My Advisor Told Me to Get Out of My Low-Cost Index Funds- Money Q&A

Transcript:

On this episode of the personal finance podcast, my advisor told me to get out of my low cost index funds. What do I do? What's

up everybody. And welcome to the personal finance podcast. I'm your host, Andrew founder of master money. co and today on the personal finance podcast. We're going to be going through a money Q and a with a bunch of your questions. If you guys have any questions, make sure you join the master money newsletter by going to master money.

co slash newsletter, and you can ask your questions there. That is the best way by far to get ahold of me. And if you want to help out the show, consider following us on Spotify, Apple podcasts, or your favorite podcast player, and don't forget to leave a five star rating and review on Apple podcasts, Spotify, or your favorite podcast player.

If you are getting value out of this show, can I thank you guys enough for leaving those five star ratings and reviews? They truly mean the world to us. And if you want to watch this on YouTube, we have the new studio built out so you can go to YouTube, uh, and watch it on the Andrew gin Cola, YouTube channel.

We have all our YouTube videos there. In addition to all of the personal finance podcast episodes. So you can watch those on there as we go through this process. Now, today we're going to be diving into a bunch of your questions. The first one we're going to be going through is someone had. Their financial advisor tell them to get out of low cost index funds and go into a different form of indexing, which is going to be a very interesting question.

We're going to dive into that. Uh, number two is the differences and the pros and cons between recasting versus refinancing your mortgage. This is a fantastic question. Uh, and if you don't know what recasting your mortgages, we'll dive into that as well. Number three is should I invest more when I'm in college?

Uh, and this person is in college. They have some internships. They have a bunch of cash that they've been saving up. Should they be investing more or saving that and putting it aside for an emergency fund? We'll talk through that. And then lastly, uh, the question is there's a lot of budgeting apps out there and how do they protect their data with third party budgeting apps?

So that is going to be question number four. And that's a fantastic question. It's what I think about a lot as well. So I have a lot of Thoughts on that. And so, um, those are gonna be the four questions today. Now, one thing I wanna note at the top of this episode is there was an episode that we did that came out on 7 29.

If you're listening to this Way in the future, 2024, um, that a listener actually brought up, and I'm so glad they brought this to my attention around the 20 to 21 minute mark. They said that you state that the Roth 4 0 3 B has RMDs, however. Unless I misunderstood, I believe any Roth accounts that are treated the same and starting with this year 2024 no longer require RMDs.

Is that wrong? Are there further associated nuances between the Roth 401k and the Roth 403b? So there Absolutely correct. And so I went back and I misstated that portion of it, uh, in the episode. So this is really, really important to understand for a lot of people. And I'm so glad they brought this up. So as of 2024, thanks to secure act 2.

0 Roth 401ks and Roth 403Bs are no longer subject to RMDs during the account holder's lifetime. And this changes align the treatment of these accounts with Roth IRAs, which is really important to note because that is a big determiner, which is really important to note. So I am so glad you brought this to our attention here because that was one thing that I need to go back and clarify is that starting this year, the RMDs will end on those.

So that's really, really important to understand. Before we dive into this episode. So just wanted to correct that we will always, always, always correct anything. You know, I, at times we'll get things wrong. And so I want you to make sure that you are double checking on stuff like this. And I cannot thank you enough for bringing that to my attention so we can let everybody else know as well.

Um, is that change did come up for the RMD. So really, really appreciate that. And now let's dive into the four questions. All right. So the first question is recently my Schwab representative advised me to diversify into bonds and non large cap stocks. Specifically, he proposed liquidating a hundred thousand of my existing investments to open a Schwab personalized indexing, MSCI, EAFE international account, and buying SWQ.

tax free bond index fund with my non tax advantage Schwab account. I am hesitant to invest in a managed account, but he showed me that the account has recently gleaned 5 percent net returns after fees, while showing a 9 percent return for tax loss harvesting. Is this a bad move? Should I stick with my current portfolio of 90 percent large cap index funds or buy some individual bonds and add this managed account?

