How to Save with Betterment

How to Save with Betterment Sep 13, 2022 12:11:25 PM Believe it or not, there is an art to saving money. Here are Betterment’s tips on how you can save effectively for your financial goals. Believe it or not, there’s an art to saving money. It’s not a static process with rigid guidelines. How much you need to save and how you do it changes with your circumstances. You react and adjust to life. But with the right techniques and tools, you can be equipped to make the choices that are best for you, whatever your situation. Here are some tips on how to effectively save for your financial goals with Betterment. In this guide, we’ll: Help you determine how much to save Walk you through the strategy behind making deposits Explain how Betterment is built to optimize your account Talk about how you can adapt to market conditions How Betterment determines how much you need to save Tell us the goal you want to reach, your target amount, and the date you want to reach it by (your time horizon), and we’ll show you how much we recommend saving each month to help get you there. That number acts as a starting point, but it’s flexible. We’ll provide you with a goal projection and forecaster to reflect the likelihood of hitting your goal, but we can’t predict the future. But that doesn’t mean you need to constantly change the amount you save. Instead, we recommend a simple strategy called a “savings ratchet.” A savings ratchet means you increase how much you save when you have to, but you don’t decrease it afterward. By ratcheting your savings rates, you may end up with greater final portfolio values. How to choose the right deposit strategy for your goals It may not seem like a big deal, but how and when you make deposits can affect your outcome and your experience. So it’s worth considering the options and their implications. Deposit types There’s more than one way to make a deposit in Betterment. Here’s what you can do: One-time deposits are exactly what they sound like. Choose the amount to transfer and where you want it to go, and the transfer happens once. This works well when you have extra cash to invest, but it isn’t ideal as a long-term strategy. Just imagine how much time you’d spend logging in and manually making transfers over the years! Recurring deposits eliminate the manual process. You set it up once, and we’ll automatically transfer the set amount from your bank account on the frequency of your choice: weekly, every other week, monthly, or on two set dates per month. Recurring deposits are a great option if you know how much you want to deposit on an ongoing basis. We’ll send a confirmation email before a scheduled recurring deposit, giving you a chance to skip the auto-deposit if needed. Deposit timing Setting up your deposits to occur the day after each paycheck is an effective auto-deposit strategy. The extra day gives your paycheck time to settle in your bank account before we start the transfer, but you’ll usually want that transfer to happen as quickly as possible. There are three main reasons for this: Paying yourself first. Scheduling your auto-deposits for right after you get paid lets you separate your paycheck into two categories: savings and spending. From a behavioral standpoint, this protects you from yourself. Your paycheck goes toward your financial goals first, and you’re free to use any remaining cash in your checking account for other spending needs. Avoiding idle cash. When your cash sits in a traditional bank account, it typically earns very little interest at best—often none at all. In times of inflation, which is most of the time, your cash is actually losing value. Letting it sit may also tempt you to try timing the market, holding on to it for even longer because of market activity. Idle cash could cause you to miss out on dividend payments or coupon income events too. Reducing your taxes. Regular and frequent deposits and dividends can help us rebalance your portfolio more tax-efficiently, keeping you at the appropriate risk level without realizing unnecessary capital gains taxes when possible. We use the incoming cash to buy investments in asset classes where you’re underweight, instead of selling investments in asset classes where you’re overweight. Even small amounts allow us to invest your money in fractional shares. To get started with auto-deposits on a web browser, first log in then head to New Transfers and choose the deposit option. Or on the mobile app, log in and choose the Deposit button that will appear at the bottom of the screen. How Betterment helps keep your goals on track Want to stay on track to reach your goals? Then your investments are going to need some maintenance. Betterment uses five strategies aimed to optimize your account and help you reach your goals. We can automatically adjust your allocations Generally speaking, the closer your goal is, the less risk you should take. There’s less time for the market to recover, so a sudden dip could set you back. This is why our auto-adjust feature is so valuable for some goals. Here’s how it works: When setting up a goal, you tell us your time horizon. We recommend an initial risk level. If auto-adjust is eligible and selected, we gradually decrease your risk level as your eligible goal approaches its end date. All investing includes some risk. Auto-adjust can’t entirely eliminate that, but it does help protect your portfolio by gradually shifting away from riskier investments (like stocks) into safer investments (like bonds). We recommended conservative savings amounts Once you’ve set up your goals and provided a target savings amount, we provide a recommended deposit amount and cadence, based on our projections for how the market may perform. To be on the safe side and give you a bit of a buffer, we base this contribution estimate on a below-average market outcome. More specifically, we aim for a 60% likelihood of reaching your goal by the end of the investment term. We help you plan for the worst-case scenario Sometimes you want extra certainty that you’ll reach your goal in time. This might be the case when: The goal’s time horizon is not flexible. The goal is very important to you. You prefer to be conservative with your finances. If any of these apply, you may want to look at our projection graphs to see how very poor markets might affect your goal. Hovering your cursor over the graph shows not just average expected performance, but also how your goal could fare depending on market performance. The very poor market outcome is indicated by the 90% chance of having at least that amount. Many investors want a 90% chance for reaching certain goals. In that case, you may want to consider increasing your savings amount. We send you reminders to update your goals Even when markets behave as expected, changing life circumstances may require you to update your goals. It’s best practice to periodically check in on your goals and see if you need to make adjustments. You should also review your financial profile to ensure your income level, tax bracket, marital status, and address are all correct. We tell you if your goals go off track Betterment makes it easy to see how your goals are doing and whether you should make changes. Based on your goal type, its time horizon and target amount, we can provide guidance on whether your goal is on track. If it’s not, we’ll show you what changes you can make to help fix it. How Betterment’s recommendations change with the market Even with the best strategies in place, sometimes the market just doesn’t perform the way we want it to. So what happens if you’re no longer on track to reach your goal? There’s no magic solution, but Betterment has some recommendations to help your goal get back on track: Delay your goal Some goals have timelines that are more flexible than others. Moving back your timeline can give your portfolio a chance to recover. It also gives you extra time to save more. You can use the Goal Forecaster within your goal to see how big of an impact the delay could have. Downsize your goal If a smaller target amount will still let you accomplish what you need to do, you may not need to change your timeline or take other actions. You can adjust the target amount to see what effect it will have on the timeline and recommended deposits for reaching your goal. This only works if you’re willing to accept a smaller target amount for your goal. Increase your savings amount Putting more toward your goal each month can help you catch up to your original target. You can increase your auto-deposit amount at any time. It’s easier said than done, but temporarily cutting back on discretionary spending may be the key to reaching your goal. For goals like emergency funds, where you don’t want to decrease your target amount and you want to reach it as soon as possible, the short-term sacrifice can be worth the long-term security. Divert money from other goals Transferring money from another account (like a goal that’s ahead of schedule) can help get you back on track. Just be careful you aren’t robbing your future self to fulfill your immediate needs. You can transfer money between non-IRA/non-401(k) investment goals from within your account by performing a goal-to-goal transfer. Just choose the goal you want to move money out of, click on “Transfer or Rollover,” and then click “Transfer to another goal.” You’ll sometimes need a combination of more than one—or even all—of these options. For example, if you can save an extra $100 per paycheck, delay your goal by three months, and also use some money from another goal, that may be your formula to get back on track.