YNAB BLOG

Should I Keep My Christmas Fund in Betterment?

Enormous Disclaimer: No part of this post constitutes investment advice, nor am I saying this is the right or intended use of Betterment’s savings tools. It’s a pure thought experiment; all comments and discussion are welcome.

I’ve been thinking about using Betterment for some of my Rule 2 funds – like Christmas, or my annual life insurance premium payment.

Risk and return frame the whole conversation: how much interest could I earn, and what risk would there be of coming up short when I need the money?

Let’s say I want to have $1,800 ready for holiday gift giving, and we’ll pretend it’s January 1, giving me nearly twelve months to save (because I procrastinate my holiday shopping to the extreme).

I head over to Betterment to add a new goal called “Christmas.”

betterment-christmas-goal

Betterment wants to know my target amount and when I’ll need the money. I plug in $1,800 and 1 year.

betterment-christmas-goal-amount-timeline

What I find interesting is the next screen that shows Betterment’s recommended allocation: 15% stocks and 85% bonds. You’d think such a short timeline would involve 95% or 100% bonds, but they must have math to support this recommendation.

betterment-advises-15-percent-stocks

Clicking on ‘See Advice’ I can see how Betterment recommends I set aside $147.96 per month to reach my goal:

betterment-chrismas-goal-estimated-growth

So, there’s a small win – rather than setting aside $150 per month for my annual premium, using Betterment might allow me to set aside just $147.96. That frees up $2.04 to be spent on two donuts per month at the local bakery. I like where this is headed.

Where things get mildly entertaining is when you look at Betterment’s probabilities at the end of the period:

(Hover your cursor over the projected balance lines on the graph to see where you might end up.)

Looks like I’d have a:

  • 2.5% chance of having at least $1,879.42
  • 10% chance of at least $1,857.55
  • 90% chance of at least $1,769.81
  • 97.5% chance of at least $1,749.68

So, here’s the summary:

Monthly Cost:
Checking: $150
Betterment: $147.96

Probably of having $1,800 after 1 year:
Checking: ~100% (barring financial catastrophe)
Betterment: ~85%

“Best” Case Scenario:
Checking: $1,800
Betterment: $1,879.42*

*Betterment’s math only gives us a 2.5% chance of getting there. Returns could be much better, in theory.

“Worst” Case Scenario:
Checking: $1,800*
Betterment: $1,749.68**

*The bank could fail, and I’d have $0.
**Again, Betterment offers a 2.5% chance the balance would be lower. In theory, it could be much lower.

What do you think? Transaction costs are low (easy transfers between checking and Betterment), so you really only have to ask yourself if you’d take this 85% “bet” that you’ll have at least $1,800 at the end of the year, with your upside being the $25 in annual savings ($150 – $147.96 x 12) and maybe $25 to $50 in investment returns. (Jesse just pointed out that the $2.04 per month are the returns.)

Combined with a couple other similar-sized Rule 2 funds, this plan could put an extra couple hundred dollars per year in your pocket – or leave you a little short when the bills come due.

Worth it?

In any case, it’s always good to have a reminder to employ your money as profitably as possible.

30 Responses to “Should I Keep My Christmas Fund in Betterment?”

  1. Mark DeNio

    I view this as game playing. The appeal of YNAB to me is “set it and forget it.” I took bad advice years ago to not pay off my student loan but invest the money instead. i wound up doing neither and am still paying 18 years later on the student loan.

    Reply
    • K-ro

      i’m not sure it’s fair to call advice bad when you didn’t follow it.

      Reply
  2. Mom

    What are Betterment’s fees and how are they accounted for? Is it accounted for in the list of returns? I would think that for such a short time, you’d earn more interest in your checking account without the risk of losing it, over paying fees for Betterment and having a higher return potential and higher risk.

    Reply
    • mark

      I wondered the same thing about the fees. Since it’s their calculator, I’m guess they factor the fees into the return.

      Reply
  3. Stephen

    I would say that it is more worth it for a Christmas fund, knowing that your Christmas budget would just have to be altered depending on your loss/gain. I wouldn’t do it for a fixed bill like insurance because you could end up well short of what you need in order to keep current on your premiums. Best advice though will always be this: 5 years=invest.

    Reply
  4. Bob

    I’ll echo Dave Ramsey’s advise here – you should not invest for any time-frame shorter than 5 years. If you’re just going to be pulling it out in 6 months, just park it in your savings account.