So Heidi, this is a fantastic question. A lot of people are going to come up. Across stuff like this. And at the beginning of your question, you actually stated that you like investing in low cost index funds, which is absolutely amazing. And so I want to kind of dive into this and talk through a little bit of exactly what you're coming across here, because most people will see somebody say this to them and throughout their lifetime.

And the way that you have to assess this Is you have to look basically one at your investment plan. So you started off with an investment plan of looking to invest in large cap stocks, things maybe like the S& P 500 or similar investments just like that. And so you started with this investment plan. Now making these adjustments doesn't make sense for your own personal investment plan.

That's kind of the first thing I would think through is do making these adjustments actually qualify for exactly what I want to be doing in my investment portfolio. But I think you know what I'm going to go into here in a second, because you have an actively managed fund that is being recommended to you.

Now, why would an advisor actually recommend an actively managed fund? Because typically advisors are going to make more money on an actively managed fund than they would if you went out and bought a traditional index fund. Why? Because there are fees for Flying around left and right on these actively managed funds.

And so when this happens, it is incredibly important to understand what the fees are in association to these actively managed funds. Now, if you haven't heard our episodes talking about how fees can impact your portfolio, it is something that'll be a major, major difference. I'm going to talk through it here today as well, just a little bit in this question, because I think it's really important to reiterate to a lot of people.

Fees will. Absolutely destroy your portfolio. A 1 percent fee. We could be a detrimental thing to your portfolio longterm. And most people don't understand how big the 1 percent fee impact is. And I'm going to go through it today. So these have a ton of different layers. And so let's take Vanguard data, and I just pulled really quickly Vanguard data from 1926 to 2019.

And if you go from Vanguard data 1926 to 2019, in fact, we've had more runs since then, so it's even higher than this. But you can look at an 80 percent stock and 20 percent bond portfolio, and it has returned 9. 7 percent over the course of that time frame. Now let's imagine That we invest 1, 000 a month over a 40 year career.

Okay? So let's say you're getting 1, 000 a month into your S& P 500 fund. You're probably investing more, but let's just say you're getting 1, 000 a month into there. Now, if you did this over a 40 year career, the beautiful thing about this is at a 9. 7 percent rate of return over that time frame, you're You'd have about 5.

8 million in that portfolio and compounding is an absolutely amazing thing. It is a beautiful thing to see how much time plus investing your dollars will allow money to compound over time. But now let's say for example, your advisor gets you into that actively managed fund and that advisor takes a 1 percent fee off the top when you go and start to get into that actively managed fund.

And let's say that actively managed fund. It's the same exact returns as that 80 percent stock and 20 percent bond portfolio over the course of that time frame. And that advisor is taking 1 percent for themselves and let's just say you get the same exact return 9. 7. So what this is going to do is this is going to take your 9.

7 percent rate of return. It's going to drop it down to an 80 8. 7 percent return because 1 percent is going to your advisor. And the result of this is your portfolio is going to end up being 4. 3 million. That 1 percent fee, just a 1 percent fee cost you 1. 5 million. million dollars. That is 25 percent of that portfolio was just taken away over the course of 40 years because you paid an advisor assets under management of 1%.

It is so important to make sure that you watch out for fees in your investment portfolio. And I'm going to say this until my lungs turn blue because the fight against assets under management AUM is what they're going to call those fees is really, really important, but there's a second layer. Let's say for example, the advisor didn't take much of a fee at all, but let's say for example they had a second layer and they invested this into actively managed mutual funds, which is probably what is happening right now, which also charges a 1 percent fee on that expense ratio.

This would further bring down that portfolio to 3. 2 million. So the advisor has a 1 percent fee. Portfolio has a 1 percent fee. That's 2 percent fees. It brings the portfolio down to 3. 2 million. That 2 percent fee wipes out 40 percent of your portfolio value by the time you hit retirement age, millions and millions of dollars.

