Chrissy Celaya, CFP®
Meet our writer
Chrissy Celaya, CFP®
Senior Manager Licensed Concierge, Betterment
Chrissy Celaya is a Certified Financial Planner™ and manages Betterment’s licensed concierge service. Her team uses an advised approach to helping customers navigate complex onboarding and account transitions. Chrissy is also a champion for innovation within Betterment, using her team’s day-to-day conversations to drive new product development. She has a BS in Personal Financial Planning from Texas Tech University and prior to joining Betterment she worked for both USAA and Merrill Lynch.
Articles by Chrissy Celaya, CFP®
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Save more, sweat less with recurring deposits
Save more, sweat less with recurring deposits Aug 6, 2024 2:56:04 PM How one click—and the power of dollar cost averaging—can boost your returns Healthy habits like exercising, eating well, and saving are hard for a reason. They take effort, and the results aren’t always immediate. Except in the case of saving, there’s a simple hack that lowers the amount of willpower needed: setting up recurring deposits. So kick off those running shoes, because you barely have to lift a finger to start regularly putting money into the market. $2, $200, it doesn’t matter. This one deposit setting, along with a little help from something called dollar cost averaging, can lead to better returns. Our own data shows it: Over the last decade, customers who used recurring deposits earned 6% higher annual returns than those who didn’t. *Based on Betterment's internal calculations for the Core portfolio. Users in the "auto-deposit on" groups earned an additional 1% annualized over 5 years and 6% over the last year. See more in disclosures. Three big reasons they fared better than those who rarely used recurring deposits include: When you set something to happen automatically, it usually happens. It's relatively easy to skip a workout or language lesson. All you need to do is … nothing. But the beauty of recurring deposits is it takes more energy to stop your saving streak than sustain it. When you regularly invest a fixed amount of money, you're doing something called dollar cost averaging, or DCA. DCA is a sneaky smart investment strategy, because you end up buying more shares when prices are low and fewer shares when prices are high. A steady drip of deposits helps keep your portfolio balanced more cost-effectively. Instead of selling overweighted assets and triggering capital gains taxes, we use recurring deposits to regularly buy the assets needed to bring your portfolio back into balance. Now it’s time for an important caveat: The benefits of dollar cost averaging don't apply if you have a chunk of money lying around that’s ripe for investing. In this scenario, slowly depositing those dollars can actually cost you, and making a lump sum deposit may very well be in your best interest. But here’s the good news: While DCA and lump sum investing are often presented in either/or terms, you can do both! In fact, many super savers do. You can budget recurring deposits into your week-to-week finances—try scheduling them a day after your paycheck arrives so you’re less likely to spend the money. Then when you find yourself with more cash than you need on hand, be it a bonus or otherwise, you can invest that lump sum. Do both, and you may like what you see when you look at your returns down the road. -
The savvy saving move for your excess cash
The savvy saving move for your excess cash Aug 6, 2024 2:37:52 PM And why taking the “lump sum” leap may be in your best interest We're living in strange financial times. Inflation has taken a huge bite out of our purchasing power, yet investors are sitting on record amounts of cash, the same cash that's worth 14% less than it was just three years ago. High interest rates explain a lot of it. Who wouldn't be tempted by a 5% yield for simply socking away their money? But interest rates change, and we very well could be coming out of a period of high rates, leaving some savers with lower yields and more cash than they know what to do with. So let's start there—how much cash do you really need? Then, what should you do with the excess? How much cash do you really need? Cash serves three main purposes: Paying the bills. The average American household, as an example, spends roughly $6,000 a month. Providing a safety net. Most advisors (including us) recommend keeping at least three months' worth of expenses in an emergency fund. Purchasing big-ticket items. Think vacations, cars, and homes. Your spending levels may differ, but for the typical American, that's $24,000 in cash, plus any more needed for major purchases. If you're more risk averse—and if you're reading this, you just might be—then by all means add more buffer. It's your money! Try a six-month emergency fund. If you’re a freelancer and your income fluctuates month-to-month, consider nine months. Beyond that, however, you're paying a premium for cash that’s not earmarked for any specific purpose, and the cost is two-fold. Your cash, as mentioned earlier, is very likely losing value each day thanks to inflation, even historically-normal levels of