Emergency Funds

Three ways to put your bonus to work Cash windfalls can have the power to supercharge your savings goals. Year-end bonuses are a blessing. And while there’s no guarantee you’ll get one—just ask Clark Griswold—if you do, they can have the power to supercharge your savings goals. So while you wait for that bonus cash, read up on three ways to handle small cash windfalls such as these. Go 50/50: Treat yourself now and save for the future Let’s address the elephant in the room: A lot of us spend the bulk of our bonuses. But there’s a psychological workaround to this temptation: Think of yourself as two people. There’s “present-day” you, flush with cash and eyeing a few items on your wish list. Then there’s “future” you and all of their dreams for major purchases or financial freedom. Since both of you can rightly lay claim to your bonus, the only fair thing to do is split it 50-50. So go ahead: Splurge guilt-free with one half of your bonus, and save the other half. Tax-savvy saving: Use your bonus to get a tax break A lot of companies withhold taxes on bonuses at the IRS-recommended rate of 22%. Less commonly, some companies lump it in with your regular paycheck, and your regular withholding rate applies. Either way, and contrary to popular belief, bonuses aren’t taxed at a higher rate. But seeing your bonus shrink due to any amount of taxes is still rough. Thankfully, you may able to minimize your tax hit with the help of a tax-advantaged retirement account: Boost your 401(k) contributions. In some cases, companies allow employees to make 401(k) contributions with their bonuses. If that’s the case for you, consider funneling “future” you’s half of your bonus into your traditional or Roth 401(k), up to the IRS limits. Traditional for a tax break now, Roth for a tax break later. Max out your IRA. Depending on how much income you make, you may be eligible to deduct traditional IRA contributions from your taxes and/or contribute after-tax dollars to a Roth IRA for a tax break later. Better yet, you have until Tax Day of 2024 to max out your 2023 IRA! Stash the cash: Start earning interest today Tax breaks aren’t the end-all, be-all, of course. In some scenarios, saving your bonus in a high-yield cash account like our Cash Reserve account might take priority. If you lack an emergency fund, for example, or if you’re planning for a major purchase in the near future. However you save or invest your bonus, rest easy knowing you’re striking a good balance between today and tomorrow. Unless your bonus came in the form of jelly, in which case you’re on your own, Clark.

Three steps to size up your emergency fund Strive for at least three months of expenses while taking these factors into consideration. Imagine losing your job, totaling your car, or landing in the hospital. How quickly would your mind turn from the shock of the event itself to worrying about paying your bills? If you’re anything like the majority of Americans recently surveyed by Bankrate, finances would add insult to injury pretty fast: 57% | Percentage of U.S. adults currently unable to afford a $1,000 emergency expense In these scenarios, an emergency fund can not only help you avoid taking on high-interest debt or backtracking on other money goals, it can give you one less thing to worry about in trying times. So how much should you have saved, and where should you put it? Follow these three steps. 1. Tally up your monthly living expenses — or use our shortcut. Coming up with this number isn’t always easy. You may have dozens of regular expenses falling into one of a few big buckets: Food Housing Transportation Medical When you create an Emergency Fund goal at Betterment, we automatically estimate your monthly expenses based on two factors from your financial profile: Your self-reported household annual income Your zip code’s estimated cost of living You’re more than welcome to use your own dollar figure, but don’t let math get in the way of getting started. 2. Decide how many months make sense for you We recommend having at least three months’ worth of expenses in your emergency fund. A few scenarios that might warrant saving more include: You support others with your income Your job security is iffy You don’t have steady income You have a serious medical condition But it really comes down to how much will help you sleep soundly at night. According to Bankrate’s survey, nearly ⅔ of people say that total is six months or more. Whatever amount you land on, we’ll suggest a monthly recurring deposit to help you get there. We’ll also project a four-year balance based on your initial and scheduled deposits and your expected return and volatility. Why four years? We believe that’s a realistic timeframe to save at least three months of living expenses through recurring deposits. If you can get there quicker and move on to other money goals, even better! 3. Pick a place to keep your emergency fund We recommend keeping your emergency fund in one of two places: cash—more specifically a low-risk, high-yield cash account—or a bond-heavy investing account. A low-risk, high-yield cash account like our Cash Reserve may not always keep pace with inflation, but it comes with no investment risk. An investing account is better suited to keep up with inflation but is relatively riskier. Because of this volatility, we currently suggest adding a 30% buffer to your emergency fund’s target amount if you stick with the default stock/bond allocation. There also may be tax implications should you withdraw funds. Your decision will again come down to your comfort level with risk. If the thought of seeing your emergency fund’s value dip, even for a second, gives you heartburn, you might consider sticking with a cash account. Or you can always hedge and split your emergency fund between the two. There’s no wrong answer here! Remember to go with the (cash) flow There’s no final answer here either. Emergency funds naturally ebb and flow over the years. Your monthly expenses could go up or down. You might have to withdraw (and later replace) funds. Or you simply might realize you need a little more saved to feel secure. Revisit your numbers on occasion—say, once a year or anytime you get a raise or big new expense like a house or baby—and rest easy knowing you’re tackling one of the most important financial goals out there.

How much cash is too much cash to be in savings? Cash is great. But can you have too much? And what should you do with it? Let’s find out. The main point: If you have too much cash in savings, you may be missing out on growth from stock or bond investments. Consider having cash in savings for short-term needs and putting the rest into investing accounts. Facts about cash in savings: Cash in savings is liquid, meaning it is easy to access when you need to withdraw it for spending. Cash in savings is also low risk, meaning your money should not decrease in value like stocks if you stay within FDIC insurance limits. But—cash in savings does not have the opportunity to grow compared to cash in stocks and bonds, especially when savings rates are not keeping up with inflation. Finding a balance: To strike the right balance between cash and investments, consider the following: Cash is a secure option for your emergency fund. Most experts recommend having three to six months of living expenses saved. Cash is the lowest-risk option but you can use a mix of bonds and stock too. Take a close look at your situation and save what feels right for you. After that, take a look at your extra cash. Cash and investments can also be right for your short-term goals. Having cash in savings can be wise for short-term goals (we consider anything under 12 months short-term). But depending on how you’re defining short-term and your risk tolerance, you may consider putting some cash for shorter-term goals in bonds and stocks. Investments can support your long-term goals. For most goals longer than 12 months, consider putting your cash into stock and bond investments. While investing involves more risk, stocks have had greater long-term gains historically than leaving your cash in savings. We have options for you: Open a Cash Reserve account if you’re looking for a secure way to save. It’s a high-yield cash account that helps grow your savings while offering FDIC insurance† up to $2 million ($4 million for joint accounts) through our program banks (up to $250,000 of coverage for each insurable capacity—e.g., individual or joint—at up to eight Program Banks), subject to certain conditions. We, Betterment, are not a bank ourselves. Open an investing account for your long-term goals. We’ll help assess your risk tolerance, provide investment recommendations, and make it easy to access expert-built portfolios to get you closer to your goals.