And this is why we say investment fees are one of many. Million dollar decisions that you need to make with your money. You don't need to be focusing on cutting out lattes and cutting out your avocado toast when you go out to eat or making sure that you save 3 here and there, what you need to be doing is focusing on the massive decisions that make a massive impact on your portfolio.

You could save money on coffee every single day, and it will not even make a close contribution to what this will. And so making sure you are focusing on those million dollar money decisions is going to be massively impactful. 1 percent fee on every 100, 000 is 1, 000 per year. And that's 1, 000 you could be investing per year instead.

So every million is 10 grand extra that you could have had invested. That could be growing and compounding. And that's just the opportunity cost associated with that money. So you got to make sure that you are thinking through that. And for the most part, I think that you know this when we're talking to this question, I'm more so just talking to everybody else as we go through this, because I think it's really important to consider.

Consider that. Now, actively managed accounts are just things that I am not interested in whatsoever because low cost index funds, ETFs do invest. Now you can do whatever you want. You can look at your risk tolerance and look, assess your personal risk tolerance. Number one thing you need to do. You can talk to your CPA and your team over there.

What I would really do is think through the fees because actively managed funds have so many fees. Now, why do they have so many fees? Because if you think about actively managed funds, they are actively trying to beat the S& P 500. Now, of the folks who beat the S& P 500, of the professional investors that can do so, It's about 90 percent of them do not beat the S and P 500.

And of the 10 percent that do, they are not the same year in and year out. So they have this massive team. They have this massive high rise in the middle of New York city that you are paying for with your investment fees. And they still can't beat the S& P 500. The facts are there and the statistics are there that simple low cost index funds historically have outperformed the market.

So I would just consider all of those facts and statistics and look through what you know, because you know those stats and statistics. That's why you started that asset allocation and that plan. And so I think it's really, really great that you're actually making sure that you're doing your homework and thinking through this as well.

Now, if you want to add more bond exposure, for example, Warren Buffett portfolio is a great portfolio. It is one that I absolutely love. And 80 20 portfolio is amazing as well. Uh, and those portfolios are 80 percent stocks, 20 percent bonds, 90 percent stocks, 10 percent bonds. Warren Buffett has his family's money in 90 percent S and P 500 index fund and a 10 percent total bond market index fund.

That's what he has it in. The best investor of all time has all of his family's money in that. And so this is where if you are not going to be looking at something that you're really gonna be on top of these numbers. Then the low cost index funds is always, always, always my go-to now you can still tax loss harvest with index funds and so because of that, moving it over to something else doesn't really make sense.

You can still do tax loss harvesting. When index funds will go up and they will go down. This is part of the market. It's the part of the ebbs and flows of market. So just moving it over for tax loss, harvesting makes absolutely no sense. Tax loss. Harvesting honestly is not even a requirement for most investors.

And so this is something that I would not even be interested in. Sure. It can be very efficient and a CFP. In your corner that you pay a hourly rate is great for that stuff, but paying assets under management and paying a percentage fee or paying a percentage fee for your investments, that's outside of 0.

30 percent is just not even worth it. 30 basis points or less is always what I am looking for. So for me. You have a couple of decisions points here. You can stay the course with low cost index funds. You can add some more bond allocation. If you want to, if your risk tolerance is saying, I don't like volatility whatsoever.

I would like some more bond allocation in my portfolio. Then you can definitely consider that at that point in time. And then you can evaluate the managed options. I personally, if I was in that situation would not be interested in those management options. Now, this is not. You know, investment advice or anything else.

You got to look at your own risk tolerance and your own portfolio. But that's what I would look at is these fees are not worth the return that you're going to get out of these funds and they're going to try to pitch. Hey, over the course of the last year, these funds got X amount of dollars and it's going to keep going up and up and up.

They want you to think that because they're going to make more money. A lot of times I always think about what people's incentives are and their incentives are to get you into more of these funds, unfortunately, so that's how I would think about it. And I think it is amazing that you were thinking through this and thank you so much for sending in the question.

