So You Got A Stimulus, Now What?

By now, most Americans have received a boost in the form of a stimulus, in this case, free money from the federal government to combat financial woes stemming from coronavirus. Now that you have money you didn’t have before, what do you do with it?

The most likely option is to spend it, as intended, to stimulate the economy. However, now is not really the time for an impulse purchase, so spending it on practical things like rent or food makes the most sense. If you are one of the 40 million filing for unemployment, spending your stimulus on basic needs becomes a clear-cut choice.

The next option is to save it, that is, if you have sufficient income to meet existing financial obligations. For those with an ample emergency fund and no need to dip into it, it might be time to invest more money towards your long-term goals. If you don’t already have a comfortable rainy day fund set aside, then add that stimulus cash to your rainy day fund.

For those not needing to rely on stimulus money, consider sharing it with others or donating to a cause you believe in. Perhaps it’s the mom-and-pop store you frequented before quarantine or the religious institution where you now join weekly service through Zoom or a non-profit organization that is suddenly without as many donors as before. No matter who you give to, your support not only provides for them, but it also lifts the economy as a whole.

Share, Save, Spend. Sound familiar? These are the 3 financial pillars we frequently talk about. You don’t have to choose just one either. You could use that stimulus money in two ways or all three! For those who did not receive a stimulus check or received less than the full amount, that’s ok. The 3 S’s still apply to you too, even though you have to rely on your own pocketbook.

While a stimulus provides a nice boost, the key is to not depend on having one. That way, if and when you get a stimulus, you have choices!

Homework: Do some research to find out what Americans did with their stimulus. Does this match your predictions?

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Spare Change

In the modern day of cashless transactions, cash still remains a popular mode of payment. According to the US Federal Reserve in 2019, cash ranks as one of the top two payment methods, used in 26% of transactions, just behind debit cards (28% of transactions). For children who don’t have a bank account yet, cash probably accounts for 100% of transactions. If cash is used so often, counting money is important for everyone, whether spending money or receiving money.

Take the following QUIZ to see how your children do when handling cash:

  • Do they know how to limit spending to what’s on hand? (i.e. Can $15 cash buy a $20 toy?)
  • If they get change back from a purchase, can they quickly verify that they received the right amount?
  • Working the cash register, can they count money quickly to make sure that the customer paid correctly?
  • If there are no dollar bills but a lot of quarters available, can they produce the right amount of change?

If your children need to brush up on these skills, or if they are just starting to learn about cash, below are several ideas that might help.

Ages 3-6: Sort change by denomination. Use clear containers/jars or an empty egg carton to separate pennies, nickels, dimes, and quarters (or your own country’s currency, for international readers). Or whenever you have spare change, give them a coin and ask for the name of the coin and amount, letting them keep whatever they identify correctly.

Ages 5-9: Ever heard of the muffin tin coin counting game? Write small amounts onto paper cupcake liners (for instance, $1.10 on one liner, 88-cents on another liner, 63-cents on another liner, etc). Pop the liners into a muffin tin, and then provide a bunch of loose change for the children to fill each liner with the correct amount in change.

Ages 9-12: Now that multiplication and decimal numbers have been introduced, learn to add tax and/or tip. Looking at a menu, what can you order with $15, assuming you account for tax and tip? If you pay with $20, tally the change due using bills and coins. Take a handful of past store receipts, and calculate how much change you get back if you paid with the closest denomination of 10 (such as paying $30 for a receipt totaling $25.79).

What children can comprehend about cash depends on their age, but starting early will empower them to make their own decisions around money. When children become adept at counting cash, they can mentally tally against their budget when shopping or dining out. Keeping to a budget allows them to live within their means and save for the future. That’s why understanding cash is so important to becoming financially independent!

Homework: Try one of the activities above. For older kids who want an extra challenge, work with parents to decide on a spending limit the next time you dine-out or order food delivery. After everyone else in the family has selected from the menu, choose your own item(s) from the menu that will allow the total after tax/tip to remain under the limit.

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The Download On Deals

What does “saving money” mean? Setting aside money for the long term is typically how we define savings, but another important discipline for building wealth is finding savings when we spend money. When you pay less than full price, you are saving money. One transaction may not seem like much savings, but many transactions together add up to big savings.

