The pros and cons of Sharebuilder
Bill wrote the other day looking for my opinion on Sharebuilder. Sharebuilder is an online discount brokerage that encourages automatic scheduled purchases of stocks and exchange-traded funds. In plain English, the company makes it easy to start investing. Here's what Bill had to say:
I was wondering what you thought about Sharebuilder. I am considering signing up for an Individual Retirement Account. I am not sure if Sharebuilder is a good place to start, or if I should try to get out of debt first (I have about $30,000 left and am paying it off). I have a 401K through my employer, so I have some retirement savings. I just don't think I have enough saved for my current age, so I am looking to offset the 401K with some other investments. Anyway, do you like Sharebuilder?
I've been using Sharebuilder for almost two year now. I like it, but it's not a good choice for everyone.
What Does It Cost?
Sharebuilder offers an easy, convenient way to begin investing, and is relatively inexpensive, but it is not free. It costs $4 to make a scheduled transaction. It costs $16 to make a market order (a trade that executes immediately).
While these fees are lower than those at most full-service brokers, they're still fees. Many people would argue — and I can't say they're wrong — that if you want to start a Roth IRA and can afford it, you should save $1,000 or $3,000 (or whatever the minimum is) to open a no-fee account at Vanguard. Truth be told, I will eventually move my Roth IRA to Vanguard, though that's still months (if not years) away.
Related >> What is a Roth IRA?
Getting in the Habit
Why did I choose Sharebuilder if I'm not 100% sold on them? Because they made it easy to get started.
I wanted to put $100/month into an IRA, but I didn't have money to make a large initial investment. Sharebuilder is designed precisely for cases like mine. I created a recurring automated transaction, and I was “paying myself first” in no time. But I was paying 4% to do this — $4 for every $100 investment — a number that would make some people faint.
Eventually I cancelled my monthly program. I now make one-time lump investments of $1,000 each, which means the $4 fee doesn't consume as much of my money. In reality, the $4 fee never bothered me. It was a small price to develop the investment habit.
Here's my current recommendation for someone who wishes to save for retirement, but who can only afford small amounts to start:
- Open a high-yield savings account at Capital One 360 (or your favorite equivalent).
- Schedule a monthly transfer to your new account. $100 is a good amount, but you might choose $25 or $250. Become accustomed to making regular investments while earning interest on the money and paying no fees.
- In the meantime, research possible locations for your IRA. As I mentioned before, Vanguard is an excellent choice, though you might consider Fidelity or T. Rowe Price.
- When you've saved enough for the minimum investment, transfer the money from ING Direct to Vanguard (or whichever place you choose).
This is a terrific way to start investing.
Do What Works for You
Zecco (Now TradeKing) is another alternative to Sharebuilder. I'm not sure what automatic investment options TradeKing provides, but they do offer $0 trades. If I were beginning right now, I'd take a look at them.
Obviously, there are other choices out there. Your best bet is to do research to find the one that is right for you. If you don't like the idea of paying investment fees, then save to open a Vanguard account. If you feel it's important to just get started, consider Sharebuilder.
Bill is to be commended for striving to become debt-free. I think it's okay to do a little retirement investing as he pursues this goal. (That's what I did.) But remember: repaying debt is the best investment. Finally, before starting an IRA, be sure to take full advantage of the employer match on your 401k. Always take the free money!