Betterment Review: Get Motivated With Betterment’s Goal Based Investing

Betterment Review

Betterment.com is a great fit for people who need a clear plan and some motivation. I really like the goal based investment plan. It allows you to allocate your money in a way that makes sense for your needs. It is clear to the user how they are progressing and because they segregate the cash into different tranches, you mentally separate the dollars as well. Betterment’s automatic savings plan is a great feature because automation is one of the keys to growing your nest egg. For some people, socking money away on a regular basis is as easy and natural as breathing.  For most people, we tend to live closer to the edge of our income than we are comfortable doing, but don’t know how to get out of the cycle.  As a college student you hear about investing and dream that someday when you are in your dream job you will be earning enough money to have extra to use for investments.  How quickly those dreams vaporize as you are hit with the expenses of inflation, taxes, and the reality of just how expensive life is.  That is why an investment program like Betterment.com is helpful. Betterment helps you save for life’s major financial hurdles by providing you with a goal oriented investment plan. It’s so easy. The best part of a service like Betterment is first, it is easy to use.  It takes about 10 minutes to get an account.  The majority of their clients are not financial advisors and they have developed their product to be easy enough to be used by just about anyone.  Second, it helps you ease into investing with a low monthly deposit, gets you out of the cycle of spending every dollar you earn and uses it to help you achieve your financial goals and protect you for your future through sound investments.

What are you investing in? Although it’s an automated program, you are involved in what you are investing in based on the way you define your asset allocation when you start your account.  And you don’t have to be a financial advisor to make good investment choices.  Betterment has done the market research already and has put together a varied portfolio of stocks and bond.  Here are some investments they offer: (the ticker is in the parenthesis) bettermentsummary2Stock Portfolio Makeup

  • 25% Vanguard Total Stock Market ETF (VTI)
  • 25% iShares S&P 500 Value Index ETF (IVE)
  • 25% Vanguard Europe Pacific ETF (VEA)
  • 10% Vanguard Emerging Markets ETF (VWO)
  • 8% iShares Russell Midcap Value Index ETF (IWS)
  • 7% iShares Russell 2000 Value Index ETF (IWN)

Bond Portfolio Makeup

  • iShares Barclays TIPS Bond Fund ETF (TIP)
  • iShares Barclays 1-3 Year Treasury Bond Fund ETF (SHY)

These choices all follow their respective index very closely and are very liquid, which lowers the bid/ask spread.  They are also tax efficient, and offer low annual fees.  In other words, you can feel secure in what you are investing in because Betterment has done the background work and only offer the best investment options for their clients.  Of course, nothing in investing is a guarantee.  There is always some risk in investing.  But where there is no risk there is no reward. Why ETFs? You will notice that the above portfolio is full of Exchange Traded Funds (ETFs).  That’s because they are more liquid and easier to trade and very cheap.  It’s like buying a stock of a bunch of tiny pieces of stock which helps you diversify in a very quick and easy way.  And being diversified is one of the biggest keys in investing.  It’s also one of the hardest things for anyone besides a financial advisor or someone who closes watches the market to do because it takes a lot of research.   You don’t want all of your eggs in one basket.  With ETFs you get a little bit of a lot of different stocks.

Aren’t we all a little afraid of how to handle our money? Because of the ups and downs in the economy, banking industry, real estate industry and the stock market over the past 20 years, many people are afraid of investing and just end up keeping their money in their savings account.  Some credit unions and banks will even pay you a small interest rate to bank with them, but there is usually a cap on what they are willing to pay you.  While savings accounts and credit unions definitely have their place in the market, they are not the best way to build a large savings account, nor will they be able to pay you the highest return on your monthly deposits. “Over the long-term, investing in the stock market tends to outperform money in a traditional bank savings account.”

Watch it Grow With Betterment, your money is always accessible to you if you need to withdraw it at any time and there is no penalty to do so.  Better yet, hopefully you won’t need to withdraw your money, as you are trying to achieve certain financial goals, and you will be able to sit back and watch over the years as the dividends you’ve earned are automatically reinvested to keep earning you money.

How Much Does Betterment Cost?

You’ll pay between 0.15% – 0.35% as a management fee. There is no minimum investment amount and no minimum balance requirement, but if you cannot invest at least $100/month, you will pay a $3/month fee. They really want to make investing easy and accessible to everyone.  They offer a free 3o day trial period and 3 plans to choose from.  You get to decide where you fit in and pick the plan that fits your lifestyle the best.  And here are the plans they offer: 1.The Builder Plan: If you are in the beginning stages of trying to build your savings/investments, the builder plan is as easy as depositing $100 and being done with it.  You can break up the $100 in to as many smaller increments that you need to in order to reach that amount, but the monthly total must be $100.  You can even use direct deposit to accomplish this and forget about it entirely, while all the while your money is being saved, invested, and used better than it would if you had it on your bank statement, just waiting to be spent.  The annual fee is .35% As noted above, if you cannot commit to $100 a month then you will be upgraded to the Better Plan.  And if you don’t have the $10,000 required for that plan, you will pay a $3 monthly fee in place of the annual fee. 2. The Better Plan: At a lower annual fee of .25%, the Better Plan requires a $10,000 investing minimal balance, but the monthly deposit is optional.   Better yet, “the $10,000  minimum is across all of your Betterment goals, including IRAs.”  This plan also carries with it the next day deposit benefit, which means that your money will be invested within 24 hours of originating a transfer, as long as the market is open. 3. The Best Plan: This is for those people who have at least $100,000 to invest.  Of course, the annual fee is the lowest for this plan, at .15% and it also has the most “perks”, including: optional monthly deposit, next day deposit, a personal consultation and also trust accounts. While Betterment does not charge hidden fees, their management fee does not include fees associated with the funds that you choose. However, the management fee does cover transaction fees, trading fees, transfers, rebalances, advice, and account administration. Betterment is an SEC Registered Investment Advisor. Betterment purchases your selected portfolio through Betterment Securities, which is a registered broker-dealer. While your deposit is not safe from market fluctuations, you are protected by SIPC up to $500,000. So if you aren’t interested in hiring a financial advisor or going through endless hours of research on your own to become your own financial advisor but want to start investing, Betterment.com is a really great option. It’s easy to use and very intuitive.

