. It has 7 million varieties of toothpaste and tomato sauce. Every other player has all those things.

But Trader Joe’s …

ROBERTO: They only have, say, 3,000 stock-keeping units in the typical Trader Joe’s. Or 4,000 at most in one of their larger stores.

Moreover, as we’ve learned, Trader Joe’s prices are relatively low. And yet: they also take in much higher revenues than stores that have more variety and more expensive items. So … how? Remember: Trader Joe’s doesn’t sell a lot of brand-name groceries. Roughly 80 percent of their products are private-label items, also known as store brands.

ROBERTO: What that means is Trader Joe’s has mitigated the power that suppliers might have over them. So while they’re not nearly as big as Kroger’s they can get great purchasing power because they’re condensing all they’re buying in tomato sauce to one vendor for a very limited number of items.

And when you’re selling something that you also manufacture, or at least source directly, you obviously stand to make more money than if you’re buying from a middleman. That said, even store-branded products need to taste good. Judging from the chain’s success, they do. In fact, some Trader Joe’s-branded items may taste identical to brand-name foods. Why?

Because, it appears, they are identical. An investigation by the food website Eater, using Freedom of Information Act requests, found that many Trader Joe’s items are, in fact, manufactured by the same companies that make the brand-name versions of products you can buy in many other grocery stores, usually for significantly more money. For instance: those Trader Joe’s Pita Chips with Sea Salt? They appear to be exactly the same as Stacy’s Simply Naked Pita Chips. Trader Joe’s Gluten-Free Chocolate Chip Cookies, according to the investigation, are, quote “nearly identical in taste, packaging, and ingredients to Tate’s Bake Shop cookies.”

There’s nothing wrong with this, and it’s hardly unusual for brand-name manufacturers to run a side business selling to private labels. But most places that sell a lot of house brands are seen as down-market discounters, not up-market superstars, like Trader Joe’s. So why are they different? Some of the credit must go to the clever packaging and the artful product descriptions. But to get to the real secret of Trader Joe’s, what I think might be the single-biggest reason for its success, you have to go back to Sheena Iyengar.

IYENGAR: I have been at the Columbia Business School since 1998 and I started to study choice way back in 1990.

Iyengar’s Ph.D. is in social psychology; as an undergrad, she double-majored in psychology and economics. She was born in Toronto to parents who’d immigrated from India. Her background, she believes, gave her a different perspective on decision-making when she started working in the field.

IYENGAR: And I got very interested in the kinds of questions that we wouldn’t have ordinarily asked “Well, do all cultures see choice in the same way?” We had assumed that it was innate; we had assumed that everybody saw it the same way, that it was somehow universal. And I think because I was an Asian-American, I didn’t see it as that obvious.

She wanted to explore this question with kids from different backgrounds. Her theory was that Asian-American kids and white American kids might think differently about choice. Before comparing the two groups, she wanted to establish a baseline, to confirm that for the white kids, choice indeed had a positive effect. This baseline experiment turned out to be pretty interesting on its own. Here’s how it worked: she brought a bunch of 3-year-olds, one by one, into a room full of toys. Half of them were allowed to choose any toy, and they could switch as they pleased. The other half would be given just one toy with no option to switch.

IYENGAR: I started by looking at white American kids because I had to first show that I’m capable of actually replicating what prior scientists would say.

What prior scientists would say — and had been saying for decades — is that choice is motivating. That having choice, or even the illusion of choice, is associated with increased satisfaction and feeling more control over your life. Therefore: the kids who could choose their toy should be happier for having the options and more likely to play longer. These ideas about choice were prominent not just in psychology; they were baked into the foundation of economic thinking at the time — that more choice is almost always better than less choice. But when Iyengar started her study and brought in the kids who could choose from an entire roomful of toys…

IYENGAR: The white kids would come in and they would look at all these toys and stare outside the window. And then when I would just give them Legos, they were really happy and they were playing and I was like, “Wait, this goes totally against what I’m supposed to find, there’s something wrong here.”

So Iyengar went back and examined some of those earlier studies about choice and decision-making. She realized that when those researchers described giving people “lots of choice,” in reality that meant something like two-to-six options. Not a roomful, like she had tried. So Iyengar ran a different study — this time limiting the number of choices, and now she confirmed what her predecessors had found. But she kept thinking about what happened in that first study, with the roomful of toys.

