We love 5 questions episodes because they are based on questions our listeners want answers to. We’re going to cover questions related to Betterment’s Smart Saver Account, student loans, investing with Fidelity versus Vanguard, your house as a retirement fund, and incorporating a business.
And as a bonus, we have a super inspiring story about paying off student loan debt from a listener.
Smart Saver Account: I currently have an emergency fund sitting in a regular money market account. Do you think it would be smart to move it to the new Smart Saver Account with betterment?
What to do with your emergency fund can be a tough question. If you have the recommended 3-9 months of expenses saved, that’s a lot of money to be sitting around in a low yield savings account where it’s making almost zero interest.
Most financial advisors recommend you keep three to six months of expenses in an emergency fund. However, putting that substantial amount of cash in a traditional savings account is “losing money safely,” said Nick Holeman, a certified financial planner with Betterment, an automated investing service.
On the other hand, we need to keep our emergency fund somewhere that is both safe and quickly accessible.
Betterment to the rescue with their Smart Saver Account. It’s a low-risk investment account made up of 80% Short-Term U.S. Treasury Bonds and 20% Short-Term Investment Grade Bonds.
The account is currently paying 2.23%, so above inflation and if interest rates rise, your yield rises too.
There is no minimum balance to open a Smart Saver Account with Betterment, and the fee is just 0.25%. You can withdraw money from the account at any time, but the ACH transfer typically takes 4-5 business days. Smart Saver Accounts are not FDIC insured, but U.S. bonds are one of the safest investments you can make.
How is the Smart Saver Account different from a Money Market Account? The two are pretty similar, but Smart Saver Accounts have no account minimum. Many Money Market Accounts have minimums of a few thousand dollars. There is no maximum number of withdraws you can make from a Smart Saver Account. You can only withdraw from a Money Market Account up to six times a month.
Betterment’s Smart Saver Account will soon introduce Two-Way Sweep. Betterment will analyze your expenses, estimate your spending needs and show you how much excess cash you’re keeping in your checking account.
Two-Way Sweep will take that excess cash and invest it in Smart Saver. If you need it, the money will be moved back to your checking account. Before moving money in either direction, you’ll get a notification.
I am a 22-year-old female, I graduated from university last May, and I am starting to pay back student loans – I have $12,000 total with an average interest rate of 3.8%. I have saved up and can pay off them all right now, but I don’t know if I should, or if I should use that money to invest elsewhere. Right now, all my money is just sitting in my savings account.
Should I follow the prescription and pay off my student debt monthly? Or should I pay it all off now? Maybe refinance them elsewhere? My credit score is “perfect” according to Credit Karma.
Also, I am applying to grad school for Fall of 2019. I have the capital to pay for school out of pocket. Should I take out a student loan with an interest rate of around 4% and invest my money or should I pay for school straight out of pocket? What traits of the market should I take into consideration when making this decision? Who should or shouldn’t use the ‘pay out of pocket’ strategy?
Laura from Iowa
An interest rate under 4% on student loans is nothing; it’s a really good rate. If you have an interest rate higher than 4%, consider refinancing to a lower rate. If your rate is 4% or lower, consider investing rather than paying the loans off.
The average return in the market over time is 7%, higher than the interest on the loans. And the longer you wait to start investing, the less time you have to harness the power of compounding interest.
Perhaps reconsider grad school at all unless you plan to enter a field where an advanced degree is required or where it’s historically shown that having an advanced degree gives you the ability to earn a lot more money than you otherwise could. When Andrew was at Lehman Brothers, those with grad degrees were only making $3,000 more than those without.
If you do need an advanced degree, consider postponing it. You’re 22 so have little to no work experience. Spend a few years gaining some and look for opportunities with employers who will contribute to the cost of an advanced degree.
If you’re dead set on getting the degree now, if you can get a similarly low-interest rate, take out loans to pay for it for the same reasons we encouraged you not to pay off your loans right now.
Some people feel that no one should have any debt and we can understand that point of view, but there’s a difference between taking on low-interest debt to get an education and taking on credit card debt to buy stuff you can’t afford.
And if you use all of your cash to pay off your student loans or to pay for college, that leaves you without an emergency fund. Should an emergency happen, you could end up having to go into credit card debt to pay for it.
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I am just learning about making smart investments and had a few questions about the old trusty index fund. I am 27 years old and have very low living costs and expenses. As a good a saver I have a substantial amount sitting in decently high-interest rate (~2.0%) saving account, but I know I can do more with this money.
After searching through funds, I landed with Fidelity’s Zero Total Market index fund. I was curious what you thought about these Zero funds. Pretty much a normal total market fund with no fees or expense ratio. I know they are young funds, so there is not much data on returns right now, but I can’t see why they would be any different than a vanguard total market with a fee.
Additionally, would you recommend throwing a large lump sum, say $10,000 all into a fund at once, or would it be better to slowly make purchases into the fund?
Fidelity offers this fund as a loss leader. It’s designed to get customers through the door where Fidelity can upsell them other products. There’s nothing necessarily wrong with that, but that’s what’s happening here.
We like Vanguard. The Vanguard model is investors as owners. The fees Vanguard charges are the fees to keep the lights on, and they are always looking for new efficiencies that will reduce fees further.
Investing a lump sum performs better, but if that feels too risky, you can use dollar cost averaging to drip money into the market, invest $1,000 a month for ten months for example. Or invest half either lump sum or through dollar cost averaging and hold the rest in reserve for an opportunity fund.
We all know we should save a percentage of our earnings each month for retirement. Question: do you consider the money one pays each month towards a mortgage as part of this percentage, and why?
Your home is a liability until you pay off your mortgage and even then, it’s something that costs you money in the form of maintenance, repairs, and property taxes. And if you decide to sell your home, it could be worth less than what you paid for it.
The right rental property, on the other hand, is an investment.
Recently I got a job offer to consult for a project that I worked on. I am in the process of forming an LLC (in MN) with the intention of electing S-corp to start work in January. From most of the research that I have done online, an S-corp seems to be the best option. Is there a drawback to being elected S-Corp if you are a consultant whose sole income is tied to hours put in?
No one at LMM is a tax professional. The advice is merely based on what Andrew and Matt have done with their own businesses.
Andrew and Matt both have businesses that make money without being tied to their time. The writer of the email is a consultant, so his income is solely based on the number of hours he or she works.
As such, an LLC might be the way to go. Your wage is the income of the business. The amount you’re taxed is basically the payroll tax.
We want to highlight the second part of this email and give this listener the major kudos he or she deserves.
He or she graduated in 2014 with $72,000 of student loan debt averaging around 5-6% interest. They realized the need to figure out a game plan to get rid of that debt because making $18 an hour with a minimum student loan payment of $800/a month wasn’t going to cut it.
Fast forward to 2018; they paid the last student loan payment all while starting a Betterment account and maxing out an IRA for two years. They have a comfortable emergency fund and about half the money saved for a downpayment on a future rental property.
Well done! This shows what you can do when you decide to really focus on a financial goal.
Keep Em Coming!
Thanks to everyone who wrote in with questions. We choose questions that cover topics lots of people are writing in about so we can reach a lot of you in one place. If you have questions, hit us up at firstname.lastname@example.org
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