Financial Goals

Three keys to managing joint finances with your partner Nov 1, 2024 8:00:00 AM Talking about money with your partner can be a difficult conversation. The key is to have open communication, sooner rather than later. Money has wrecked its fair share of relationships. Maybe you’ve even seen one of yours go up in flames because of it. But it doesn’t have to. And while every partnership is different, we’ve seen an emphasis on three areas help our clients avoid the worst of money fights: Communication Prioritization Logistics Whether you’re married or not, and whether you join your accounts or keep them separate, they can help soften one of love’s thorniest topics. Open (and keep open) those lines of communication When you choose to share your life with someone special, you bring all sorts of baggage with you. Among the bags you might want to start unpacking first is your relationship with money. It could be complicated, and there’s probably all sorts of emotions wrapped up in it—especially with debt—but transparency can help avoid unpleasant surprises down the road. So to start with, try sizing up the financial state of your union by crunching a few numbers for each of you: Net worth (assets − liabilities) This can be the most emotionally-charged of numbers, and it’s no surprise why. It’s right there in the name: net worth. We tend to bundle up our concept of our own self-worth with our finances, and when those finances don’t look pretty, feelings of shame or embarrassment may follow. So it’s important to support each other during this exercise. Help your partner feel safe enough to share these sensitive details in the first place. When you’re both ready, add up all your assets (cash, investments, home equity, etc.), then subtract your total liabilities—namely debt (credit cards, student loans, mortgage, etc.)—to get a good sense of your separate and combined balance sheets. If you’re a Betterment customer, connecting your external financial accounts to Betterment can be a handy shortcut for this number-crunching. Cash flow (income − expenses) Now comes the time to size up how much money is coming in and going out each month, with the difference being what you currently have available to save for all your goals (more on those later). For simplicity’s sake, it can be easier to start with your take-home pay, which may already factor in payroll taxes and expenses such as health care insurance. If you already contribute to a 401(k), which automatically comes out of your paycheck, be sure to count this toward your tallied savings when the time comes! Toss in a survey of your respective credit scores, which could affect future goals such as home ownership, and you’ve started to lay the foundation for a healthier money partnership. And by no means is this a one-time exercise. For some couples, it helps to schedule a monthly financial check-in. Why monthly? Some people don’t like talking about finances at all. A monthly check-in gives you a safe space to start the conversation. Others think and talk about money all the time, which can be draining on a partner. Unless it’s urgent, you can make a note and wait to bring it up until the next check-in. A recurring monthly check-in solves both these problems and provides a forum to talk about upcoming big expenses and important money tasks, among other things. To make things fun, you can build your check-ins around something you already enjoy, like a weekend morning coffee date. Prioritize as partners With key details like your net worth and cash flow in place, next comes the process of visualizing what you—as individuals and as a couple—want your money to do for you and your family. Couples don’t always see eye-to-eye on this, so now's the time to hash out any differences of opinion. If you have financial liabilities, know that it’s possible to manage debt and save at the same time; it all comes down to prioritizing. In general, we recommend putting your dollars to work in this order: Assuming your employer offers a 401(k) and matching contribution, contribute just enough to your 401(k) to get the full match so you’re not leaving any money on the table. Address short-term, high-priority goals such as: High-interest debt Emergency fund (3-6 months’ worth of living expenses) Save more for retirement in tax-advantaged investment accounts such as a 401(k) and IRA. How much more? Sign up for Betterment and we can help you figure that out. Save for other big money goals such as home ownership, education, vacations, etc. The devil is in the details with #4, of course. And you may not be able to save as much as you need to for every single goal at this time. Just know that if you start at the top and set specific goals—”I’ll contribute X amount of dollars each month to pay off my high-interest debt in X number of years,” for example—you’ll eventually free up cash flow to put toward priorities that fall further down on your list. Tend to the logistical paperwork With your planning well underway, next comes execution. How exactly will you set up your financial accounts? If you’re married, will you file taxes jointly or separately? And how will you update (or set up for the first time) your estate plan? These are three big questions best to start considering now. Set up your accounts for success There’s the process of jointly managing finances with your significant other, then there's the actual act of opening joint accounts. These are accounts you both share legal ownership of. Whether or not you decide to keep all or some of your accounts separate is a highly-personal decision. One way to address it is the “yours, mine, ours” approach, also known as the “three-pot” approach. To keep some financial autonomy, you and your partner might each maintain credit cards and checking accounts in your own names to cover personal expenses or debt repayments. The bulk of your monthly income, however, would go into a joint account to cover your monthly bills and shared expenses. Head on over to our Help Center for more information on how to manage money with a partner at Betterment. If you’re married, weigh the pros and cons of filing taxes jointly In most cases, the financial benefits of you and your spouse filing one joint tax return will outweigh each of you filing separately, but it‘s important to know and understand your options. When you choose to file separately, you limit or altogether forgo several tax breaks and deductions including but not limited to: Child and Dependent Care Tax Credit Earned Income Tax Credit The American Opportunity Credit and Lifetime Learning Credit for higher education expenses The student loan interest deduction Traditional IRA deductions Roth IRA contributions That being said, you might consider filing separately if you find yourself in one of these scenarios: You and your spouse both have taxable income and at least one of you (ideally the person with the lower income) has significant itemized deductions that are limited by adjusted gross income (AGI). You participate in income-driven repayment plans for student loans. Filing separately may mean lower monthly loan payments in this scenario. You want to separate your tax liability from your spouse’s. If you know or suspect that your spouse is omitting income or overstating deductions and/or credits, you may want to file separately. You and/or your spouse live in a community property state. Special rules apply in these states for allocating income and deductions between each spouse’s tax return. Update (or establish) your estate plan An estate plan can define what will happen with the people and things you’re responsible for if you die or become incapacitated. Who will make medical or financial decisions on your behalf? Who will be your child’s new guardian? How will your finances be divided? Who gets the house? If you haven’t yet created one, now may be the time. And if you have, it’s important to keep it up-to-date based on your latest life circumstance. Don’t forget to update your beneficiaries on any accounts that may pass outside the estate. That’s because beneficiary designation forms—not your will—determine who inherits your retirement savings and life insurance benefits. You can review, add, and update beneficiary listings on your Betterment accounts online.

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 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.