Spotting deals can take some work. Fortunately, with some practice, it becomes easier. Here are tips to help you become a better spender, and by that, I mean a better saver.

  1. Read the fine print. Often, sales and coupons have exclusions, so make sure you read the fine print ahead of time.
  2. Have a plan. Just like writing out a grocery shopping list, circling items in the weekly ad or compiling all coupons before starting to shop will allow you to capture every deal.
  3. Stack those deals. One of the best feelings you get from shopping is when you stack a coupon on top of a sale. Qualify for a rebate afterwards, and rise up to the ranks of a pro shopper!
  4. Choose an alternate. If you’re not crazy about the brand name product, you can get more for your money with generic. Or go with a substitute, like buying groceries that are in season instead of ones that are not.
  5. Be patient. Sometimes the things you want are not available at a lower price right away, but you know the price will come down in time. If you can go without that item for a little longer, wait.

Although getting the best deal requires some effort, the satisfaction you get is worth it. Once you’ve had some practice, being a smart shopper will become second nature!

Homework: Set a spending limit to buy all the groceries you need this week. Involve kids by giving them $10 to purchase some of the necessary categories on your list. For example, if fruit is one of the categories, they can choose whichever fruit(s) will last one week. Challenge them to get as much leftover change as possible on the entire purchase.

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Needs Vs. Wants

This week’s lesson is a short one, but a very important one: Needs Vs. Wants. Everyone has both things they want and things they need. But when faced with spending a finite amount of money, needs come first.

Learning about needs and wants starts at a young age. The good news is that you can learn the difference without spending any money at all. Use everyday situations to guide your decisions. For instance, what will you eat for dinner? Instead of choosing only dessert, which you may want, pick an item from each food group you need: grains, proteins, and vegetables. Another example could be how you choose to spend your time. Are you doing necessary chores and homework or playing games or watching TV instead? We have needs and wants in everyday life. Knowing the difference and putting needs first will come in handy when it comes to spending money wisely.

Homework: Take inventory around the house or at a store, and identify which items are needs and which items are wants. If the difference between both is still confusing, there are many helpful kids’ videos on “Needs Vs. Wants.”

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“Playing” With Cash

With all the cashless ways to use money in this day and age, it’s difficult to show kids the value of a dollar. Substitutes just aren’t the same. Do you sense the same satisfaction from earning an extra $500 when it is deposited directly to your account instead of visiting the bank with a paycheck? Would you buy that $20 sweater if you only had $15 in your wallet vs. pulling out a credit card? When a friend pays back via Venmo for a coffee that you bought with your parents’ money, do you still return the money to your parents?

The old adage is true:

It’s never too early to teach kids about money.

Before children enter the world of direct deposit, credit cards, and Venmo, get them acquainted with cash. What do bills and coins look like, how do you make change, how do you get money, and what choices do you have with money? If your children are still too young to do math, play a game of “pretend” with them. Run through the following exercises with just $1 dollar. Wouldn’t you rather have children learn with $1 dollar than make mistakes when dealing with much more money later on? Exactly. Start NOW!

Exercise 1: From Earning to Spending

Ask your children to create an ad for a product or chore task that you can buy for $1 dollar. Pay $1 dollar once the product or service is sold, and then ask them to spend that $1 dollar on themselves, whether it be for food or a toy. Challenge them to spend $1 dollar on something they need (like lunch), not something they want (like candy). Maybe they can find a way to get both?

Exercise 2: Saving Money

Give 50-cents to your children, and ask them to hold onto the money for a week. Tell them that you will double whatever remains at the end of the week. Each day that week, tempt them with a treat, such as ice cream, and charge 5-cents for it. If they can hold onto the entire 50-cents for a whole week, you will match all 50-cents, so that they are rewarded with $1 whole dollar at the end of the week. If they are tempted into spending down to the last 15-cents, you match 15-cents, so they end up with only 30-cents.

Exercise 3: Borrowing Money

This exercise is easier with an allowance, so let’s play out that scenario first. As the creditor, you offer to lend 90-cents, if your children deduct 25-cents from each allowance payment for the next 4 payments (totals $1 dollar to demonstrate interest charged on the 90-cent loan). Do they take the loan?

