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Betterment Editors
The editorial staff at Betterment aims to keep the Resource Center up to date with our evolving approach to financial advice, our product offerings, and new research. Articles attributed to the editorial staff may have originally been published under other Betterment team members or contributors. Read more detail on the Betterment Resource Center.
Articles by Betterment Editors
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5 financial tips: What to do when rates fall
5 financial tips: What to do when rates fall Sep 10, 2024 2:54:29 PM Interest rates are falling but that doesn’t mean the sky is falling when it comes to your finances. Here are 5 tips to help you weather a falling-rate environment. Table of contents: Why does the Federal Reserve cut rates? What happens to cash, stocks, and bonds when rates drop? 5 financial tips to consider when the Fed cuts rates What should you do with your money when rates fall? It can be hard to know what to do with your money when the Federal Reserve (aka the Fed) cuts interest rates. But we’ve got you covered. In this article, we’ll explore why the Fed cuts rates, what happens when they do, and most importantly, what you can do to keep your finances on track. Why does the Federal Reserve cut rates? The Fed cuts interest rates for various reasons related to stimulating economic growth and addressing concerns about the economy's performance. As we look into the future, some of the specific reasons why the Fed might decide to cut interest rates include: Curb an economic slowdown: If the economy is showing signs of slowing down, such as a decline in GDP growth or an increase in the unemployment rate, the Fed may cut interest rates to encourage borrowing and spending to boost economic activity. Manage inflation: When inflation is stabilized or falling, the Fed might cut interest rates to stimulate demand and help achieve its target inflation rate. Lower interest rates make borrowing cheaper, which can lead to increased consumer spending and business investments. Stabilize financial markets: In times of market volatility, the Fed may cut interest rates to calm investors and restore confidence in the economy. Lower interest rates can reduce the risk of defaults on loans. Support job growth: The Fed aims to keep the labor market healthy by promoting job creation and wage growth. By cutting interest rates, the central bank makes it easier for businesses to hire workers and invest in their employees' future. What happens to cash, stocks, and bonds when rates drop? In a rate-cut environment, the performance of high-yield cash accounts, stocks, and bonds can be affected in various ways: Cash account returns: When interest rates fall, high-yield cash accounts may experience lower returns as the annual percentage yield on their investments decreases. However, cash accounts can still provide liquidity and safety during periods of market volatility. And high-yield cash accounts, like Betterment’s Cash Reserve, still offer a competitive variable yield for your excess cash. Stock prices: Rate cuts can potentially boost stock prices as lower interest rates can stimulate economic activity and encourage borrowing by companies. This can lead to a positive sentiment among investors and push stock prices higher. However, if the economy continues to weaken or is volatile, or if inflation rises, stocks may decline due to increased uncertainty. Bond prices: As interest rates decrease, current bond prices tend to rise because there is less demand for new bonds that now have lower yields. This inverse relationship between bond yields and prices means that existing bonds with higher yields become more attractive to investors seeking income. 5 financial tips to consider when the Fed cuts rates Depending on your financial situation, as interest rates fall, consider how you can apply these five tips to help keep your financial goals on track. Tip 1: Keep enough money in cash for short-term goals In a falling-rate environment, having a cash cushion can provide peace of mind and flexibility for unexpected expenses or opportunities. Make sure to allocate some funds for short-term goals, like upcoming bills or home improvements. Make sure you have an emergency fund: An emergency fund acts as a safety net during turbulent times. Aim to save 3–6 months' worth of living expenses in a high-yield savings account or money market fund. Keep enough cash for purchases you are planning to make in the next 12 months: Whether it's a new car, home renovation, or vacation, having cash on hand can help you take advantage of sales and discounts without worrying about interest rates. Tip 2: Consider moving excess cash to investments With interest rates falling, yield on cash accounts generally falls too, so consider investing your extra cash into assets with potentially higher returns. This could include stocks or bonds. Why bonds? When rates drop, bond prices tend to rise. They are also generally less risky than stocks, making them a solid addition to a diversified portfolio. Why stocks? Rate cuts can stimulate economic growth, potentially boosting stock prices. While investing in individual stocks carries risk, diversifying your