It is fantastic what you have already done thus far. You kind of explained some of your portfolio at the beginning of this question too, and it Awesome. Awesome. Awesome. That you have your goal in place. You were on your way to retirement. And the cool part is, you know, you said you're about 40 percent of the way to retirement and you're at the point in time now where it's going to start to accelerate because you have this portfolio together and you have it built up.

Your portfolio is going to start to accelerate towards retirement. And so I cannot wait to see what you do. Congratulations. And if you have any other questions, please shoot them over to me. All right. The next question. Is Andrew huge fan of the show and appreciate all you do to help people on this journey.

Well, thank you so much for listening. I truly appreciate each and every single one of you listening as well. So thank you so much. Can you go over the pros and cons of recasting your loan on a mortgage versus refinancing? Assuming interest rates drop. Curious to see if one option is better than the other.

And so this is a great question and we haven't actually gone through a ton of recasting a mortgage on this show. And we have talked about refinancing a little bit, but recasting a mortgage is not something we've gone into. So if you don't know what loan recasting is, um, what it basically is, is it's making a large one time payment towards the principle of your mortgage.

And once you make that large one time payment, the lender is actually going to recalculate your monthly payments based on the new lower principal balance. Now the interest rate and the loan terms when you recast a mortgage remain exactly the same. So you can have interest rates at the same exact number.

Um, and basically you are just paying it down faster and lowering your monthly payments over time. Now, this is something that is great for people who are making a bunch of different transitions. We'll talk about the pros here in a second, but a lot of times, one reason to do this is say you just want to lower your monthly bills in a certain scenario.

Maybe you're making a life change. So a great reason for it to do this is maybe one of. You or your spouse is going to be staying home with the kids and you have young kids, for example, and so you could recast your mortgage to lower your monthly liabilities so that you have more cash on hand and reduce some of those risks.

Now, some people like to do that for that reason. So that's just one of many reasons why you could do it. Also, if you're like approaching retirement age, for example, you have a ton of cash on hand. You don't want to have as high of a mortgage payment and you're still going to carry a mortgage in retirement.

That's another reason to do that. So big life changes that would make a ton of sense. Maybe you're starting a business and you're going to go full time in that business and you don't want to have a ton of liability on hand. And so you're trying to reduce that liability. So there's a bunch of pros to recasting.

One is lower monthly payments, and you can reduce your monthly payments by lowering that. Principal balance and just having it recast to its cost effective. So typically mortgage recasting only involves a small fee. It's not something where you're paying a ton of different closing costs. It's often around like 250 to 500.

You need to try to negotiate that fee. That is one thing that you definitely can negotiate, um, which is significantly lower than closing costs that would be associated with refunds. financing a mortgage. And so closing costs are really a huge factor when you look at refinancing because they can kill you on some of that.

There's no credit check for recasting a mortgage, so they're not gonna pull your credit. If you have any credit issues that you had after you got your loan, they're not gonna pull any credit whatsoever. So you could recast that mortgage and lower those monthly payments. And it's very simple process. It's a very easy thing.

It is straightforward. You're just lowering your principle. So that you can lower your payments. And so this is a systematic way where if you're going to make a big lump sum, it's probably worth the time to look into this. Say, for example, you got a big financial windfall and you want to put it towards your mortgage because your mortgage interest rate is like eight, 9 percent and you got it right after COVID when the interest rates just started to skyrocket.

And maybe you just want to lower that monthly payment. Uh, that would be one reason to do that. But interest rates, if they do make adjustments, There's a better way to do it. I think we'll talk about here in a second. Now the cons are, there are no interest rate changes. The one I'm talking about here, there are no term changes, meaning that the loan term remains unchanged.

You're just lowering the payments to make additional principal payments. Like typically when you make a larger payment towards your loan, you could lower some of the terms and then large cash outlay, meaning that you have to take a bunch of your cash. And don't take any emergency fund cash for this or anything like that.