If there is no allowance to repay from, opting into the loan means your children agree to do one extra household chore every week for 4 weeks. If that chore is missed in any of the 4 weeks, the “credit score” takes a hit, which means no more loans. Was the loan worth it?

Homework: Try one or all of the exercises above. What lessons did you learn?

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Allowance

April marks National Financial Literacy Month in the US, so why not take this time to learn (and teach) about money? It can be difficult to understand money at a young age because children cannot make money through employment like adults do. By the time children reach an age where they can work for money, they have already witnessed many financial transactions and have pre-determined values and practices around money. There is a void between when children form money habits and when they can start to earn money of their own. That is the case for an allowance — to fill in this gap.

Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance.

Just like money doesn’t come free for adults, children should “work” for their allowance, doing things like household chores or achieving good grades. Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance. Other than money that is gifted and the occasional lemonade stand (or passion project), an allowance gives children money of their own to manage.

Deciding on all the rules around an allowance requires some planning ahead. Here are some questions to think about.

  • Does the amount change every year based on bills or obligations that the child assumes, such as a cell phone, or school lunch, or gas? Or does allowance simply increase by a pre-determined amount each year?
  • What frequency makes the most sense — weekly, bi-weekly, monthly?
  • Would it be easier for you and your child to handle allowance in cash or through direct deposit or cashless transfer (Venmo, Zelle, etc.)?
  • What situations warrant a partial or zero allowance?
  • Does paying allowance rely on task completion? If so, how do you measure and monitor on an ongoing basis?

Ideally, the requirements are the same for each child and do not stray from the plan over time, but you can certainly make exceptions if financial circumstances change. Pay reductions and unemployment happen in real life, so the allowance may have to be lowered or paused at times. On the flip side, when times are good, consider adding a bonus for a job well done or starting a matching contribution when certain savings milestones are met. An allowance should teach about both the good and bad times.

If you’re puzzled on where to begin with an allowance, stick to this simple plan. Base the amount of allowance on the age of the child, and pay on a weekly basis. For a child who is 3, the allowance would be $3 per week. For a teenager who is 15, allowance is $15 per week. This continues until your child starts working or graduates from high school, whichever comes first. Lean towards paying allowance in cash, so that your child can hold the true fruits of their labor.

Once an allowance is in place, then all the other lessons about money become easier to learn. A good first lesson is Share, Save, Spend. From there, help children understand taxes by automatically deducting a household tax. Instead of paying $4 per week, the household tax reduces allowance to $3 per week. Set up an auto-savings for one-third (1/3) of the allowance to deposit directly into a bank account for long-term savings. If children need to borrow money, ask them to come up with a payment plan, and reduce allowance by the amount of the payment plan accordingly. These are the lessons that will mentally prepare children for a future of managing their own money.

Happy Financial Literacy Month!

Homework: There’s no such thing as free money! Before starting an allowance or making the next allowance payment, parents and children can collaborate together on a chores chart or achievement chart to earn that allowance.

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The Rhyme And Reason For A Roth IRA

Rap Ode To Roth IRA

Here's the thing about Roth IRAs.
Pay taxes now, no delays.
You won't owe any more while your investments grow.
Once you're ready to retire, it's ALL your money to sow!
Add contributions up to the annual max, 
Then pick the investment(s), and see how it stacks!
Don't touch the money before age 59 1/2,
'Cuz taking earnings early costs a penalty and tax.
Don't wait! Start a Roth soon as you can,
Earn that compound interest -- That is the plan! 

The topic of retirement savings is especially pertinent right now for two reasons: either people are considering tapping into retirement savings as cash runs short or on the opposite end, they are looking to invest more money while market prices are low. One type of retirement savings account, the Roth IRA, caters to both. Let’s dive deeper into both scenarios.

Roth IRA – Taking Money Out

Contributions to a Roth IRA can be withdrawn with no penalty and no tax at any time, as they were taxed once already. This is one retirement savings vehicle that offers more withdrawal flexibility than others. However, earnings, or how much your money grows, are subject to both tax and a penalty if taken before age 59 1/2. There are some exceptions to this rule, but a Roth IRA is largely meant to be used for retirement savings.