portfolio across sectors and industries can help mitigate potential losses during market volatility. And if you have a long-term time horizon, staying invested can pay off over the years. While investing involves more risk than keeping your money in cash, stocks have had greater long-term gains historically than leaving your cash in savings. Bonus tip: Two ways to invest when rates fall. Lump sum investment: This simply means that you take all, or a large portion, of your cash and invest it in one sum. It’s easy, and it gets your cash invested in the market quickly. Dollar-cost averaging: You can automate your investments at Betterment using recurring transfers and deposits for dollar-cost averaging. It’s a great method to invest a little bit of each paycheck. Start investing at Betterment today. Tip 3: Diversify your investments Falling interest rates can have unforeseen effects on various asset classes. To hedge against these fluctuations, make sure to maintain a diversified investment strategy that includes a mix of stocks, bonds, and other assets. By investing in many types of assets, if one falls in value, your overall portfolio is less impacted. Diversification is your friend because we can’t predict the future. Tip 4: Understand how falling rates impact the housing market As interest rates decrease, mortgage rates for buyers may become more favorable. However, this could lead to increased demand and potentially higher home prices. If you're planning to buy or sell a property, be prepared for these shifts in the market, and work with a trusted real estate professional to understand what’s happening in your local housing market. Depending on housing prices and interest rates, you may want to weigh the benefits of buying, renting, or — if you already own a home — refinancing. Tip 5: Refinance high-interest debt Take advantage of lower rates by refinancing high-interest debt. This can include mortgages, auto loans, personal loans, and even credit card debt. For example, if you purchased your home when mortgage rates were at recent highs, refinancing to a lower rate could save you thousands of dollars in interest payments over the course of your loan. Another strategy to consider if you have multiple sources of debt is a loan consolidation. You may be able to secure better terms by consolidating your debts into one loan for easier management. What should you do with your money when rates fall? As we said in our five tips, we recommend considering moving excess cash to stocks and bonds to diversify your overall investing strategy. But what does that look like? It’s a balance of risk and reward to support your goals. Ask yourself: What are my financial goals? Are they short- or long-term? And how much risk am I willing to take? If you are willing to take on a bit more risk and have longer-term goals, then moving more money into stocks and bonds may be a wise approach to grow your money over time. Just make sure you have enough cash on hand for emergencies and short-term goals. At Betterment, we have accounts to support your goals. From growing your savings to building long-term wealth, you can be invested with your preferred balance of risk and return. Consider Cash Reserve: With our high-yield cash account, earn interest on your savings with no market risk and access your money whenever you need it. Goldman Sachs Tax-Smart Bonds: A 100% bond portfolio that gives higher-income individuals a personalized option to target additional after-tax yield. BlackRock Target Income: With this 100% bond portfolio, aim for higher yields while limiting stock market volatility with one of four levels of risk to choose from. Investing portfolios: Build wealth over time with one of our diversified portfolios of stocks and bonds. Ready to be invested? -
Make Your Money Hustle: Bond Investing
Make Your Money Hustle: Bond Investing Sep 9, 2024 8:00:00 AM Explore how bonds can diversify your investments, filling the gap between cash and stocks. Bonds can be confusing, but we’re here to simplify them. Here’s the TL;DR: Bonds are loans you give to companies or governments who pay you back with interest. Bonds generally earn more return than high-yield savings accounts while taking on less risk than stocks. Bonds can be bought through several sources, including a broker, the U.S. government, or a diversified ETF like the multiple bond portfolios offered by Betterment. Congrats—you made it past the TL;DR. Next, we’ll dive deeper into how bonds may be able to bring balance to your investments, filling the gap between cash and stocks. In just a few minutes, you’ll walk away knowing: The basics of bonds The benefits of investing in bonds An easy way to buy bonds As interest rates begin to drop, bonds may be a good way to earn extra yield. The basics of bonds No need to read a book about bonds—here are three Q&As that give you the basics. Question 1: What is a bond? Answer: A bond is basically a loan that you provide to an entity such as a business or government that wants to raise money. You can buy and hold a bond directly from the issuer (e.g. buying US Treasury bonds from TreasuryDirect) or choose to buy and sell bonds on the secondary market (e.g. an online broker). Question 2: How does a bond work? Answer: After you “loan” your money to the entity issuing the bond, they agree to: Pay back your principal: The issuer promises to pay your initial money back, aka your principal, by a specified date called the bond’s maturity. Pay you interest: You’ll receive periodic interest payments based on the annual interest rate paid on a bond, called the coupon rate. These interest payments are either distributed to you or reinvested into your investment on a consistent schedule. Question 3: Are there risks to bond investing? Answer: Generally, bonds are less risky than stocks, but that doesn't mean they are without risk. Examples of these risks include: Credit risk: There’s a chance that a bond issuer won’t pay you back. Interest rate risk: There is a chance that the value of the bond will go down as interest rates go up. Long-term bonds have greater interest rate risk than short-term bonds. Most bonds are rated based on the bond issuer's financial strength and ability to pay a bond's principal and interest. Like stock investments, bonds with less risk offer less potential for return (aka lower yields). Less risky bonds include higher-quality bonds (more likely to be paid on time) or bonds with shorter maturities (length until full repayment). The benefits of investing in bonds For investors looking to put some of their cash to work but not wanting to go all-in on the stock market, here are three benefits that bonds can offer, making them complementary to cash and stock. 1) Bonds can help you avoid market volatility Unlike stocks, bonds don’t represent a share of ownership in a company. Because of this, you won’t see the value of a bond increase as much as a stock when a company grows, but you generally also won’t see it decrease as much as a stock when a company struggles. 2) Bonds can help you preserve wealth Bonds, especially short-maturity bonds, can be a good choice to help preserve your money while potentially earning more return than cash in a traditional savings account, money market account, or CD. 3) Bonds can help you generate income Because the entity issuing a bond typically pays the bondholder interest on some regular schedule, they can help generate consistent income with less risk than stock investing. An easy way to buy bonds Most bonds don't trade directly on centralized markets like stocks, making it more challenging to invest in individual bonds. You can buy individual bonds from a broker or directly from the US government, but both of those options require DIY knowledge and time to build a diversified portfolio. An easy way to invest in a diversified portfolio of bonds is to invest in a bond ETF. A bond ETF, or exchange-traded fund, trades on stock exchanges, like a stock ETF. In one purchase, a bond ETF offers investors a way to gain exposure to a diversified portfolio of bonds, which can include government, municipal, corporate, and international bonds. Bond ETFs aim to provide regular income through interest payments from the underlying bonds and offer the flexibility of buying and selling shares on an exchange throughout the trading day. Make your money hustle with a Betterment bond portfolio We’ve created two types of bond portfolios with different needs in mind: BlackRock Target Income portfolios What is it? The portfolios include a diverse set of bond ETFs with a range of risk levels, helping to mitigate exposure to volatility in the stock market, aiming to preserve wealth, while seeking to generate income. Who is it for? These portfolios may be better suited for investors looking for lower risk compared to stocks, with the option to choose one of four portfolio strategies targeting increasingly higher yields. The portfolio strategy should be selected based on your risk tolerance. Keep in mind, getting more income from a specific target portfolio also means taking on more risk. Goldman Sachs Tax-Smart Bonds portfolio What is it? This portfolio is built by Goldman Sachs using 100% short-term bond ETFs. Betterment then personalizes the portfolio based on your tax situation with the aim of generating after-tax yield. Who is it for? The portfolio is designed for higher-income individuals, especially in the 32% or greater federal tax bracket, looking for a potentially higher after-tax yield than a cash account with less risk than a traditional stock-and-bond investing portfolio. In both portfolios, all interest payments, also called dividends, are automatically reinvested to help grow the portfolio’s value. Ready to be invested? We make it simple to invest in a bond portfolio with three options: Make a one-time deposit. Set up recurring deposits from Betterment Checking or an external account. Schedule recurring transfers from your Betterment Cash Reserve account. -
How we keep your Betterment account and investments safe