How Could Betterment Improve? I keep waiting for another Personal Financial Management company to combine investing and expense tracking like Personal Capital. I’d like to see Betterment combine my accounts and then provide advice based on the whole picture. For now, you could combine Betterment with SigFig to get a picture of your combined portfolio. You’ll like the clean look and goal based investing. Tracking investments inside the system is easy and if this is your first foray into investing, Betterment is a great choice. You can sign up for Betterment by clicking here.

3 Mistakes I Made This Tax Season And How I’m Going to Fix Them

With tax season behind me, I’ve had some time to review my finances from a tax perspective. I made a few mistakes this year that I need to correct immediately in order to ensure that I have a smoother 2013.

Mistake #1 – I did not review my withholdings in September. I hear about people who are very excited in April to get their “tax bonus” and can’t help but scratch my head. Unless you are receiving earned income credit, you should be disappointed in your tax planning because you left money on deposit with the government. You did not earn a return on that money. I’m fine paying what is lawfully required (by fine I mean I will pay it because it is my legal obligation), but I don’t want to have a large deposit on hand with the government and lose out on earning interest. My goal each year is to owe a small amount to the government at tax time because this means that I have withheld the right amount on my W-2. My second goal is to avoid underpayment penalties. It’s a fine line but easily achieved with a little bit of foresight and planning. My mistake this year was to assume that I had already withheld enough to cover my liability. In fact, I was well short and had to adjust my finances at the beginning of the year to cover the shortfall. Fortunately, I was not subject to penalties.

What I should have done is first ensure that I was covered by safe harbor rules and then run an estimate of my current year tax liability. If you make under $150,000 you fall under the safe harbor rule as long as you paid at least your prior year liability. So if I owed $6,000 in tax in 2011, I would not be subject to penalties as long as I paid at least $6,000 during 2012. For you filthy rich people making more than the princely sum of $150,000 per year you need to pay in at least 110% of last year’s liability, meaning that you need to pay $6,600 in our example.

To run an estimate of my current year liability I like to use Intuit’s TaxCaster. It runs a quick calculation. To figure out how much I will owe for the year I enter in my salary, dependents, and deductions, but leave the withholdings blank. This will tell you how much you’ll owe for the year. Compare that to what’s been pulled out of your paycheck for the year and you’ll know if you’ve over- or under-estimated your withholdings. Huge Disclaimer: I am not advocating that you lie on your W-4. You should fill it out accurately and completely. As the IRS website says,

After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding. You should try to have your withholding match your actual tax liability. If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, you will lose the use of that money until you get your refund. Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability.

Mistake #2 – Tracking and Documenting Charitable Miles – I help out a bit with a church youth group and took those kids on a few trips. They were probably three or four trips that totaled around 100 to 200 miles. Unfortunately, I didn’t write down the trips when I took them and didn’t track the miles. It was a small bit of savings lost. The key here is documentation. For charitable miles, the IRS tells us to keep reliable, written records. What is considered a reliable, written record? Depends on the facts and circumstances but Publication 526 says, “For example, your records might show the name of the organization you were serving and the dates you used your car for a charitable pur­pose.”

What I should have done: Just kept a log of my trips. This year I’m documenting my trips with a map and sticking the miles driven along with the date and purpose for the trip into Evernote.

Mistake #3 – Business Expenses – If you haven’t figured it out, I really need to work on my documentation. I didn’t miss out on too many. Again it was primarily miles driven and phone expenses for which I simply did not track until it was too late.

What I should have done is simple. Nothing major is required, but standard business practices need to include reconciling accounts and documenting expenditures in clear and concise way. It’s a tough lesson to learn because I missed out on a few deductions.

This year I’m also considering whether or not to take a home office deduction. The two major hurdles. First, I need to have part of the home regularly and exclusively used for business. Second, it needs to be my principle place of business. Right now, I’m good on the second but not so good about the first. Mostly because the space that I need is fairly small so I haven’t roped off an exclusive area so to speak. The good news is that for 2013, there is a simplified method for computing the home office deduction that could reduce some of the administrative burden normally associated with carving out a portion of your home costs. Could make life easier.

My mantra for 2013 is documentation, documentation, documentation. Track costs like a fitness freak tracks steps. Cash transactions and miles driven are the tricky ones. Everything else I’m tracking through Personal Capital or my bank accounts. The to tax planning is to start early and have a plan of action. Check your progress in June, September, and December so that you are not stuck with any surprises in April.