There are a lot of fintech companies doing hyper-personal financial management. Certainly Acorn, Stash, and others like Wealthfront, Betterment, etc. etc. etc. The ideas implemented are simple but amazingly cool.
The trick being used is that the companies will either by means of being at all of your financial purchases via a debit card, or otherwise have access to your spendings through yodlee means. Then at time of each transaction they can bring about an investment. Implementations are different between vendors and I haven’t found one that I really like, but essentially there are two ideas behind this:
- the investment is made to the company you spent money at. This makes sense because in making a purchase, you are in some sense increasing the value of the company, and buying shares is just a way to recuperate the lost future investment gain on the spent money. “Invest in what you use/buy/love.”
- the investment is made as a percentage of your spending. If we assume that you use toilet paper and drink coffee today, it is reasonable that you will do the same in 10, 20, 30, maybe even 50 years. Given any rate of return, you can calculate how much money you have to put aside to eventually be able to make that same consumption at the same frequency without adding more money.
- Use completely automated process in the investment process to execute investments according to a modern data-driven, hyper-personal, scientific, effective and safe design.
So let’s say I drink a $5 Starbucks coffee daily. My financial advisor can guarantee with his life that they can provide a 10% inflation adjusted annual return on any and all investment. The setup is then as follows: the fintech company will make a withdrawal an additional 15% of each purchase from my balance and immediately invest the money. So, that’s $5 To Starbucks and $0.75 to investments for a total of $5.75 out of my bank account. That’s pretax, but you can also include tax in the calculations and pay future sales and income taxes as well. The present calculation do not factor in tax. If we keep doing this daily, then in 20 years, we will have accumulated enough money to drink a coffee every day forever. NB, the design is for the daily per-purchase-investment into the coffee fund to accumulate to a level when in retirement you will no longer need to grow the coffee fund, it’s earnings in investments will pay for all future coffee drinking.
You can plug your tolerance for saving rate and what you feel is believable sustained inflation-adjusted return on investments in the chart above to see how long you’ll have to save before retiring to the same life style you have today. If you let your imagination run wild a little bit and believe in a stable accumulative return quoted in inflation-adjusted annual percentages yield, then saving for retirement actually doesn’t seem that bad! 20 years is how long I’ve worked for already! If I thought of this when I was a fresh college grad, I’d be sipping on free coffee by now! But it’s not too late now, I can still work another 20 years and get my free coffee thereafter.
There are also other issues like the dollar cost averaging effect and the need for rebalancing the investments. There seem to be some additional games that you can play to increase investment risk as you get older because the fund will not need to sustain you caffeine needs for as long as forever. This is opposite of all investment advise you received today. Normally you are asked to reduce risk of your portfolio when you draw nearer to death. But in reality, if you are sure that you don’t have to pay for free coffee forever, the equation changes and suddenly you can take on much more risk with the extra coffee money.
Another concern is you may have change in taste or lifestyle expectations, one should analyze the directive to prepare for the same cup of joe for the rest of your life. For another example, a woman may not need to buy as much feminine hygiene products after menopause. The proposal uses your every spending habits today as a surrogate for measuring your future life style. But this may very well not be something you look forward to retirement. But these are more advanced financial, psychological, physiological and philosophical topics reserved for homework or future blogging.