How we keep your Betterment account and investments safe Aug 5, 2024 6:00:00 AM So you can invest with peace of mind All investing comes with some risk. But that risk should be based on the market, not your broker. That’s why we safeguard both your Betterment account and your investments with multiple security measures, all so you can log in and invest or save with peace of mind. Here’s a sampling. Four ways we keep your Betterment account safe Two-factor authentication Two-factor authentication (2FA) adds an extra layer of security to your account, like an extra lock on a door. Besides your regular password, 2FA requires a second form of verification such as a code texted to your phone (good) or one served up by an authenticator app like Google Authenticator (even more secure). This helps ensure that even if someone manages to get hold of your Betterment password, they still can't access your account without a second form of verification. Encryption Every time you interact with us, whether on our website or our app, your data is protected by encrypted connections. This means that the information transmitted between your device and our servers is scrambled in a way that only we can understand. Password hashing When you create a password for your Betterment account, it's not stored in plain text. Instead, we use a process called hashing, which converts your password into a unique string of characters. This way, even if our systems were breached, your actual password would remain unknown and unusable by unauthorized parties. App-specific passwords Connecting third-party apps to one another unlocks all sorts of benefits. You can see your net worth when you log in to Betterment. You can quickly import your Betterment tax forms to your tax prep software. To enable these connections securely, we offer app-specific passwords. If any one of these connections is compromised, you can easily revoke access without affecting the security of your main Betterment account. Four ways we keep your investments safe Easy verification of holdings Transparency is one of our key principles, so we make it easy to verify everything is in its right place. We not only show each trade made on your behalf and the precise number of shares in which you’re invested, we also list each fractional share sold and the respective gross proceeds and cost basis for each. You can find all this information in the Holdings and Activity tabs for each of your goals. Independent oversight We regularly undergo review by independent auditors. This means auditors reconcile every share and every dollar we say we have against our actual holdings. They also spot check random customer accounts and verify that account statements match our internal records. And they ask questions if anything is even a penny off. No commingling of funds Your funds are kept separate from Betterment’s operational funds. This means that your investments are held in your name and are never mixed with our company finances. In the unlikely event we face financial difficulties, your assets remain secure and untouched. SIPC insurance To add another layer of protection, your Betterment securities are insured by the Securities Investor Protection Corporation (SIPC). This insurance covers up to $500,000 per customer, including a $250,000 limit for cash claims. While SIPC doesn’t protect against market losses, it does provide a safety net in case of a brokerage failure. An explanatory brochure is available upon request or at sipc.org. How you can help In the end, the most important security measure is you. Be on the lookout for suspicious phone calls, texts, and emails (odd-looking URLs, typo-riddled messages, etc.) and know that Betterment will never ask you for your password or 2FA code except when logging in or editing your personal information in the app. Use a strong, unique password for your account, and don’t hesitate to contact us directly if you suspect a scam message and need to verify that we’ve reached out. We’ve got your back, and between the two of us, we can help keep bad actors at bay. -
Your retirement income shouldn’t be a guessing game
Your retirement income shouldn’t be a guessing game Jul 29, 2024 5:44:49 PM So we built a dynamic safe withdrawal tool to help take the guesswork out of it The thought of running out of money in retirement can be scary, and it begs a common question: How much can I safely withdraw in retirement? The 4% rule has dominated the conversation here, due in large part to its simplicity. The idea: spend up to 4% of your retirement savings each year, and your money will most likely last 30 years. It’s a helpful shorthand early on, but the closer you get to retirement, the more nuance matters. Because the truth is there is no one single safe withdrawal rate. Yours will change year to year depending on a few variables, including: Market conditions (see: the retirement Class of ‘08) Inflation (see: recent times) How long you expect to live If all of this sounds maddeningly inconclusive, we agree. So we designed a dynamic safe withdrawal strategy and built the tool right into the Betterment app. All so you can spend with peace of mind. How Betterment handles safe withdrawals If you're a Betterment customer, you’re probably familiar with Goal Forecaster. It's one of the most helpful tools we have in charting a path to retirement. Once you're in retirement, we shift Goal Forecaster in reverse. Instead of projecting how your savings may stack up over the years, we project different scenarios for spending them down in retirement. Want to see for yourself? Create a new Retirement Income goal (Add new > IRA > Create new Retirement Income goal) and find the tool under "Projections." Enter how much you have in retirement