In response to financial hardships caused by COVID-19, the CARES Act changed a few rules this year. For those in financial need, the early withdrawal penalty on Roth IRA earnings is waived for 2020, and distributions up to $100,000 are allowed before age 59 1/2. These distributions of earnings are considered income and will be taxed as such, but there is the option to spread the tax burden over 3 years or pay back the “loan” within 3 years to avoid paying taxes. Before you withdraw from your Roth IRA, carefully consider what this means for your retirement. In addition, taking money out of any investments could mean selling at a loss. Consult your financial advisor and tax advisor if you are contemplating a withdrawal of retirement savings.

Roth IRA – Adding Money In

For those in a position to invest right now, adding money to a Roth IRA (up to the max) not only takes advantage of stock market lows, but also yields more tax savings down the road if you expect to be in a higher tax bracket in the future. The Roth IRA works especially well when investments have a long time horizon for growth because you get to keep every penny gained without sharing a cut of the profits with taxes.

An attractive option this year may be a Roth conversion, which converts an existing IRA to a Roth IRA by paying taxes on the amount converted. If your income is lower this year than most years, you may fall in a lower tax bracket and therefore, pay less tax on that Roth conversion than you normally would. Furthermore, as a result of the market downturn, your investments may be worth less than previously, so less taxes would be owed. It’s a good idea to check with a financial advisor and tax advisor before making these financial decisions.

Making The Right Choice

No matter the impact that COVID-19 has on our financial lives, savings are still important. In fact, times like these make us realize that having savings gives us one more safety net when falling on hard times. So regardless of whether you are saving for retirement or saving for a rainy day, the point is to remember to SAVE!

Homework: Pay tax now or pay tax later? One reason to choose a Roth IRA (pay tax now) vs. traditional IRA (pay tax later) is if you believe your tax rate will be higher when you withdraw the money. Use the following math problem to understand the difference.

Say you earn $5,000 this year that you pay 20% tax, or $1,000, and you decide to contribute the remaining $4,000 to a Roth IRA. You add no more money to that investment, and it averages 6% annual growth over the next 36 years — How much will your total investment be? (Hint: Use the Rule of 72 to get $32,000 for the Roth IRA.) Assume instead that you defer paying tax until withdrawal by investing the full $5,000 in a traditional IRA– How much will your total investment be after 36 years of 6% annual growth? ($40,000.) After 36 years, if your tax rate is 20%, your total investment will net the same amount in either the Roth IRA ($32,000) or traditional IRA ($32,000) after taxes. If your tax rate decreases to 15% after 36 years, the traditional IRA ($34,000) nets more than the Roth IRA ($32,000). If your tax rate increases to 25% after 36 years, the traditional IRA loses ($30,000), and the Roth IRA wins ($32,000).

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Back To Basics

As a result of the financial turmoil caused by COVID-19, there is a lot of confusion about what is the best thing to do with your money? Let’s face it. Watching a paycheck disappear or get reduced is scary. And seeing investments bounce up and down daily can be unsettling. During uncertain times like these, it’s important to keep to the basics.

Just as you use a compass to navigate through a storm, use the following basic principles to point you in the right direction.

