Emergency Savings or "Safety Net" at Betterment

Anyone else have an account at Betterment for their emergency fund, or as Betterment calls it, "Safety Net"?  I budget for an emergency fund in YNAB and then transfer it over to the Betterment Safety Net account every so often.

For an emergency fund, Betterment recommends a split of 40% stocks and 60% bonds, along with making the emergency fund 12-20% higher than what you need, to account for any stock market fluctuations.  So far I've been pretty happy with my Betterment account and this method.  I think my only "concern" would be that the emergency savings is in stocks and bonds and not 100% in bonds or in a strict savings account... but they wrote this article to address concerns like mine here.

Curious if anyone else is using Betterment... I opened it in Nov. 2016 and it's gone up 12% (better than keeping it in a checking/savings account; the best APY I've found for checking if with Aspiration that offers 1% APY for balances over $2,499).

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  • No, I do not. Maybe as a third or fourth tier, after 1) savings account, 2) CDs, 3) I Bonds. But I don't think I would want to keep any percentage of my emergency fund in stocks. The whole point of an emergency fund is to have the money there when you need it.

    As for how much it went up, of course it did. Have you looked at how the stock market has done the past year? All my investments are up. Big time.

    Rather than make my emergency fund 20% larger than it needs to be to offset the risk (yes, 20% for a 40/60 allocation, not 10% or 12%), I just invest extra money that isn't needed in a taxable account in stocks, and keep my emergency money in the bank in savings and CDs. Currently my taxable brokerage account at 100% stocks is almost as large as my emergency fund. But my taxable brokerage account is part of my long-term portfolio asset allocation along with my retirement accounts and HSA. Therefore I don't have to bucket my investments. My bond allocation is entirely in tax-deferred accounts ,where it is most efficiently placed.

    How does betterment maintain the 40/60 asset allocation? Do they rebalance for you when it gets out of whack? That could generate unnecessary taxes. Or do they only rebalance with new money?  So if you're not adding new money, your asset allocation will drift away from 40/60 to something heavier in stocks. And what kind of bonds are they using in the account? Do they make the best choice on a client by client basis based on your personal tax situation?

    And does Betterment give you the option of what part of your portfolio to sell when you need to make a withdrawal for emergencies? Or does it sell from both parts of your portfolio to maintain your asset allocation? Because I would much prefer to make my own choices for brokerage withdrawal for the best tax treatment.

     

    But the big "wait a second" bit is this....
    Betterment wrote an article to address the concerns. Well, duh! Of course they did. They make their money by taking a cut of the money you have invested in them. So of course they are going to promote you investing money (with them) that should be held in a no/low risk account. I have three words for that...  conflict of interest.

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    • nolesrule thanks for the feedback. I’ve found their fee structure to be very competitive at 0.25% (https://www.betterment.com/pricing/).

      This article talks about how they choose what to sell when a withdrawal occcurs to minimize tax impacts and gains/losses (https://www.betterment.com/resources/investment-strategy/taxes/lowering-your-tax-bill-by-improving-our-cost-basis-accounting-methods/).

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      Green Mare (bc765dbaa74e)  Paying fees at all is not competitive.

      There's a tradeoff between minimizing taxes and maintaining asset allocation. You can't necessarily do both.

       

      Still, your emergency fund is not an investment, it's (self) insurance. It's supposed to be there when you need it 100% of the time. It's job is not to make money for you.

      It's just a bad idea in general, and as Ihave said every single time this question comes up with Betterment, it's a conflict of interest.

      BTW, my method of keeping the emergency fund in an FDIC insured account and investing money I don't need doesn't require 0.25% AUM. I'm also maxing out all of my tax-advantaged accounts (2 401ks, 2 IRAs, HSA).... are you?

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  • Also, if you are in the process of accumulating your emergency fund and haven't hit 100% yet (let alone 120%), you have no business putting what you do have at risk like that. One of the biggest emergencies one may face is loss of employment, and that quite often coincides with a stock market downturn.

