Betterment: Where We Invest Money for Non-Retirement Goals

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Not long ago, my wife and I were buried in five-figures worth of student loan debt and no investment savings outside of small 401K balances.  Investing seemed silly at the time because any extra money we came across could simply go toward exhausting the student loans earlier.  But in 2014, my wife became pregnant with our daughter and our priorities shifted.

We still had about $14,000 left on our student loans, but the interest rate was only 2.5%.  We decided to invest before paying off all our non-mortgage debt.  The move wasn’t as risky as it sounds — we adjusted our spending habits and still paid off our student loans over a decade early in 2016.  But the student loans did take longer to pay off because we started throwing as much money as we could at investments.

Our reason for investing in 2014?  We wanted to begin saving for our daughter’s private school education and were willing to risk that our returns would exceed the 2.5% interest on our remaining student loan.  My wife and I both attended private school growing up, and our goal is to do the same with our children.  With private school costs rising significantly more than inflation over the last decade, we knew we needed the advantage of compounding investment returns.  While investing returns are never guaranteed — the longer time horizon increases our chances of hitting our ultimate goal.

Evaluating Savings Options

Now that we had a goal in mind, it was time to figure out where to save our money and what type of account to utilize.

I eliminated savings accounts very quickly since 1% interest is actually considered “good” these days.  And why save at 1% when I could pay off student loans at 2.5%?

I also eliminated individual stock investing.  While there are a lot of great companies that have the potential to significantly increase my returns over the next decade (Apple’s stock is up nearly ten-fold, Amazon is up nearly twenty-fold in the last ten years for example), I prefer the diversification of index funds when investing money for a specific purpose or goal.

And since my wife and I are saving for our children’s private school education before college, a 529 college savings account was not the answer — at least for this specific goal.  If we were to utilize a tax-advantaged investment account for pre-college saving, Coverdell Education Savings accounts offer up to $2,000 contributions per year, per beneficiary.  There is no deduction for a Coverdell ESA, but returns grow tax-free.  We decided not to invest in a Coverdell ESA due to the low contribution maximum, but this type of account may be beneficial to others saving for education costs.

Ultimately we decided on two types of investment accounts to save for our children’s private school education — a Roth IRA and a taxable investment account.  The potential for high returns coupled with relatively low-risk due to our long-term horizon made investing the obvious choice.

Why We Are Investing Our Non-Retirement Money with Betterment

I learned about Betterment’s investment services by reading financial blogs back in 2013 and 2014.  At the time, Betterment was relatively unknown and trying to find a niche.  While online investing goes back well over a decade, the popularity of robo-advisors like Betterment is quite new.

Betterment piqued my interest because I was looking for three things:

  1. A diversified portfolio to grow non-retirement money for over 10 years, with our children’s educations as the ultimate goal.
  2. A transparent, easy to understand system with tools to track my goals.
  3. Roth IRA and taxable investment account options.

In the three years since I opened my Betterment account, I realized it has (or it added) additional features that coincide with our evolving money goals, including:

  1. Balance-based fee structure: I am not dissuaded from making small contributions due to $6-10 transaction fees attached to every deposit because there is no per-transaction fee with Betterment.  Instead, the fee is 0.25% of balance annually (automatically withdrawn quarterly).
  2. Tax-loss harvesting: A great, automatic tool that helps you to reduce your tax bill by automatically selling and re-buying funds at a loss.  The tax loss can lower ordinary income or other taxable gains and increase your tax refund.
  3. RetireGuide: A tool that allows users to add external 401Ks or IRAs to be analyzed by Betterment to create a customized retirement plan.  You can add inputs like your desired retirement age and have Betterment calculate an estimated social security benefit.  Betterment will then give you an idea how much money you will have available to spend in retirement.  It’s a great way to know if you are ahead or behind on your retirement goals.

Getting Started With Betterment

If you want to open an account with Betterment, it’s actually quite easy (took me less than 10 minutes) and is one of the best options to get started investing with little money to start.  Investing does not have to be complicated, and Betterment proves that with its easy sign-up process.

Step 1: Follow this link and click “Sign Up” to get started

Betterment will ask you a couple basic questions like your age, whether you are retired, and your annual income.  This helps Betterment start to customize its recommendations for you in subsequent steps.

Step 2: Choose an investment goal

This is where it gets fun.  Investing can be done for a variety of reasons — not just retirement.  Betterment gives a few options right off the bat including a safety net (emergency fund), retirement, or general investing.  If you don’t have anything in mind, general investing is how we got started with a taxable investment account.  For education and retirement purposes, a Roth IRA is a nice tax-advantaged option offered by Betterment.  Click “Read More” for each choice to understand more about the option that is right for you.

Step 3: Create your account

Next, you provide your information to Betterment to set up your account.  In addition to your basic information like name and address, you will need bank account information to link with Betterment (so you can deposit and withdraw your funds!).  You will also need to supply your social security number, as investment transactions and dividends are required to be reported to the IRS (Betterment makes tax time a breeze with in-house tax forms personalized for you).

Step 4: Review your portfolio

Once you provide your information, it’s time to set up how you are going to invest.  Betterment makes this very easy by recommending a target allocation (how much you invest in stocks vs. bonds) based on your age and investing goal.  If you are young and saving for retirement, it will recommend a high percent of stocks because it offers the most growth opportunity.  On the other hand, if you are older or saving for an emergency, it will likely recommend a higher percentage of bonds.  Bonds offer less growth potential but are also less likely to have large losses as the market swings.

Betterment’s recommendation is just that — a recommendation.  If you are concerned about a high percentage of stocks, you can customize the allocation to your risk tolerance.  The really cool part about Betterment is that it will forecast future growth opportunities based on your target allocation.  So if you move your allocation from 90% stocks to 70% stocks, Betterment will show a lower projected future balance, but the potential gains/losses will be more narrow.  This is a really informative feature that Betterment gives its customers — and you can customize it at any time, not just when you sign up.

Step 5: Making your first investment

Once your portfolio allocation is ready to go, you will want to make a deposit to your account.  Betterment is great because, unlike many online brokers, there is no minimum deposit amount.  You can deposit $1 to start if you like.

You can also setup auto-deposit from your bank account.  We started with low auto-deposits from our account and slowly increased it over time.  Since the money was auto-withdrawn from our account, we were never tempted to spend it because we never saw the money.  Set it and forget it!

No, not my $350K!

You’re all set!  I encourage you to poke around your new Betterment account and check out all the cool features.  My favorite is the “Advice” tab with the visual of my money growing over time.  It really shows the power of compound returns over time and makes me happy I started investing at a young age.

If you have any questions about Betterment, please feel free to reach out to me either via email or in the comments section below.

Disclaimer: Lacking Cents has a business relationship with Betterment and may receive a commission if you sign up using our links.  This does not change the cost to you, nor does it influence our recommendation that Betterment is a great investing service.  We have used Betterment for our own personal investing since 2014.

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Betterment offers several investment account options to cover just about anyone’s situation. No amount is too small to begin investing with Betterment. We opened our accounts in 2014.


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2017-05-16T16:44:06+00:00 May 18, 2017 6:30 am|Categories: Investing, Recommendations|Tags: , |0 Comments

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