  • Focus on your rainy day fund. Although you might need to lean into your emergency fund right now, that doesn’t mean squandering it away. Try to preserve cash as best you can, and use a budget to identify where you can reduce expenses. You may already notice your discretionary spending has gone down with shopping malls closed and social outings cancelled, but challenge yourself to find extra ways to cut costs. If you are still receiving a paycheck, devote more cash to your reserves. Getting a tax refund? Put it in your cash reserve. Expecting a stimulus check? Put it in your cash reserve. When you can keep a steady 3- to 6-month emergency fund (amount depending on your level of comfort), then you can shift focus towards other financial goals.
  • Don’t sell your investments in a panic. Despite the stock market taking a bumpy ride, now is not the time to sell all your investments. Doing so could lead to significant losses that you may not recover once the market rebounds. A 401(k) loan or IRA loan may sound tempting, but taking money out of your retirement accounts could mean selling investments at a loss. Keep that in mind when weighing this option.
  • Avoid debt if you have cash. More options have become available to delay bills, like mortgage and rent payments. Be careful to examine what this means for your financial future. Simply put, these are loans, which means they must be paid back someday. Are you certain you can pay back the balance by the imposed deadline? What if, in the post-coronavirus world, wages are lower, and income doesn’t cover regular monthly bills along with what’s owed? For these reasons, it’s best to consider borrowing as a last resort, when all other cash is depleted.
  • If you have money to invest, dollar-cost average. For those who have a comfortable rainy day fund set aside and have spare cash outside of those reserves, you may be wondering what to do with your spare cash? Assuming that you’re not tapping into that emergency fund, there is no need to hoard more cash than you already have. Now that stocks have dipped to lower prices, it’s a great time to buy shares at a discount. But instead of timing the market, divide that investment over a period of time, otherwise known as dollar-cost averaging. As long as you keep a long-term outlook, chances are pretty good that you’ll come out ahead.

Navigating through a financial rough patch may seem complex, but doesn’t have to be with these basic principles in mind. As we go back to normal, these principles shouldn’t go away. Saving for a rainy day fund is always a good idea, as is keeping a long-term outlook on investments and avoiding the cycle of debt. Stick to the basics, and your money will stick with you!

Homework: To emphasize the importance of a rainy day fund and maintaining a comfortable amount, try this game with a deck of playing cards. How does your number do?

How To Play: Once the cards are shuffled, remove half the deck, and place the other half face down. You will draw from this half. Start with a number between 0 and 60; a multiple of 10 works best. As you draw a red card, subtract the number on that card from your original number. As you draw a black card, you have 2 choices: add that number or toss it. For example, drawing a red card with 6 means subtracting 6, and drawing a black card with 5 means adding 5, or 0, depending on how you decide. Royal cards and aces equal 10. If your deck includes jokers, add 10 when you draw a joker, regardless of red or black card. If your number ever dips below zero, game over. If you successfully finish through the half-deck, what number is left?

In this game, each card symbolizes money. The original number and ongoing tally is your rainy day fund. Red cards symbolize unforeseen expenses. Black cards represent income, which you can either save (add) or spend (toss). Joker cards can represent a rare windfall, such as stimulus money. Finding the right number for your “rainy day fund” and maintaining that number is key to winning the game!

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Money Lessons At Home

Now that everyone is home due to Coronavirus COVID-19, it’s a great chance to spend that quality time together brushing up on subjects that school may not focus on, like learning about money! Here are some suggested activities that can make learning about money FUN!! Some ideas come from personal experience, but I found neat ideas from others too, so click through the links to learn more. And of course, there is one more fun activity you can do on family game night — Monopoly! Happy studying, ACE!

Activities (Sorted By Grade Level)

  • Preschool – Kindergarten
    • Share, Save, Spend – Review the purpose of each bucket before beginning. Give play money (or real coins), one bill/coin at a time, for your child to place in 1 of 3 buckets. At the end, count the money in each bucket. Was the total amount distributed evenly?
    • Compound Interest In MarshmallowsThe Marshmallow Game is all about delayed gratification and the rewards that come with it. If your child likes something better than marshmallows, use that treat.
  • Grades 1 – 6
    • Mini Society – Find goods around the house to buy and sell to each other. This exercise teaches negotiation, pricing, supply and demand, entrepreneurship. You set the rules in this market!
    • Heads Up! Money Style – Ellen Degeneres’ popular cell phone game, Heads Up!, may not have a category for finance/money, but that shouldn’t stop you from making one. Write money phrases or words on index cards, and then place all the cards on a table, with the words facing down. The words can be simple, like “credit card,” or a little tougher, like “401(k).” Now let the guessing begin! Do your kids understand each financial concept?
  • Grades 7 – 9
    • Get A Job! – Parents should post chores around the house as jobs for hire. Children can practice writing a resume and then interviewing for the part. Parents can either pay real wages or reward with TV/tablet time. This mom actually held a job fair for her kids!
    • Stock Market Investor – Starting with a hypothetical investment of $10,000, pick 10 stocks for your portfolio. Track the investments over a year, and see how they perform. Just because it is fake money, don’t make decisions that you wouldn’t normally make! Get to really know your risk tolerance and investment style.
  • Grades 10 – 12
    • Beans for BudgetsThis activity is brilliant and works for college kids too! It’s better with small groups, but it can still work on an individual. You start with 20 beans that you decide where to “spend” them on. Occasionally something happens that causes you to re-think where you put your money!
    • Decoding Documents – It’s time to get acquainted with what bills and paychecks look like. Take a handful of real statements — paystub, investment, credit card — and learn what each line means. Are you ready to graduate from the school of personal finance?