savings, then we'll serve up a personalized projection for a safe monthly withdrawal. We auto-fill a life expectancy age, but you can tinker with this number too. When the time comes to retire and start putting your hard-earned savings to use, we suggest reviewing your safe withdrawal rate annually, and working with both a tax and financial advisor to fine-tune a spending plan for your specific situation. Assuming your retirement savings are spread across taxable, tax-deferred, and tax-exempt accounts, the ideal withdrawal order between all of them will depend on a few variables. Before you go any further, however, it's worth reflecting on a final question. What does "safe" mean to you? "Die with Zero" makes for a provocative book title, but we don’t recommend taking it literally. So while most safe withdrawal strategies (including ours) define "safe" as simply not running out of money, you, a totally reasonable human being, might want to raise the bar slightly higher. Maybe you'd rather not cut things so close at the end. Maybe you'd like to leave some of your wealth to family or charity. Whatever your reasons, they’re valid. Just know you'll need to adjust your withdrawals accordingly. So play around with our projections. Sit with a few different end-of-life scenarios, until you land on a number you can live with. Then spend away, and start realizing the retirement of your dreams. -
How tax loss harvesting can give your taxable investing an edge
How tax loss harvesting can give your taxable investing an edge Jul 29, 2024 5:42:22 PM The tax strategy can unlock similar benefits as tax-deferred accounts Tax loss harvesting, or TLH for short, is the act of selling an asset at a loss, then quickly replacing it with a similar one—primarily to offset taxes owed on capital gains or income. In practice, it lowers your taxes now and increases them later. But don’t freak out, because the key takeaway of TLH is this: TLH can take a portion of your taxable investing and effectively turn it into tax-deferred investing. And tax-deferred investing, as we’ll quickly demonstrate, can do wonders for wealth-building. Tax me now or tax me later Take a dollar you would’ve otherwise paid in taxes today. Now invest it wisely. Odds are, it’ll be worth a lot more in the long run, even taking away any taxes you eventually owe. Depending on how your tax situation shakes out over the years, tax-deferred investing can be like Uncle Sam giving you a nearly interest-free loan to invest. This is in large part why tax-deferred accounts like traditional 401(k)s and IRAs come with restrictions. They’re reserved for retirement, namely, and their contributions are capped. But tax loss harvesting opens an entirely new door for tax-deferred investing, along with a few other side benefits. For a few types of investors in particular, it offers tremendous upside. Who TLH benefits the most Let’s start with an important caveat: While TLH offers potential value for most investors, it can be a wash or actually increase your tax burden in certain cases. But for now, let’s focus on three types of investors who can reap some of the biggest rewards from the strategy: The high-income earner Once you’ve offset all of your realized capital gains taxes for a given year, any leftover harvested losses can be used to offset taxes on up to $3,000 of ordinary income. So in the case of high earners, this means trading a high income tax rate for a relatively low long-term capital gains tax rate. The end result is both deferring and discounting your taxes. The steady saver Not only are recurring deposits a great way to start a savings habit, they also produce more harvesting opportunities. That’s because the older an investment, the less likely it drops below its initial purchase price (aka “cost basis”) and can be harvested at a loss. A steady drip of deposits, monthly for example, creates fresh crops of investments for harvesting in the near future. The tax-smart philanthropist A common misconception of tax loss harvesting is that it helps you avoid paying taxes altogether. Believe it or not, however, two scenarios exist in which you actually can cancel out your tax obligation: The first is when you donate shares to charity. As we mentioned earlier, selling and replacing shares as part of a harvest increases their future tax bill. It does this by lowering the shares’ cost basis, or the initial purchase price used to calculate capital gains. If you donate and replace these shares down the road, however, you reset their cost basis to a new, higher level. This effectively wipes out their entire tax bill(!) that had accrued to that point. In the eyes of the IRS, it’s like those capital gains never happened, and it’s one big reason why wealthy investors have long paired TLH with the practice of donating shares. The second scenario is posthumously. At that point, you won’t get a tax break, of course. But any individuals who you leave shares to will, because immediately after your death, the cost basis of your investments similarly “steps up” to their current market value. Your harvest awaits Historically-speaking, tax loss harvesting has been too time-intensive and costly to execute for all but the wealthiest of investors. But technology like ours and the low-cost trading of ETFs have made it a tax strategy for the masses. If TLH is right for you, the sooner you open and start contributing to a taxable account, the sooner you can start giving a portion of your taxable investing an edge. If you already have a Betterment taxable account, here’s how to turn on tax loss harvesting. -