But you have to take a large lump sum of cash and put it towards your mortgage instead of you could put it towards investments or other things that could be better off for you. Now, let's look at the pros and cons of refinancing a mortgage because this is important for a lot of people to also note and refinancing.

If you never heard of it, we talked about a lot in this podcast because for a lot of people, these interest rates might make some adjustments over the course of the next couple of years. And so refinancing involves taking out a new mortgage. To pay off the existing one, and when you pay off that existing one, you can change your loans interest rate term.

So a great example for people that would potentially want to do this is let's say, for example, got a really high interest rate. Okay. And you've got a high interest rate and then all of a sudden COVID hit in 2020. And those interest rates dropped down to two and a half percent. So you had a, like a 7 percent interest rate and they dropped the two and a half percent.

Well, that would be a great reason to refinance your mortgage because you're lowering your interest rate. interest rate, which is the first pro you can lower your interest rate with refinancing. And if it's drastic enough to offset all the costs where you can save enough money to offset those costs, uh, refinancing will secure that lower rate, reducing those monthly payments overall, which will help you a ton.

And so I like refinancing because a, it does one reduces your payments because you're not paying that money to interest, which is just basically throwing money away. And two. You can reduce that interest rate so that you save money. So there's a win win scenario here. You can also do this and refinance if you want to adjust the terms of your loan.

So say you want to go from a 30 year loan to a 15 year loan. You bought a house and it was something where you had a 30 year loan for a long term and all of a sudden you decide, hey, I actually want to go to a 15 year loan. It'll. Force me to pay off this loan faster, then you can definitely go out and do that.

And you can save more on interest by paying off your mortgage faster. If that's something you're interested in, if you're a mortgage free person, Hey, more power to you. It's not the most optimized way to get to wealth, but it's also a way that a lot of people enjoy and I have no issues with it. If you want to pay that off.

Uh, also if you want to switch loan types, like maybe you have an arm right now, or you have an adjustable rate mortgage and you want to switch to a fixed rate mortgage, cause you just didn't understand the difference between the two. I would always, always, always, when you buy a house, go to a fixed rate mortgage.

But if you can go to a fixed rate mortgage, providing more payment, you know, stability, that's another reason to do this. And that's another great reason to go out there. Or if you want to do a cash out option, maybe you want to take equity from your house that you need and do something else with it. We won't talk about the pros and cons of that right now, but there are reasons to do that.

And so if you went and did that, that would be something else. Now the cons, the biggest, biggest, biggest con to refinancing is. Is closing costs because closing costs are typically 2 to 5 percent of the loan amount. So this can be a massive amount of money. So the interest rate differential when you refinance has to be much greater than the closing costs are going to cost.

So you need to be saving a lot more money than the closing costs in order to do that. You also need to have the same loan qualifications. So if your credit score for some reason dropped, maybe you went through some tough times, your credit score dropped, this would not be the option for you. And it would also extend your loan term.

If you went from a 30 year mortgage, maybe you paid it down for a couple of years and you refinance back to a 30 year mortgage that would extend your loan term. So I would try to reduce that loan term down. If you decide to refinance your mortgage to either. Exactly where you were and or maybe even a shorter term loan so that you can get to pay off faster And so that's another option for you now recasting is great For people who have those covet interest rates Like for example, I have one of those covet interest rates for my interest rate It's like two and a half percent on my house So if I wanted to pay down my house, I would do a recast.

I don't want to change that interest rate Anytime soon, and honestly, if your interest rate is that low anyway, I do not want to pay it off anytime soon because I would rather invest those dollars or I could put them in a high yield savings account and make more money than I would be paying off that loan.

That'd be the last loan I would ever pay off personally. Now, if you hate debt, you want to pay it off. Recasting is a great option for that. If closing costs are a concern. Then recasting is also another great option. And if you have no need for that rate change, then recasting is perfect. Now, when would I choose refinancing over recasting?