inflation. Then there's the opportunity cost. You're missing out on the potential gains of the market. And the historical difference in yields between cash and stocks is stark, to say the least. The MSCI World Index, as good a proxy for the global stock market as there is, has generated a 8.5% annual yield since 1988. High-yield savings accounts, on the other hand, even at today’s record highs, trail that by a solid three percentage points. So once you've identified your excess cash, and you’ve set your sights on putting it to better use, where do you go from there? What should you do with the excess? Say hello to lump sum deposits. Investing by way of a lump sum deposit can feel like a leap of faith. Like diving into the deep end rather than slowly wading into shallow waters. And it feels that way for a reason! All investing comes with risk. But when you have extra cash lying around and available to invest, diving in is more likely to produce better returns over the long term, even accounting for the possibility of short-term market volatility. Vanguard crunched the numbers and found that nearly three-fourths of the time, the scales tipped in favor of making a lump sum deposit vs. spreading things out over six months. The practice of regularly investing a fixed amount is called dollar cost averaging (DCA), and it’s designed for a different scenario altogether: investing your regular cash flow. DCA can help you start and sustain a savings habit, buy more shares of an investment when prices are low, and rebalance your portfolio more cost effectively. But in the meantime, if you’ve got excess cash, diving in with a lump sum deposit makes the most sense, mathematically-speaking. And remember it’s not an either-or proposition! Savvy savers employ both strategies—they dollar cost average their cash flow, and they invest lump sums as they appear. Because in the end, both serve the same goal of building long-term wealth. -
How we help you navigate market volatility
How we help you navigate market volatility Aug 16, 2023 12:00:00 AM At Betterment, our portfolios and automated features are designed to handle the market’s downturns. You may have been told to “sit tight and stay the course” when the market is dropping. That’s not always easy to do—unless your portfolio is designed to handle market volatility. The big idea: At Betterment, our platform was designed to help manage the inevitable downturns of the market. You can sit tight and stay the course, knowing that: Our portfolios are constructed with volatility in mind Portfolio management features such as automated rebalancing and tax loss harvesting are built to help keep you on track during downturns How we construct portfolios to weather the storm: We create diversified portfolios designed to offer relatively low costs and keep long-term performance in mind. First, we use expert-based assumptions: Our stock and bond allocation recommendations are based on assumptions, including a range of possible outcomes, in which we give slightly more weight to potential negative ones, by building in a margin of safety—otherwise known as ‘downside risk’ or uncertainty optimization. Even before you’ve invested your first dollar, your portfolio has already been designed to account for the market fluctuations like the big downturns in 2008 and in 2020. Second, we use your personal goals: Our allocation recommendations consider the amount of time you’ll be invested. For goals with a longer time horizon, we often advise that you hold a larger portion of your portfolio in stocks. For shorter-term goals, we recommended a lower stock allocation. By using your investor profile and the goal details you provide, in conjunction with our expert-based assumptions, we’re able to recommend a diversified portfolio of stock and bond ETFs that has an initial allocation recommended just for you. How our automated features keep you on track: We’ve designed three key features to navigate volatility for you. First, automated allocation adjustments: For certain goal types, our system changes your portfolio’s stock and bond allocation automatically over time to help manage risk based on your goals. We call this recommendation “auto-adjust” or a goal’s “glidepath”—a gradual reduction of stocks in favor of bonds. For most Betterment goals, we recommend that you scale down your risk as your goal’s end date gets closer, helping to reduce the chance that your balance will drastically fall if the market drops. You can use our auto-adjust feature in eligible portfolios and goal types. Second, automated portfolio rebalancing: We monitor and adjust your portfolio based on your account balance and market movements to help manage risk. Rebalancing is the process of selling and buying the necessary securities as the market fluctuates to bring the value of each allocation back to the desired level of the portfolio. When the market fluctuates, not all investments fluctuate to the same degree. For example, stocks are generally more volatile than bonds, which can create an undesired asset allocation within your portfolio. We automate that process for you and do it with potential tax implications in mind. Third, automated tax loss harvesting: Our automated software monitors your account for opportunities to harvest tax losses. Tax loss harvesting is the practice of selling a security that has experienced a loss to potentially reduce your tax bill. The sold security is replaced by a similar one, ideally maintaining an optimal asset allocation. It can be beneficial if you have a lot of short-term capital gains, which are taxed at a higher rate than long-term capital gains. Any unused losses from the current tax year can be carried over indefinitely and used in subsequent years. You can opt into tax loss harvesting, but keep in mind that everyone’s tax situation is different—and tax loss harvesting may not be suitable for yours. -
