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.

    Like 3
    • 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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      • Silver Snow
      • Silver_Snow.10
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       I'd hesitate throwing out an option on the reasoning of "a business providing reasons you should consider their services is a conflict of interest". In that sense, any marketing or advertising would be a conflict of interest. So to those considering Betterment and are taking what they said in their article as potentially plausible, I'd say research on (I'm not even using their services). 

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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.

    Like 4
    • 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.

    Like 12
      • Turner Monroe
      • Steel Blue Camera
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      • 13 days ago
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      HappyDance You make a good point about investing with emergency funds you have to be willing to sell the investments to actually use them! But, although this sounds like a terrible experience it feels weirdly like an argument for investing your emergency funds to me. Your funds made money for you, and then when you thought you needed them you were able to find another way without using them, something you might not have done had they just been cash (then they would have been losing money every year due to inflation, and you'd have spent them when you went into crisis). Seems like you were fine if you really had to sell them, and you came out of the situation much better off than had you had a cash account.

      Like 1
      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
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      Hi, Turner Monroe 

      I'm now more convinced than ever that it's extremely unwise to invest the emergency fund in the market.  In this year of COVID-hell (2020), I watched my long-term investments drop like stones in March, then slowly recover and even surpass their January starting points by September.  Had I liquidated investments, I would have sold at the bottom and divested myself of my speculative investments just before they took off big time.

      Now, I did have to tap into my $20K emergency fund in February/March, and because it was liquid and not invested, I was able to leave all my investments alone to recover and increase.  If you take particular note of just what the market was doing in February/March, 2020..... right about the time I needed funds and when  everyone on the planet was facing a crisis....

      I'm happy to state that I came through 2020 (so far) unscathed. I am still debt-free, my e-fund is back to fully funded, and my networth has increased by over 65% since March and by over 35% since January, all because I was in a position to not need to sell investments.

       

      The TSX (Canadian Market)

       

      The NASDAQ (US Market)

       

       

      My two biggest gambles (two highly speculative stocks) - both took off and increased, one by 10-fold and the other by 30-fold off the bottom this year.

       

        

      Like 1
      • Turner Monroe
      • Steel Blue Camera
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      HappyDance I would agree with this, I don't think you should invest in assets that go down when you most need them. I have a low-risk tolerance Wealthfront account that has lots of bonds and I believe it only went down 10% at most during the crash earlier this year. 

      The way I've set up my accounts is to have my extra cash auto invested in my portfolio and to have a very healthy buffer in this portfolio to protect against market volatility. All gains and losses go to the buffer account, which will be used for retirement eventually, so it never changes my budget. Currently, my account would have to devalue 72% before it affected my budget's emergency funds.

      What you're saying is true about selling low, and a real issue. Ideally, my revolving balances in my cash accounts (of which I try to leave what I consider a healthy buffer) would be able to cover any true expenses/emergency spending. If I do need to draw from the account, I can instead just borrow against it short term to cover the expense and pay back the loan, not messing with the underlying investments. In the case of a true emergency I know I can rely on that the cash is there, whether it's from selling or borrowing against the portfolio, as it would have to make a significant, historic drop to affect those savings categories. This method absolutely opens me up to risk, but I think the risk is managed and small, and to me, it's worth it to be able to capture gains on my emergency funds (which would otherwise be cash drag) to be able to add to retirement.

      Also, I think doing it this way has given me a lot of clarity about what those funds are supposed to do. I have a much clearer idea of what these funds are for than if I was just throwing money into an investment account. At least for me, I have no desire to have an investment that's the only purpose is to indefinitely grow bigger, I'd much rather know those funds are allocated for emergencies, for retirement funds, for future plans, or whatever. 

       

      Just for the record, I'm in no way arguing with you. Everyone has different risk tolerances and limits, and I also think it's very unwise to invest emergency funds into investments that are likely to decline just as you might need them. There could actually be some wisdom in investing emergency funds into shorts or put options, but I haven't really explored that as much. I think doing it the way I currently do, allows me to capture some gains while still remaining secure my funds are going to be there for what I'm allocating them for. I guess time will tell! I'd love for people to tell me why they think I'm right/wrong, as it's not something I've heard anyone else doing.

      Like 1
      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
      • 11 days ago
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      Turner Monroe 

      🙂 I saw your post as further discussion on this topic and did not see it as argumentative, so no worries on that score.  It's a good discussion to have.

      I admit that I personally lean towards an ultra-conservative position, one of not wanting to ever have to resort to credit as part of my emergency-handling strategy (even though I could), and that's because I've been through a couple of life events where going into debt was either not an option at that time, or that going into debt only delayed the inevitable while adding on interest as a kick-you-while-you're-down penalty. 