Homework: What other activities help to learn about money? Contribute your ideas in the comments!

Spring Break: Ace Academy will skip the next two weeks’ lessons and be back in session during the first full week of April. Stay safe and healthy!

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Target Date Funds

Set it, and forget it!

– Ron Popeil
(Infomercial King,
Founder of Ronco)

If you are watching your savings go up and down in the stock market with a queasy stomach, you’re not alone. The natural human reaction when this is happening is to take all your investments and cash out. But that’s exactly what fuels a downturn in the stock market, a mass sell-off when too many people cash out at the same time. Panicked investors are actually selling low, instead of selling high when the market is doing great. How do you avoid this gut reaction to follow the herd?

If you’re the type of investor who gets nervous during stock market drops, you would benefit from something called target date funds. To understand target date funds, we first need to understand mutual funds. A mutual fund, which can be shortened to a single word – fund – is a bundle of investments purchased altogether. This bundle may contain only one type of investment, like a stock fund or a blend of types, like stocks, bonds, commodities, etc. The bundle might even be comprised of multiple funds, in short, a fund of funds.

To visualize this, say you are at a farmer’s market, and you buy some carrots, celery, and lettuce. Those veggies bundled altogether are like a mutual fund. Now let’s bundle another set: corn, cucumber, and zucchini. That’s another mutual fund. Bundle the two veggie sets together, and you have a fund of funds. A huge benefit to using mutual funds is the diversification it offers in one investment. With the veggies we bought, you can make veggie soup on a rainy day or salad on a sunny day. Mutual funds offer the same variety, so that you have some investments that perform better than others at different times. They also cost less bundled together than purchasing each investment by itself.

When you select a mutual fund, you automatically accept all the investments bundled within. There is no hand-picking like you do with individual stocks or bonds. A mutual fund has one or more mutual fund managers who pick for you. It’s almost like enlisting someone to do your farmer’s market shopping for you. At times, the fund manager(s) may decide to change some investments inside a mutual fund, like switching one stock to another. This is much like picking strawberries over watermelon, based on what’s in season.

As you can guess, this carries a cost, known as the expense ratio. It is not a dollar amount, but rather a percentage (%). So if the fund averages a 10% return that year, and the fund’s expense ratio is 1%, you see a 9% return on your money. If the fund loses money, that same expense ratio still applies. Try to find an actively managed fund with a low expense ratio (around 1% or less), and you’ll still be better off than trying to match the time and expertise of a fund manager when picking investments on your own.

Now let’s get into target date funds. A target date fund is also a mutual fund, in which the investments within change from aggressive (more stocks) to conservative (more bonds/cash) as you near a specified target year. As an example, Fidelity Freedom 2055 Fund currently contains 93% stocks and 7% bonds, whereas Fidelity Freedom 2020 Fund contains 54% stocks and 46% bonds. Why switch from more stocks to less stocks? The idea is to get more return by taking on more risk when you have many years before you plan to take money out of the fund. As you get closer to your target year, being more conservative allows you to withdraw money without worrying about swings in the market and without suffering big losses when it’s time to cash out.

Although you have many choices where to invest your money, a target date fund is a simple choice that gives you the sophistication of investing in many areas while not needing to check your portfolio every minute of every day. Think of it like auto-pilot. You buy just one target date fund, which is already diversified with many investments inside, and stick with the same investment until you need to use the money. This is the ultimate investment choice for someone who wants to, as Ron Popeil put it, “Set it, and forget it!”

Homework: Are you a target date fund or an a la carte kind of investor? Where could a target date fund work well for you?

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