IYENGAR: Why were they staring out the window? I don’t get it. I gave them really, really cool toys. I gave them all the most modern toys. At the same time, I was going to this upscale grocery store.

The store is called Draeger’s Market; it’s a northern California institution. Iyengar was at Stanford at the time.

IYENGAR: So they had like 250 different kinds of mustards and vinegars and mayonnaises, and 500 different kinds of fruits and vegetables, and 100 different kinds of olive oils and, oh my god, it was amazing. And I would go to all these little tasting sessions and try out like 10 different kinds of vinegar. And I also then thought to myself, Well, how come you never buy any of those things you taste? And I then went to the store manager and I asked him whether his model of offering people all this choice was working. Now, he said it did — and he pointed to the traffic, and this store did have a lot of traffic. But it was still an empirical question. Was it helping or was it not?

So Iyengar designed an experiment, at Draeger’s, to answer the question. She set up a tasting booth for jams. And she alternated the choice set: sometimes the booth would feature six different jams and sometimes 24.

IYENGAR: And we looked at two things. First we looked at in which case did more people stop to sample some jam. And we found that more people stopped when there were 24 on display. So 60 percent stopped when there were 24 on display versus when there were six on display, only 40 percent of the people stopped. And then when people stopped, we gave everybody a coupon giving them $1 off if they bought a jar of jam. And on the back of the coupon was a code that told us if they saw six versus 24. Now what we found was that of the people who stopped when there were 24 on display — only 3 percent of those coupons were redeemed. Whereas of the people who stopped when there were six on display — 30 percent of the coupons were redeemed.

Interesting: a larger choice set generates more interest; the smaller choice set generates more action. Sheena Iyengar’s jam study — very simple, but very powerful — would go on to become one of the most famous studies in decision science, because it illustrates what a lot of us feel when we enter, for instance, a gigantic supermarket.

IYENGAR: What the finding illustrated was that we want more choice presumably because of all the opportunities it provides us. But when it comes down to making a choice, we don’t want that choice to be too hard or too conflict-ridden or too burdensome.

Iyengar followed up her jam study with a look at employee participation in retirement-savings plans.

IYENGAR: And essentially what we found was that the plans that offered their employees more options, you saw real decrease in participation rates. So, if you had a plan that offered people less than five options, the likelihood to participate was roughly around 75 percent. And by the time you got to plans that offered people around 60 options, now participation rates had dropped below 60 percent.

This phenomenon has come to be called “the paradox of choice.” But Iyengar doesn’t think that’s quite right. It’s not that more choice is always worse and that less is always better. She argues that choice is both a limiting and a powerful tool. Every context is different. You can imagine that a huge choice set is particularly welcome in the digital realm, where you can search for exactly what you want with a few keystrokes — assuming, that is what you want. But in the analog world — in the world of a grocery store, for instance — the size of a choice set matters. Not just because of the cost of real estate and transportation and storage and labor to stock the shelves. But because of how we, people, make decisions. Envision a shelf in a typical supermarket:

ROBERTO: It has seven million varieties of toothpaste and tomato sauce.

And a Trader Joe’s shelf?

IYENGAR: It doesn’t overwhelm me. It usually gives me just a few choices per domain.

And having just a few choices per domain is more likely to lead to action. Imagine yourself standing in an aisle in Trader Joe’s when you come across their five-seed almond bars. And your lizard brain says: “Well, there are no four-seed almond bars, or six-seed almond bars — and I don’t even know why I need seeds in my almond bars — but sure, I think I’ll get some of those.” Trader Joe’s understands less-is-more. It understands — to use a word of the moment — curation.

IYENGAR: They don’t overwhelm you with choice, which is why you’re more willing to examine each novel choice.

There is a story, probably not true, about Michelangelo. Someone supposedly asked him how difficult it had been to sculpt his famous David. And he said, “It’s easy. You just chip away the stone that doesn’t look like David.” I’m not saying Trader Joe’s is quite on Michelangelo’s level, but you get the idea: there is great value in clearing away the clutter. Which is one reason Sheena Iyengar personally loves shopping at Trader Joe’s.