One, if market rates have dropped significantly and I need to drop my interest rate, that is definitely one that I would do. And what I would do is get one of those comparison tools online. There's online calculators that will help you kind of look at the differences between what the interest rate differential is and how much you could save every single year.

Those are fantastic to kind of run through. And so I would look at that first. If you have a desire to change your loan terms, meaning that you want to go down to like a 15 year note or you have a 15 year note and it's getting kind of overwhelming to make that payment. You want to go to a 30 year note.

That's another option. So you can do that to refinance or if you have a need to cash out and you want to take some cash out of your equity and you want to do something else with it, that would be another option. So if interest rates have dropped significantly, that's when I would refinance. But if you don't need to change your interest rate, I would recast because that is a, just a better option to.

Keep your fixed rate in one spot. So really, really great question. And glad we kind of went through the pros and cons on this. Cause I think it is really important for a lot of people to know these options. And so keep me posted. Let me know what you think, but that's exactly how I would think about it.

So if you're worried about rates adjusting over the course of the next couple of years, Then I would do the refinance as long as it outweighs the closing costs. All right. The next question is hi, I'd like to get your advice on if I should be investing more right now, or maybe putting it towards something else.

I'm 21 and currently in college where I don't currently and won't have any debt after college, which is. Absolutely fantastic. Amazing that you could start your life that way. I also don't pay for my rent and my parents help with some everyday things like food and gas, but not all of it. So, I don't have too many monthly expenses.

I have around 22, 000 in a high yield savings account and 8, 000 spread between stocks and a Roth IRA I started last year. Congratulations. That's absolutely amazing. I was wondering if since I don't have any big payments for the near future, should I dump more of my savings into the Roth or stocks? The only thing holding me back is thinking about those large payments I may have in the next 5 to 10 years.

And my mind thinks if I have enough money in savings, I don't need to take out loans for stuff such as a car. Or should I not worry about that now and take advantage of compound interest? So, first of all, congratulations for being in college and even thinking about this stuff. It is absolutely amazing, um, that you are thinking through these options.

And there are a bunch of key considerations here, but here's how I think about this. Number one is you mentioned that you're worried about payments the next five to ten years on specific things. I would not worry about that. In fact, we don't want you keeping cash on hand for anything longer than a five year time horizon.

There's no reason to kind of keep that in cash for that time horizon. Now, if you want to, like if you're saving up for a mortgage or something like that, and you want to have the down payment ready, um, that's something that's down the line. And so for the most part, I wouldn't be keeping this cash on hand to go out and buy a depreciating asset, like a car or something like that, especially in these prime years, you are so early on.

And these dollars are so incredibly valuable at your age that really One of the best options here is a, make sure you have a little emergency fund in place. Don't take all of it and start investing these dollars, but have six months of your college expenses saved in an emergency fund. And as your life progresses, and as you start your real job, then you can build up that emergency fund slowly over time and continue to grow it with the one three, six method, which.

We just talked about in a previous episode. So you can go through the one, three, six method and make sure you have that emergency fund saved up in that. If you guys haven't heard that episode, just make sure you check that out, uh, and go through that process, but make sure you go through one, three, six, and we talk about how to continually build that up after that though, once you have that in place and you're at that three month mark, it's time to start investing those dollars and getting those things moving and rolling and starting to grow.

Because every single dollar right now that you invest is going to grow and compound to massive amounts of money. In fact, depending on how old you are, if you're in college and you're 21 years old, for example, every dollar you invest is worth over 90 in retirement over the course of the next 40 years.

And so these dollars are so incredibly valuable when it comes to that. So you could think you could go buy a 5 item right now. And that 5 item is going to be worth like 200 in future retirement dollars. So it's incredible what your money can do when it's invested right now. And so for me, what I would look at is investing more cash on hand, getting those dollars working because you don't have many expenses right now.