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    • HappyDance
    • YNABing consistently since 2014
    • HappyDance
    • 2 yrs ago
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    I flipped off the conservative forum advice I received on this subject as overly cautious. I'm a little stubborn when I think I'm right. I invested my emergency fund....and then I had an emergency. No big deal, right? Just liquidate some investments and pull the funds out. Yeah. Sure.  There I was staring at my portfolio, specifically my tax-free savings account (Cdn option) because I can withdraw from it without penalty or tax, and trying to decide which to sell:  the investments that had lost money but which I fully expected to recover and increase, or the ones that were rising beautifully and would likely keep going if I didn't sell them. Sell the winners? Or sell the losers? That hadn't been factored into my thinking.

    [crickets chirping for a very long time while I dealt with my stomach churning over the decision] 

    I went to my bank and applied for a $10,000 line of credit  instead. In the end I didn't need to use a single dollar of the LOC. I had just enough to pay my essential expenses in the next month with $100 to spare for the entire month, and I ate a lot of soup and oatmeal. And luckily for me nothing else happened. It scared me plenty. That was 2016. I  spent 2017 rebuilding liquid savings including a new liquid and uninvested emergency fund that is going to stay in the savings account earning next to nothing.  Lesson Learned.

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  • I don't have an emergency fund. I have a loss of income fund (I also have a medical category with 100% of my out of pocket max, a car repair category with a few thousand, and a home repair category with a few thousand). If I were to be laid off because my industry isn't doing well, it could very well be because the entire economy isn't doing well in which case if my loss of income fund is in an investment account, it might be in a nosedive just when I need it the most.

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    • Ben
    • Toolkit for YNAB Designer & Developer
    • furiousfalcon
    • 2 yrs ago
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    I am using Betterment, and I do generally have good things to say about it... but at the same time, that money isn't truly liquid. I consider that money long-term investments, not an emergency fund. At least in my mind, I want my emergency fund to be money I can access without worrying about fees and taxes, and available within a couple days. Like others are saying, in the case of a significant stock downturn, I really don't want my emergency fund losing value.

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  • In Betterment if I changed the allocation to 90 or 100% bonds then wouldn’t that be super conservative and “safe”? 

    They do let you withdraw money at any time (assuming it’s still there).  For example, I can withdraw money today (the 11th) and it will be in my checking account by the 18th. 

    I was considering the money in Betterment to be pretty liquid in that I could access it / withdraw it within about a week’s time. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      Green Mare (bc765dbaa74e) Bond funds lose value in the short term in a rising interest rate environment, which we are currently in. If you use a bond fund, it should be short term to minimize the interest rate risk. However short term bond funds have lower returns.

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  • Investing is for money that has a long-term time frame.

    An emergency fund is like Shroedinger's Cat. It simultaneously has a zero-day and infinite timeframe, in that you might need it now, or you may never need it. But you should treat it like you need it now.

     

    Some day, if you have enough assets, then perhaps you won't need safety of cash. Until then, investing should be only for money you don't need.

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    • VanillaCottage
    • Believer in the life-changing magic of YNAB4 - since 2013
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    Green Mare (bc765dbaa74e) said:
    For example, I can withdraw money today (the 11th) and it will be in my checking account by the 18th

     A 7-day turnaround is terrible for an emergency fund. Think of it this way - would you want to spend 7 days in jail before someone could use your e-fund to bail you out? I know I wouldn't.

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    • VanillaCottage 

      Not sure why they had to wait 7 days?  Maybe it is the amount?  I usually get the money in 2 days.  Though they do say you can put it on a card then use it to pay the card (not sure how I feel about that).  Don't get me wrong I like Betterment.

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    • HappyDance
    • YNABing consistently since 2014
    • HappyDance
    • 2 yrs ago
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    HappyDance said:
    I flipped off the conservative forum advice I received on this subject as overly cautious. I'm a little stubborn when I think I'm right. I invested my emergency fund....

     😉  Hmmmm.  Maybe everyone goes down the same path until they hit the same pitfall..... Maybe you won't have an emergency and it will all work out for the better.  I sincerely wish that happy outcome for everyone.