IYENGAR: It doesn’t give me the boring stuff, it keeps me excited because I want to see, what do they have? And what do they have that might get me thinking about something I don’t ordinarily think about? So they also maintain the mystery of novelty for me.

Novelty is also a powerful tool in sales, and this too Trader Joe’s understands. It is famous for constantly introducing new products — experimenting with them, really. Which means old products have to go. Maybe they’ll come back, maybe they won’t. This strategy would appear to be risky.

ROBERTO: Normally, in a typical grocery store, if the item that you typically bought isn’t there, you’re really pissed, right? You’re mad. At Trader Joe’s, customers have come to understand that that’s part of the trade-off. You might see your peach mango salsa disappear, but there’ll be something new to try that you can offer at your next cocktail party and wow people with.

Iyengar notes this strategy also gives every trip to Trader Joe’s a sense of a treasure hunt. But that our appetite for novelty is domain-specific.

IYENGAR: I deliberately go into that venue—

“That venue” being Trader Joe’s …

IYENGAR: —because I want to learn about some choices. I’m trying to update my brain on choices. But when I go into my coffee shop in the morning I do not engage in any act of updating. I don’t want to know. I walk into my coffee shop every morning. I don’t even say anything. They just bring me out exactly what they bring me every other day. And it’s made exactly the same and I have no interest in engaging in any kind of variety-seeking.

GARDINER: I discovered Trader Joe’s totally by accident.

Mark Gardiner again, the former advertising executive who wound up working at Trader Joe’s. He was living in California at the time.

GARDINER: I thought it was a local store, it had a kind of a surf theme and I didn’t know any better, because they don’t do any advertising. I only was exposed to it because it happened to be in my neighborhood.

Then Gardiner moved to Kansas City.

GARDINER: Yes, and that’s when I really learned about Trader Joe’s as a company, because there was no Trader Joe’s. But there were these rumors that we’re going to get a Trader Joe’s. And there was so much excitement. There’s a Facebook page called “Bring Trader Joe’s to Kansas City” that has 5,000 friends.

As a former advertising guy, Gardiner was impressed.

GARDINER: I think the number-one thing that struck me about Trader Joe’s is that they almost don’t advertise at all. They don’t market. They have a pretty good website now. But for years they had a rudimentary website. They had almost no social media presence. They had almost no kind of public relations. So they didn’t do a whole bunch of the things that I had spent my entire working life thinking, “Well these are things that you do when you build a brand.” So that was really striking to me. And I just had this thought, What if I went and worked there? What would I learn about this company?

Gardiner learned enough about the company by working there that he wrote a book about it, called Build a Brand Like Trader Joe’s. How did Trader Joe’s respond?

GARDINER: Well, as you know, they’re a very, very secretive company. So they responded exactly the way I expected, which was with utter silence.

What initially impressed Gardiner was how Trader Joe’s had grown so much without spending all the money that most firms spend on marketing, advertising, and so on. But what impressed him once he got inside — working as a crew member for $12 an hour — was the company’s culture. Well before the new Kansas City store had opened, on the first or second day of training, a Trader Joe’s executive came in to meet with the roughly 50 new hires, including Gardiner. The proceedings began with that standard, horrifying request to say your name and tell a story about yourself.

GARDINER: And I am not kidding you, 50 hands went up. All these people were like, “Pick me. I want to be the first, I want to start. I want to tell you my story.” And I looked around at that group of hands going up, and mine was up too, because I love talking about myself. But most people don’t, at least not to a group of strangers. And I thought, Wow, this is not an ordinary group of people. And what I realized pretty quickly is, Oh my God, this is what they hire for — they hire for this kind of extroverted, naturally chatty kind of person.

As the training progressed—

GARDINER: These guys really weren’t too worried about teaching me how to operate a grocery store, right? I mean there was some discussion about keeping the cold things cold, and how important that is, and there was a little bit of discussion about, “This is how our cash register works,” about, “When you’re bagging groceries, this is how you do it.” There was some discussion of process. But actually there was a lot of discussion of Trader Joe’s values. There was a tremendous amount of discussion about how are you going to be with the customers.