Five common Roth conversion mistakes
Five common Roth conversion mistakes Oct 14, 2022 12:00:00 AM Learn more about Roth conversion benefits—for high earners and retirees especially—and common conversion mistakes to avoid. Converting pre-tax funds from your traditional retirement accounts into a post-tax Roth IRA (i.e., a Roth conversion) can make sense in certain scenarios. But before you move any money, we recommend connecting with a trusted financial advisor and, in some cases, a tax advisor. They can help you sidestep five common Roth conversion mistakes: Converting outside of your intended tax year You must complete a Roth conversion by a year’s end (December 31) in order for it to count toward that specific tax year’s income. Keep in mind this is different from the IRA contribution deadline for a specific tax year, which (somewhat confusingly) bleeds into the following calendar year. As we’ve mentioned before, Roth conversions require careful planning on your part (and, ideally, your tax advisor) to determine how much you should convert, if at all, and when. Converting too much Speaking of, the question of how much to convert is a crucial one. Blindly converting too much could push you into a higher tax bracket. A common strategy used to avoid this is called “bracket filling.” You determine your income and how much room you have until you hit the next tax bracket, then convert just enough to “fill up” your current bracket. Of course, it can be difficult to determine your exact income. You might not know whether you’ll get a raise, for example, or how many dividends you’ll earn in investment accounts. Because of this, we highly recommend you work with a tax advisor to figure out exactly how much room you have and how much to convert. You no longer have the luxury of undoing a Roth conversion thanks to the 2017 Tax Cuts and Jobs Act. As a side note, you can squeeze more converted shares into your current bracket if the market is down since each share is worth less in that moment. To be clear, we don’t recommend making a Roth conversion solely because the market is down, but if you were already considering one, this sort of market volatility could make the conversion more efficient. Withdrawing converted funds too early When making a Roth conversion, you need to be mindful of the five-year holding period before withdrawing those converted funds, which is different from the 5 year holding period for qualified distributions. And as we mentioned earlier, you’ll typically pay taxes on the amount you convert at the time of conversion, and future withdrawals in retirement can be tax and 10% penalty free. After making a Roth conversion, however, you must wait five tax years for your withdrawal of your taxable conversion amount to avoid the 10% penalty. Withdrawals of amounts previously converted are always tax-free. Notably, this countdown clock is based on tax years, so any conversion made during a calendar year is deemed to have taken place January 1 of that year. So even if you make a conversion in December, the clock for the five year rule starts from earlier that year in January. One more thing to keep in mind is that each Roth conversion you make is subject to its own five year period related to the 10% early withdrawal penalty. Paying taxes from your IRA Paying any taxes due from a conversion out of the IRA itself will make that conversion less effective. As an example, if you convert $10,000 and are in the 22% tax bracket, you’ll owe $2,200 in taxes. One option is to pay the taxes out of the IRA itself. However, this means you’ll have only $7,800 left to potentially grow and compound over time. If you’re under the age of 59 ½, the amount withheld for taxes will also be subject to a 10% early withdrawal penalty. Instead, consider paying taxes owed using excess cash or a non-retirement account you have. This will help keep the most money possible inside the Roth IRA to grow tax-free over time. Keeping the same investments Conversions can be a great tool, but don’t stop there. Once you convert, you should also consider adjusting your portfolio to take advantage of the different tax treatment of traditional and Roth accounts. Each account type is taxed differently, which means their investments grow differently, too. You can take advantage of this by strategically coordinating which investments you hold in which accounts. This strategy is called asset location and can be quite complex. Luckily, we automated it with our Tax Coordination feature.