How to talk money with your aging parents
How to talk money with your aging parents Jul 9, 2024 11:43:32 AM Talking about their financial future isn’t easy, but it’s important Talking money with your parents is no one’s idea of a good time. But as you enter middle age, and they enter their Golden years, it’s important to create an open dialogue. Because one day, you could be pressed into duty helping them manage their finances, or even stepping in with financial support yourself. Pew Research Center polled adults with an aging (65+) parent and found it’s more common than you might think. So before you buy another bouquet of flowers, or another tacky tie, consider gifting your parents an awkward but meaningful conversation on money’s role in aging with grace. Here's how. Step into their shoes, then switch mindsets If you think it's hard having this “talk” with your parents, imagine how they must feel. Maybe they're afraid their money won't last. Maybe they're too embarrassed to ask for help. From anyone, let alone someone whose diaper they once changed (and changed, and changed). This sort of empathy sets the stage for a true heart-to-heart. Sure, you could share any number of practical tips—everything from catch-up contributions and safe withdrawal strategies to (quick plug) how awesome Betterment is and how easy it is to switch—but those conversations are best left for another day. What matters most in these first few exchanges is to build trust, and to come at things through the lens of curiosity, not problem-solving. To that end, we leave you with a few suggestions. Three ways to set the table, and three icebreaker ideas Depending on your relationship with your parents, there may be no way around this: It will be awkward. Your inquiries may be met with resistance. So start getting comfortable with both possibilities. A few tips can help your odds: Pick a boring time. Steer clear of hectic holidays. Start small. Spread things out over multiple conversations. Stay curious. The questions matter more than the answers. Now, once it’s time to actually start the conversation, consider a few icebreakers: The “23andMe” angle. “I’m curious, how did your parents handle their finances as they aged? Did you ever talk about it with them?” The “I’ll go first” angle. “With the kids getting older, I’ve been thinking more and more about estate planning lately. But it’s all so overwhelming.” The CNBC angle. “Did you see the Dow just dropped [insert number] points? I know it’s easy to overreact, but it stings seeing my portfolio shrink even just a little.” Regardless of where things go from here, remember to give yourself credit. You just took the hardest step (the first one) in joining your parents on their financial journey. And if there ever does come a day when they consider joining you at Betterment, our team is here to help. -
The keys to building wealth, whether you rent or buy
The keys to building wealth, whether you rent or buy Jun 14, 2024 4:07:01 PM There's more than one path to prosperity To rent or to buy. At some point in your life, adulting may very well boil down to this one anxiety-inducing question. But it’s really two questions wrapped in one. The first is highly-personal: “Which lifestyle is right for me, right now?” And that answer is totally up to you. It’s largely based on individual circumstance, personal preference, and how much time you can handle at The Home Depot. But the second question? It deals with dollars and cents, and it’s right up our alley. So we’re here to offer you a sigh of relief, then help you turn hypotheticals into concrete action. Is renting or buying your primary residence the smarter money move? We’re in the business of building long-term wealth, and on that topic the historical data is pretty clear: both renting and owning a home can generate large sums of wealth in the long run. In the case of homeownership, that’s assuming you live there long enough to build equity and recoup the big, additional expenses that come with purchasing and maintaining it. And with renting, that’s assuming you invest wisely the extra money you would’ve otherwise spent buying and maintaining the home. A real estate investment firm recently crunched 50 years of data (see pages 3-5 for all of their assumptions) to see exactly how each hypothetical scenario fared. Wealth after 30 years *Data shown is for illustrative purposes only, and is not reflective of any Betterment portfolio or performance. As such, this graph does not reflect any of Betterment’s management fees, transaction costs or fund expenses. Renting slightly edges out buying in this study, although a buyer with a paid-off home could arguably close the gap in subsequent years if they invest their old mortgage payments. But these nitpicks miss the point, because in terms of wealth, both people are doing just fine in this hypothetical. So let’s all take a moment to exhale, because you can do well no