    Reply
  5. UWi

    There is the math calculation and the risk calculation. You did the math. The risk includes what are the consequences if you fall short of the goal.

    Christmas, birthday, vacation money, probably not much – you just spend a little less or make it an aggressive last month of putting money aside. Annual insurance premium where it could terminate your policy, bad idea.

    Also, the more categories flow into that account, the “more” money you have available to float the other items. At that point, when you pull out money, you just have to adjust the remaining money on the other goals that are still in the pot, and possibly adjust how much money you are putting into the account for each remaining item. That is assuming you do not pull out all the money at the same time of course.

    It can get complicated – and, like Mark DeNio said, the appeal of YNAB is that it’s automatic. Most people fail b/c they have to do too much to keep track. So the best of both worlds would be to go the traditional route of putting as much into Betterment as if you put it into checking, and then go and have a really nice dinner or vacation with all the extra you can possibly make with this move. :)

    Reply
  6. Leeabe51

    Bonds are not doing well lately, even the hint of rising interest rates has sent bond fund prices falling (Vanguards Total Bond Fund is down something like 2.5% YTD, which is what Betterment uses I believe). It would make very little sense to invest on bonds/funds with such a short term time frame.

    Your time horizon would need to be at least 2 years I believe.

    And as someone else mentioned, you end up paying Betterments and Vanguards fees. You would be better off doing an all in one Vanguard fund for a couple of years.

    Reply
    • mark

      Interesting point about bonds. I’ve actually been considering a shift in my Betterment allocation toward stocks.

      Reply
  7. Michael

    I used to have my short-term savings in Betterment, but the risk is to much. I feel if you need it in 5 years or less then a coffee can is better than stocks and bonds, but a savings account is better than that.

    You said the bank could be $0, if it is FDIC insured the risk of it being $0 is, well 0. If you have it is a savings account at .7% you would have $1,806.84. (6 donuts for the family at Christmas)

    Reply
    • mark

      Hadn’t even thought about FDIC coverage, although I really don’t consider my credit union failing an even remote possibility.

      Reply
  8. f0xfire13

    I already do this but I have an account that includes a number of things: holiday gifts and well as other gifts, vacation, and several other goals and bills that are paid annually or semi annually. This account also includes my general emergency savings so I’m regularly depositing over and above the amount budgeted for each category into the account. To me it makes more sense for the money to be earning a better rate of return in betterment than to just sit in my checking or savings account.

    Reply
  9. brad

    Employing your money as profitably as possible is something that can only be determined in hindsight, because there are always unknown risks. Even with a “certain” investment like a savings account, your ultimate return is uncertain because you have to factor inflation into the picture. If you earn a guaranteed rate of 1% but inflation is running at 1.5%, you’ll effectively end up with less money than you put in. Similarly, if you try to maximize short-term savings by investing them, you face uncertainty. Based on past results, you could expect to earn a better rate than you would in a savings account, but with fluctuations in the market you stand a good chance of losing a percentage of your initial investment.

    Here in Canada, I have a balanced portfolio of index funds with a mix of bond and stock ETFs, similar to what you’d get from Betterment. My portfolio is down a little less than 2% for the year so far; if I had needed to withdraw the funds at the end of June I would have lost more than 4%. That’s due to weaknesses in the Canadian stock market and also to the decline in bond fund values. My US portfolio is looking fine for the moment, but my point is that what I’m experiencing in my Canadian portfolio this year could happen to a US-based Betterment portfolio next month or next year. If you’re okay with losses on that order for a short-term goal, no problem. But if the prospect of losing 5% of your investment gives you heartburn, you might want to think twice.

    Reply
  10. Agamede

    A note on your aside “The bank could fail, and I’d have $0.” No, you wouldn’t. If the bank “failed” (or got robbed, or closed, or burned down, or, or, or…), you’d have $1,800. This is a really, really important point, because this sort of misinformation leads people to stay away from banks and keep their money in cold, hard currency, which is MUCH riskier!

    Assuming that you’re in the United States and keep less than $250,000 in any one bank, your money is insured 100%. You can’t lose money in a checking account. If the bank fails, the FDIC will step in and take it over– generally on a Friday afternoon– and by Monday you’ll have access to your $1,800. Credit unions work similarly, though their insurance is through NCUA instead.

    Reply
  11. Andrew

    You’d need to factor in capital gains/taxes as well into the costs for using Betterment as well, right? It may be that the 5 figure check I wrote to the IRS this year still has me a little tax-sensitive to transactions :-)

    I really like the tools they have for the goals setting. It’s just too bad you can’t park it in a savings account. Is there anything like this that would go to a savings account?