      As a result of COVID closures, my organization laid off the staff in three branches, and that was a historic 100-year first for us. I count myself as extremely fortunate to have been spared the loss of income this year. My job was not in jeopardy, but the unknown spooked me. I would not have wanted to begin a descent into debt after losing employment and with no clear timeline on when I would be once again earning an income.

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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.

    Like 3
      • Turner Monroe
      • Steel Blue Camera
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      • 13 days ago
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      jenmas This is a VERY good point. I think if you are going to invest your True Expense / Emergency funds then you should have a decent amount of cash and a very healthy buffer in the investment account (like 30-50%) to account for market fluctuations. It's also a good reason to make sure investments are VERY safe. Unless you're retired, who needs investments when everything is doing awesome?  You can just make more money yourself.

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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.

    Like 3
  • 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
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      • nolesrule
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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.

    Like 3
    • 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.

    Like 3
    • 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
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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.

    Like 1
    • 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. 

    Like 1
      • Turner Monroe
      • Steel Blue Camera
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      • 13 days ago
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      Jen This! Also, the fact that unless a lot of things come up at once, often you're revolving balance can handle any individual "emergency" / True Expense. Since we budget for a bunch of different True Expenses that savings can end up being quite big, but in reality we only need a small amount of that money at a time. I think shoving the rest into an investment account (low risk, with buffer) to have it work for you is worthwhile. 

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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.

    Like 1
  • 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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      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
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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
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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.  

    Like 3
  • Turner Monroe said:
    The way I've set up my accounts is to have my extra cash auto invested in my portfolio and to have a very healthy buffer in this portfolio to protect against market volatility. All gains and losses go to the buffer account, which will be used for retirement eventually, so it never changes my budget. Currently, my account would have to devalue 72% before it affected my budget's emergency funds.

     Sounds a bit like me.

    I now only keep 6.5 months in take home pay in cash instruments with the rest getting invested every month. But my budget money is safe because the vast majority of my investment money is just money being invested  to be invest long term + gains, as some money gets budgeted toward investments every month, whether anything actually gets invested or not based on that 6.5 month cash target.

    But that is the only reason that I put any of my budget money into an investment account. I am strongly against this for most people because they do not actually understand the risks involved or they do not have the cushion to weather the volatility. When you get to the point where you have extra money that can be invested just to be invested, that's when you can start think about investing your budget, and no earlier.

    Like 1
    • Superbone
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    I'm keeping a year in cash and the rest invested. I got down to less than that but I found I wasn't comfortable with it. But, I'm also not too far from retirement. I might even keep two years in cash when in retirement.

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      • nolesrule
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      • nolesrule
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      Superbone A year of what? expenses? take home pay? taxable income? gross income?

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      • Superbone
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      nolesrule Take home pay minus bonuses.

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      • HappyDance
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      Superbone 

      I now feel a little naked when my on-budget liquidity dips below a year's worth of take-home.  Funny when I remember that in 2014, when I started using YNAB, I had trouble keeping more than a couple month's worth in my accounts because I feared being destitute in retirement and was constantly skimming my accounts to invest, invest, invest.

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      • nolesrule
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      Superbone Gotcha. We use 6.5 months (plus a couple other medium-term savings categories with expected near-term spending).

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      • Superbone
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      HappyDance When I started, I had a decent amount in retirement accounts but absolutely NO liquid savings. Talk about feeling naked!

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      • HappyDance
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      Superbone 

      Yep.  I really credit the old YNAB forum with my education on many financial matters.  There were so many YNABers who were generous with their advice and patience on that forum.  I honnestly feel that I was propelled light years forward. Prior to finding both YNAB and that forum, I simply operated in the vacuum of my own thoughts and opinions, occasionally influenced by articles and books I read along the way.  Gaining a more practical understanding from others about liquidity and emergency planning and how it worked in their lives and budgets totally revolutionized my approach.

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      • PhysicsGal
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      Superbone HappyDance

      I was the same way, I kept putting money into my retirement accounts instead of keeping anything in liquid savings, because I ended up spending anything I kept because I wasn't paying attention to my spending like I am now.  So I'm in a much better shape than if I hadn't been doing that, since I have a pretty good size retirement nest egg, but it feels so wonderful to have the liquid savings and all that true expense money there keeping Murphy from beating me up.  Pay yourself first really does work well for me when it's in a retirement account, but I only figured out how to save liquid savings once I started YNAB.

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