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    • Jen
    • Budget Expert
    • Jen_c
    • 2 yrs ago
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    Just hopping in to say, I've used Betterment for my emergency fund (and IRA!) for a few years now. I've found that the extra resistance of pulling money out of that separate account has helped me reconsider what I thought was an emergency. I've never once pulled money out -- instead if I really needed to I've cleared out a True Expenses category (I'm quickly rebuilding "Summer Camp" right now) or un-buffered myself by pulling money from next month's budget. 

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  • I think it's a good idea to understand what you are doing with the money when you put it in an investment account, and that includes understanding what you are investing in and what the inherent risks are.

    There can come a time when your investment portfolio is large enough that all of it is an emergency fund, but if you are still building your emergency fund and/or you have debt at a not-so-low interest rate you are servicing, you're probably not at that point.

    There are a lot of good comments in the Betterment article, explaining why this isn't really a good idea. But one of my favorites can be paraphrased as...

     

    If I have to invest $23,000 to make sure I have $18,000 in 5 years, then I might as well keep $18,000 in the bank and invest the other $5,000.

    And that is essentially what we do. If it's a line item in the budget and has a time horizon of 5 years or less, it's in the bank. We don't even have any financial goals > 5 years that are also not long-term. So the extra money is not earmarked for anything and we send it off to Vanguard and invest it in Vanguard Total Stock Market Index Fund Admiral Shares or Vanguard Total International Stock Market Index Fund Admiral Shares... neither of which costs an extra 0.25% annually in management fees.

    But we're also already maxing out all our taxed advantaged accounts. Are you?

    Like 2
  • Although I have a betterment "safety net" account, I have to agree with the general sentiment here. 

    Although I'm currently including it as part of my EF, it is a very small part of my EF ($1600 out of a $13K EF which is on top of being buffered, having a good handle on my true expenses, and dedicated RDFs for things like my car).

    Every pay period I deposit $50 in my betterment account. It's an amount of money that I could easily piss away on fancy coffees, work lunches, or beer - not that I would do that, but the point is it's a small enough amount that if it were to disappear in a poof of smoke it would suck, but not be devastating. 

    I'm happy with my betterment account - it's been doing well but I feel (gut feeling not based on expertise) that these good times are not going to last long.

    There are plenty of banks/CUs that offer rates above 1% without minimums: https://www.nerdwallet.com/blog/banking/best-high-yield-online-savings-accounts/

    There are also plenty of options for HY checking accounts.  I currently have two: 2% and 5% APY when basic qualifications are met (the tricky one for me is 15 POS transactions/mo).  Here is a bank I've never heard of before, but they offer 1.5% on up to 250K (most I've seen max out at 10K - with only 5 transactions a month.

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  • Just to follow up. I keep my budget cash needs in a checking account, money market account and CDs at Capital One 360, savings account and CDs at Ally, and I Bonds with the US government.

    Money that is not part of the budget is at Vanguard invested in Total Stock market Index Fund and Total International Stock Market Index Fund and included in our overall investment protfolio asset allocation of 78/22 (we're glide-pathing). All bonds in the asset allocation are kept in 401k accounts (tax-deferred, which is the optimal location).

    Including our budget cash (bank accounts,  CDs and I Bonds), our actual effective asset allocation is roughly 60 stocks / 40 fixed income/cash.

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  • I do this and I really like it.  I transfer over money weekly to them.

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  • Barclays dream account offers 1.50% APY.

    https://www.banking.barclaysus.com/online-savings.html

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  • nolesrule said:
    How does betterment maintain the 40/60 asset allocation? Do they rebalance for you when it gets out of whack? That could generate unnecessary taxes.

     They only re-balance when you "shift" to far to the left or right.  They also take into account tax loss harvesting.

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  • nolesrule said:
    And what kind of bonds are they using in the account? Do they make the best choice on a client by client basis based on your personal tax situation?

    And does Betterment give you the option of what part of your portfolio to sell when you need to make a withdrawal for emergencies? Or does it sell from both parts of your portfolio to maintain your asset allocation? Because I would much prefer to make my own choices for brokerage withdrawal for the best tax treatment.