    Reply
    • Michael

      Agreed, all those deposits will be subject to short-term capital gains tax which is *significantly* higher than long term capital gains tax

      Reply
  12. Jason Smith

    There is also the disadvantage that according to Betterment, you will always be “on track” because the goal is just “1 year from now”, and not “December 2013″.

    Reply
  13. Kara

    The bit of mystification I have about this and Betterment in general is: how will this affect me tax-wise? Is saving for a short goal this way going to end up costing slightly more when it comes time to pay Uncle Sam? BTW, just started my [modest] Betterment account in March!

    Reply
  14. f0xfire13

    I guess for me it just make since to build my betterment account this way since I’m lumping several goals/money I’m not going to need for some time together in one account. I have a different Betterment account for longer term investing. Does anyone else already do this?

    Reply
    • Leeabe51

      Foxfire13, anything but a savings account is extremely dangerous for short term savings. The stock market could fall any time and you may need years to rebuild your losses. Bonds are about to get hit as soon as interest rates recover (as early as 2014). You could take heavy loses if both things happen at the same time.

      Vanguard says you should have a time frame of 3-5 years for stock/bond accounts. It is far too risky for anything less.

      Plus why way Betterment what you can do yourself easily?

      Reply
  15. LuLessa8

    It’s just risk vs rewards. A year seems short to me. I’d save for a new car like that over 3 to 10 years. Or save for xmas 2016.

    Let’s do some math with your best case scenario:

    Invest 147.96/month. 147.96 * 12 = 1775.52 invested after 12 months.

    Betterment’s best case scenario balance after a year = 1879.42. That’s 103.90 gained.

    Minus Betterment’s fee @ 0.35% per year (approx. $4.35):
    103.90 – 4.35 = 99.55

    After short-term gain 33% taxes : 96.90 * (1 – .33) = 66.70 net profit

    Of course, you might be in the 25% or 15% tax bracket. Now, if you’re investing for 2-3 years out, your long-term capital gains tax would be 15% at most (or nada if you’re in the two lowest tax brackets).

    In Betterment’s worst case scenario, you’d lose ~$25. As Jesse pointed out, the $2.04/month you don’t deposit into Betterment would be part of your returns. If you set aside the monthly 2.04 * 12 = 24.48. So you lose $25 in Betterment, worst case, you compensate with the $24.48. No big deal.

    Betterment is pretty diversified. With 15/85 stock/bonds split, a 50% nosedive in stocks and 20% dive in bonds would mean you lose about 24.5% overall = $435 or 1340.51 left.

    Bonds are more stable compared to stocks. I would think it’s unlikely they’d drop more than 10-20% even in a terrible year (can anyone confirm based on long history??). And Betterment’s bond basket is TIPS and short-term bond ETFs – not so vulnerable to inflation or raised interest rate.

    Reply
  16. Daryl

    Any goal under 3 years should not involve the risk of investment. The timeline is simply too short. Everything else is details and distraction. This is a great example of how inappropriate advice can be delivered automatically. I’d recommend speaking to a qualified (human) financial advisor that can provide personal and customized direction.

    Reply
  17. Adam

    Why not use a reward checking account at over 3% APY? There are some restrictions, but they are usually not too tough to work around.

    Reply
    • f0xfire13

      Examples of reward accounts? I bank local in my hometown so I’m not familar with all the big bank offers.

      Reply
  18. David K.

    You should probably be using the same deposit amount if you want to compare the two equally. Just a thought.

    But I agree that it’s not a good idea for short-term “savings” anyway; it is an “investment” tool after all. For short-term, you would be better off with any guaranteed return over 0%. So maybe a 12 month CD (assuming you had all of the money up front of course) or a money market account.

    Reply
  19. Steve

    This is why we switched to a credit union (Alliant, to be specific) when we got married. They don’t offer the absolutely highest rates in the world, but they do pay interest on both checking and savings. I think the rates are right around 0.70% these days. For any short-term or emergency cash, it’s the best place. Yes, you’re not going to make a killing, but that’s the whole point of that kind of savings… right? :)

    I do think the Betterment idea is intriguing, though – IF, and this is a huge IF – you’re willing to accept the savings goal as flexible/not 100% fixed. If you can allow yourself that leeway, I suppose the added risk is worthwhile. I’d also suggest saving the same $150 that you otherwise would; we’d all like the opportunity to end up with slightly more in the end!.

    Reply

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