And you are lucky enough to have parents in your corner who are helping you with some of your expenses. And so, because you have those two options, I would definitely get more dollars invested. Now, if you have a future large purchase that you know you're going to be buying within the next three years or five years, then maybe you keep some of the cash on hand aside and continue to save up for that over time.

But for the most part, I would not be worrying about that at this point in time. And as your life progresses, because your life is going to change a ton over the course of the next five years, as your life progresses, you adjust your savings goals based on that. But you are never going to regret investing money early.

I promise you I've never invested a dollar and been like, gee whiz, I wish I never invested that money. Because I know how valuable dollars are to get them invested. They can work so much harder than you can. And the more that you can get them invested, especially at your age right now, I didn't have that much money invested at that age.

And so if you can get your money invested, you know, if you had another 10, 15 grand that you started to invest, That'd be way more than I ever had at that age. And so it's something that I think that could be really powerful for you for your time horizon here. So you said you're 21 years old. So your money would be able to grow just a massive amount.

It'd be, you know, every dollar is worth over 90. So really, really powerful stuff as you go through this. So keep that emergency fund going, get the six months in emergency fund of whatever your expenses are right now. If I were in your situation, I would increase contributions to my Roth. Uh, and then from there, then I would grow to other areas if you can, and then just have it in diversified portfolio.

So that's how I would think about that. And amazing that you were thinking through this process. Cannot wait to see how much wealth you build because you are taking the right steps right now. Uh, and it's absolutely incredible. So keep your questions coming if you have any more, and I appreciate it. Um, and I appreciate you being a listener to the show.

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I've been listening to your podcast for a while and really love it. Really appreciate all the guidance you provide. I have a question. I was hoping you might answer this on the podcast if you can. Well, here we go. We're going to answer on the show right now. I frequently heard you mentioned a tool Monarch money on the podcast, and I know they are a sponsor of the show.

Yes, they are. And they're amazing. I've looked into using Monarch. It seems amazing. But my reservation is just giving a third party site access to all my financial information. For example, if the site was ever hacked, would it be possible to discuss how you gain comfort around this? So this is a wonderful, wonderful question.

And one that's I think a lot of us need to be thinking through before we give any of our information away to anybody else. And so we need to think about security measures and considerations with these third party sites. So before you even give any information to a site, and this is why we partnered with Monarch Money because first I was looking for a budgeting tool to make sure that we could automate your personal finances and Monarch Money checked that box.

They can automate pretty much everything. But then in addition, I wanted to make sure they had security measures in place. So Monarch money, what they do is they, uh, have data encryption and security. So like many other financial tools, they use bank level encryption to protect your data. The founder of Monarch money was actually a previous employee at mint, and he was pretty high up at mint.

Um, and then he founded Monarch money. So he knew how to kind of utilize some of this bank level encryption to protect your data. Um, and this means that your information is encrypted both during transmission And while at rest, making it extremely difficult for unauthorized parties to even access this.

It would take like some top level people to access this. But secondly, your financial data is also only on read only access. So banks will only allow these things to have read only access, meaning these platforms can only have Read only access to your financial accounts, similar to like read only access to a spreadsheet.

This means they can view your data, but they cannot perform transactions or make changes, reducing the risk of unauthorized access. And they use a platform called Plaid and a couple of others for that, um, that allow them to do that data encryption. Now they also have data, privacy and control settings. So when you go in there and your budgeting app should have this.

So I'm kind of talking through this as if you're using a different budgeting app, you need to check off these boxes to make sure they do this, but they have control over what data you share with Monarch money. So for instance, you can choose which accounts to link and you can unlink them at any time, deciding to stop service.

If you want to, um, you do not have to continue linking those specific accounts. And then they have some really good privacy policies that you can review. I always read through all that stuff as well. Okay. But they also have two factor authentication protection. Everybody should have that on. A lot of people like to turn it off because it's too many steps, but you need to have that two factor authentication process on because that adds the extra layer of security, which this would be, you know, three things that they have in place.