     Here is what they invest in for the "Safety Net"

    VTI, VTV, VOE, VBR, VEA, SCHF, VWO, VTIP, SHV, MUB, TFI, LQD, VCIT, BNDX, EMB, VWOB

    It sounds like Betterment is not for you as you want more granular control over your portfolio.  For someone like me I prefer Betterment to managing it myself.  I also like that they buy partial funds instead of having to shell out say $3,000 into one of Vanguards (not everyone has $3,000 lying around)

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      • nolesrule
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      • nolesrule
      • 2 yrs ago
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      VoltaicShock 

      VoltaicShock said:
      Here is what they invest in for the "Safety Net"

      VTI, VTV, VOE, VBR, VEA, SCHF, VWO, VTIP, SHV, MUB, TFI, LQD, VCIT, BNDX, EMB, VWOB

       Wow that's a complicated portfolio. There is some overlap, but that makes sense if there's tax loss harvesting, however the combination of stock funds doesn't make sense.  And plenty of funds in there that I would rather not hold, particularly the last 3.

      VoltaicShock said:
      They only re-balance when you "shift" to far to the left or right. They also take into account tax loss harvesting.

       Do you have all of your IRAs with betterment as well? Would suck to get a wash sale, and worse, not report it properly.

      I'm curious how much tax loss harvesting was done in 2017 and how much was paid in AUM fees in 2017. Care to share your results?

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      • nolesrule
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      • nolesrule
      • 2 yrs ago
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      VoltaicShock Also, I'm not sure if you've kept up on my current choices.

      I'm moving my "safety net" into I Bonds... and away from CDs and CD ladders. I Bonds are inflation protected so I'm not having to play keep up with a bunch of CDs. About half of the income replacement fund is currently in CDs and 20% in I Bonds. But in all the CDs and I Bonds are about 20% of our entire budget.

      The extra money (that is truly extra) is invested monthly into VTSAX and VTIAX (or if you want the ETF versions VTI and VXUS). I have just as much in this account as I do in my budgeted Income replacement fund.

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    • nolesrule 

      Personally I don't keep much there I just started it a few years ago and wanted to see what it was all about.  I do have good returns and I haven't had any issue with wash sales and the like.  It all syncs up with Turbotax and pulls it all in.  They also tell you what your "expected" tax will be when you withdraw.

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    • nolesrule 

      Here is how I have my 401K setup

      I have been doing well with a three tier fund (to a degree) on Vanguard. Though I have access to the institutional funds which have a lower expense ratio.

      I can provide my Rate of Return (Based on what Vanguard tells me)

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      • nolesrule
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      • nolesrule
      • 2 yrs ago
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      VoltaicShock Why are you holding the 3 fund and a Target Retirement fund? I have to say I'm envious though. I hate my 401k. It's expensive with poor fund choices.

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    • nolesrule 

      I already had that fund and just left it there (yeah I know it basically has those funds in it).  That's why I said to a degree lol (I might move funds from the 2050 to the other three).

      Yeah my expense ratio is very low.  I have access to some great funds.  I pay almost nothing in fees.

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    • MsTJ
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    I like Betterment for some investing.  Hold enough to keep me going for 2-3 months in my regular monthly accounts, then pull some off budget to invest, about 2.5% of income.  Of that, I put about .75% in Betterment, at 80% stocks.  The rest goes to Vanguard and is invested in VTI (Total US Stock market) and VXUS (Total International stock market).  Another 25% of income goes to savings goals on a regular monthly basis, which are kept in my regular monthly accounts.  I am happy with the results this way.  Still working on getting my bond investments up and I'm happy with the direction I'm going.  For now I'm working on building my cash holdings as opposed to bond investments.  

    Guess it's a matter of what you are willing to risk.  For me, 2.5% of income is not much to risk.  Others might feel differently.  I definitely would not put it all at Betterment, or even Vanguard.  Investing 10% of my savings feels good to me today.  

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