matter which path you take. In the case of renting, it just requires you to actually invest those savings and not spend them. And we can help with that. How to realize the potential of “renting + investing” Let’s use the median house in America as an example. It costs roughly $415,000. Here’s a rough approximation of how much money you would need, both up front and ongoing, to buy and maintain it. Keep in mind the ongoing costs listed below exclude the mortgage payment itself. Up-front expenses Amount Downpayment (20%) $83,000 Closing costs (2%) $8,300 Agent commission* (3%) $12,450 Total $103,750 Ongoing expenses Property tax** $484 Homeowners insurance $179 Maintenance $534 Total $1,197/month Pay attention to your emotions here, because they can help guide your decision making. If you can’t imagine saving and investing this much money right now, then you may struggle to afford owning the median U.S. home. And that’s okay! One's answer to the Rent vs Buy question may very well change multiple times throughout life. Just remember you can still build wealth while renting. Crunch the numbers above based on your own budget, then follow two steps to see the strategy through to the end: Start saving for those upfront costs now. Once you have that amount in hand, start investing the equivalent of those monthly non-mortgage costs via recurring deposit. Now it’s no longer a hypothetical. You’re putting those savings to work. Should you decide to buy down the road, you’ll be more financially ready—and the tradeoff will be clear as day: Buy a house. Or keep saving at your current levels. There’s no wrong answer here. Whatever you decide will be the right decision for you. And it’ll be an informed one. -
How to plant the seeds for a smoother tax season
How to plant the seeds for a smoother tax season Apr 29, 2024 10:46:32 AM Whether you overpaid or underpaid, taking a few actions now can make next year’s taxes less of a headache. Rejoice! Another Tax Day has come and gone. But don’t go shredding your receipts in celebration just yet. Now’s a good time to reflect and plant the seeds for a smoother tax season next year. Because whether you overpaid and received a refund (roughly two-thirds of Americans do) or underpaid and had to cut a painful check, you can take a few actions now that have the potential to pay off down the road. For the purpose of this article, we’ll divvy up these tips into three buckets: A tip for over-payers: Ignore the internet A tip for under-payers: Dial in your withholding A tip for all taxpayers: Save more to save more in taxes A tip for over-payers: Ignore the internet The internet commentariat will snidely tell you that getting a tax refund is like giving the government an interest-free loan. The implication being, you should stop doing it. And of course, if your tax refund is pushing five figures, maybe you’d be better off putting some of that cash in your pocket (or the market) earlier in the year. But the average tax refund typically falls in the ballpark of $3,000-$4,000. And we’ll be the first to tell you that in many cases, there’s little wrong with overpaying by that amount. Cash windfalls such as these can supercharge your savings goals. There’s also an emotional benefit to “found” money. Even if that money was yours all along. And the alternative of underpaying can sometimes have pricey consequences. A tip for under-payers: Dial in your withholding Most salaried workers have income taxes withheld from their paychecks throughout the year. Case closed, right? Not always. Come tax time, some realize they still owe a substantial amount of taxes, so much so that the IRS slaps them with an underpayment penalty on top of their already nausea-inducing tax bill. It happens more than you think. The IRS dished out more than $1.8 billion of these underpayment penalties to about 12 million people in 2022 alone. If you’re one of these unfortunate souls, you have our sympathies. Now here’s our two-step tip: Step 1: Increase the amount of income tax withheld from your paycheck by completing a fresh W-4 form and submitting it to your employer. Step 2: As a backup plan, consider opening a new Cash Reserve account and setting up recurring deposits—just in case your withholding estimate was off and you still owe taxes next year. How much cash should you set aside? One approach is to shoot for 10% of your total tax amount from this most recent return. You can find this amount on line 24 of your Form 1040. A tip for all taxpayers: Save more to save more on taxes One surefire way to make tax time less painful is to pay less taxes in the first place. Sure, you could accomplish this by moving to one of the nine states with no income tax, but have you seen those Zestimates® lately? We’ll go ahead and unheart that idea for you. By comparison, an easier way to lighten your tax load is by contributing more to a traditional IRA and/or traditional 401(k). Between those two accounts, eligible individuals can reduce their taxable income by up to $30,000 in 2024. For someone making $77,000, the point at which the IRS starts to phase out a traditional IRA’s tax benefits, that could mean more than $5,000 in federal tax savings. And it all comes with the sweet, sweet side effect of saving more for retirement.