Optimize your investing by optimizing your deposits
There’s an art to investing money. We can help you determine how much to save and the deposit strategies to help reach your goals.
How much you need to invest and how you do it changes with your circumstances. With the right techniques and tools, you can be equipped to make the choices that are best for you, whatever your situation.
Why it matters: If you simply invest money when you have “extra” or make deposits randomly when you remember to, you may be missing out on growing your investments or even reducing your taxes.
When you open an investing or Cash Reserve goal, we’ll ask you what you’re saving for, your target amount, and the date you want to reach it by (your time horizon). Then we’ll recommend how much to save each month and give you resources to show projections since we can’t predict the future.
There are two deposit strategies to choose from:
- Lump-sum investing is depositing the entire balance of cash at once.
- Dollar-cost averaging is depositing the same amount of money at fixed intervals (weekly, monthly, etc) over a period of time.
Lump-sum investing may be better if you have extra cash and are looking to maximize the time your funds are invested which can result in higher long-term returns. But know that it can require strong discipline during volatile markets. You might see sizable unrealized short-term losses during market declines, making it hard to resist the urge to sell.
Dollar-cost averaging may be better if you want to take less risk with a lump sum of cash and protect against short-term market declines, or if you only have money to save after each paycheck. But know that you may be forfeiting potential long-term upside by not investing a larger amount right away. On the positive side, this method helps you avoid timing the market and can be easily coordinated with the timing of your paycheck. You end up buying more shares of an investment when the price is low and fewer shares when the price is high which can result in paying a lower average price per share over time.
Pro Tip: The easiest way to start dollar-cost averaging is by automating your deposits.
- To get started with dollar-cost averaging, simply log in to your Betterment account, click the Deposit button, select an account, and adjust the frequency to meet your needs.
If you’re dollar-cost averaging, consider this: The timing of your deposits matters. Scheduling deposits to occur the day after each paycheck can be an effective strategy.
There are three reasons for this:
- Paying yourself first. From a behavioral standpoint, this protects you from yourself. Your paycheck goes toward your financial goals first, and then toward other spending needs.
- Avoiding idle cash. When your cash sits in a traditional bank account, it typically earns very little interest. In times of inflation, your cash is actually losing value. Idle cash could cause you to miss out on investment growth.
- Reducing your taxes. Regular deposits can help us rebalance your portfolio more tax-efficiently, keeping you at the appropriate risk level without realizing unnecessary capital gains taxes. We use the incoming cash to buy investments in asset classes where you’re underweight, instead of selling investments in asset classes where you’re overweight.