The read only access, the data encryption, two factor authentication. And so that's really, really important to understand as well. And then they also have regulatory compliance to go through where the regulatory agencies will come to them and they have to go through all these protection agencies at the start.

So getting comfortable with using these, here's kind of how I always do this with tools every single time. This is my four step process. Okay. One is I start small. If you're worried about it, I start really small and start to monitor by just linking a few accounts. So the first thing I did was I just linked my smallest checking account that I have on hand.

And usually my checking account is just a quick pass through, so everything kind of passes through my checking account. The way I operate my finances is that's all a checking account is there for. It's to allow money to pass through, okay? So we have that on the hand of just a pass through account. So I just linked my checking account and I can start monitoring transactions and it's going to help me kind of monitor through.

Then I can start linking other accounts, savings, whatever else you want to start linking. But again, as you start to realize these are only on read only access because of these third party authentication apps, it's really important to kind of see that a it's encrypted basically. So they really cannot do much.

On those, what you have to worry about is that they can get into your bank. Your bank is more so what they need to have, uh, more so protection on that. So they can just kind of read what you're doing is essentially what Monarch money does. And so what I do with Monarch is I start really small. Two, is then I will start to diversify and add more in, uh, The cool thing about mark is you can do things like track your net worth.

Now, too, in their new net worth tool, you can add Zillow data. And I know Zillow data is not perfect every single time, but you can actually add in Zillow data to add to your network statement on your house and it'll, it'll adjust in real time. So if that would stress you out, don't do that. But if it doesn't stress you out, I love having that available.

You can add your car VIN numbers in and it will actually track your car's value over time with like the car facts with the blue book value, which is pretty cool. And they use a third party to do that. And so there's a lot of cool diversification options that you have with it. Third thing though, I do. Is I monitor their security measures.

So I kind of monitor specifically with like the tools that I'm using a lot. So Mark is one that I use a ton right now. And so because of that, I kind of monitor their security measures that they're utilizing. Uh, you can ask customer service their entire their You know, security measures so that you can have some additional information on that, and then I make sure I look at backup plans and things that they have available as well.

So that's kind of how I do it. I start really slow, and then I slowly will add additional accounts if you're super worried about that. And so, because of the data encryption, because it's read only, I am much more comfortable with that information than I would be. Um, if it was something that, you know, they were directly in your bank account, if you're budgeting directly in your bank account, your bank is the one that you really need to worry about in terms of people getting access to, because there's nothing they can actually do through Monarch, um, but plaid or your bank, those are the two that I would make sure that they have the additional data encryptions as well.

Now, ultimately though. If you are totally not comfortable, I get it. And that's one thing where for a lot of people, it comes down to how comfortable you are in your risk tolerance. Some people may just not have the risk tolerance to allow third party apps to have access. And so you need to utilize a spreadsheet, a spreadsheet is going to take a lot more work, but if you are more comfortable with that, then you need to go that route.

That is the way to go. You do not want to be stressed around your finances and kind of worried about this stuff in the back of your head. Uh, is somebody going to steal my information? If you're really, really worried about that. Uh, please use a spreadsheet. Make sure you use that spreadsheet. These tools are there to make your life easier and to automate the process, which is what I love about them.

But that's the risk I take is making sure that they at least have my login on plaid in order to be able to go through the process of linking my bank account. So my transactions come through, but it is read only access. It is encrypted data. authentication on as well. With your bank and with them so that you can have just additional security and peace of mind.

That is how I would look at it. And that's how I became comfortable with it. So, uh, I really, really appreciate the question. A great that you are thinking through this process. And it's really important that people think through this as well. So listen, thank you so much to everyone listening to this episode.

I truly appreciate you taking your time and investing in yourself. That's exactly what you're doing by listening to this podcast is you are investing in yourself. So Thank you so much for listening. If you guys have questions again, join the master money newsletter, master money. co slash newsletter. And you can reply to any of those emails that come out every single week.

Thank you again for listening. And I hope you have a wonderful week. We will see you on the next episode.