And then, once the store opened—

GARDINER: No matter how crazy the store was, no matter how much pressure there was to do something else, if you were doing something for a customer, that trumped everything.

Seeing how Trader Joe’s encouraged its employees to interact with customers — to partner up with them — didn’t just make sense to Gardiner. It inspired him to wonder why this theoretically-obvious approach is, in fact, quite rare. Consider, he says, a standard trip to the Department of Motor Vehicles.

GARDINER: What happens when you go to the D.M.V.? Well, what happens is, you stand on one side of a counter and then there’s your opponent on the other side of the counter. And it’s as if you’re in sort of a game or a sport where you’re trying to get your license plate or a driver’s license and they’re going to say, “Oh yeah, you don’t have an up-to-date inspection certificate for your car. So get out of here.” Right? It’s like a volleyball game, practically. And it’s you against them.

Now what if you change the rules and and what if you said, “You guys are both on the same side. Your goal is to get them that driver’s license or that license plate that they need.” And so instead of just saying, “You don’t have the right inspection,” what if you told them, “Look, this is what’s wrong with the certificate that you’ve got. It’s either out of date or it’s from the wrong state, or whatever. And this is where you would go to get the inspection that you need. Right? And let me look at all your other things while I’ve got you here — and if there’s anything else you need, I’ll tell you what you need so that the next time you come, it’s going to be a slam dunk for you.” What if it wasn’t adversarial? What if you guys were both on the same side?

“What if you guys were both on the same side?” It’s a good question, don’t you think? Look, I’m not saying Mark Gardiner’s example is necessarily fair to the D.M.V. Nor am I saying that Trader Joe’s should win the Nobel Peace Prize. But, it does strike me that a lot of interactions in the modern world are set up to be more competitive than they need be, and that the benefits of collaboration are often undervalued. I think back to an interview we did with Microsoft C.E.O. Satya Nadella, who has been reversing Microsoft’s longstanding policy of treating tech rivals like Google and Apple as pure rivals. And instead, sometimes partnering with them.

NADELLA: [From “It’s Your Problem Now”] Nothing can be taken for granted and there’s no such thing as a perpetual-motion machine. What you have to do is be good at being able to refresh yourself at the crucial times.

So if you had the choice, would you have Trader Joe’s run the Department of Motor Vehicles? And maybe even — I’m not serious here, except, maybe I am? — would you have them run America? Or at least would you try to export some of their collaborative, frugal, don’t-take-yourself-so-seriously methodologies? Michael Roberto, the business-school professor who has analyzed Trader Joe’s, warns it’s not so easy. That it wouldn’t even be easy for another grocery story to replicate the Trader Joe’s experience:

ROBERTO: To do what they do, you can’t just hire the same people they hire. You have to emulate the private-label strategy. The real-estate strategy. The pricing. The quirky culture. And it’s often the soft things. Not just the kind of people you hire, but the way you train them and the culture you create. I mean, we can build a store that looks like a Trader Joe’s. But when we have people walk in, can they have the same experience? Well, that’s very hard to replicate.

Fair enough. And, again, I don’t mean to heap undue praise on a grocery chain just because they’ve found a way to make their appealing food cheap and treat people pretty well along the way. But I will say this: we spend a lot of time on this show, and in modern society at large, pointing out problems and failures and sundry idiocies. It’s nice, once in a while, to come across an institution — even if it’s just a grocery store — that seems to work well, for several constituencies on several dimensions, and to see what can be learned from it. If you have an idea for a future episode about something else that’s working well, and what we can learn from it — let us know, would you? We’re at radio@freakonomics.com.

And if you’re dying to learn a bit more about how Trader Joe’s works, check out the episode that the podcast Household Name did about two-buck Chuck, the famous cheap wine beloved by Trader Joe’s fans. You can find it wherever you find your podcasts.

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Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Alvin Melathe. Our staff also includes Alison Craiglow, Greg Rippin, Harry Huggins, and Zack Lapinski. Our theme song is “Mr. Fortune,” by the Hitchhikers; all the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.

The post Should America Be Run by … Trader Joe’s? (Ep. 359) appeared first on Freakonomics.

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