By Jimmy Rogers
Contributing Writer, [GAS]
As a graduate student, I’m certainly not a high-roller financially, but for the first time in my life I’m making more money than I spend. It’s certainly not much, but it’s gotten me thinking: should I be more proactive about my savings?
Over the last few weeks I’ve looked at money market and CD options, but they all seem to have high minimums, extremely low interest, and some of them have additional fees or requirements. My savings account offers only slightly less interest. Two days ago, I was pleased to stumble across a new startup called Betterment, which just received the award for Best New York Startup at Tech Crunch’s “Disrupt” conference. They seem to offer, in this blogger’s opinion, a much-needed alternative to more conventional investment strategies.
Before I continue, I want to add that GeeksAreSexy.net does not officially endorse Betterment or give any financial advice. Also, in the interest of full disclosure, I am personally using Betterment’s service at the time of this publication. The graphics below use made-up demo data.
Betterment’s overarching principle is value paired with simplicity. They see savings accounts (which offer stability but very little growth) and the financial products mentioned earlier and recognize a void where something else could fit.
So what do they do differently? Well on first look, their site is very slick. The front page spells out the entire plan very clearly and even provides a semi-functional demo interface so you can get an idea of how the day-to-day management works. Also, they lay out a lot of security and financial stability infrastructure which seeks to gain your trust and confidence.
The long and short of the plan is this: they have two funds, one that is stable and one that is more high-risk. The stable fund (constructed of treasury bonds and other sound investments) will provide a fairly small amount of net growth at a predictable rate. The higher-risk fund is based in the stock market and is intended to do as well as or better than the market as a whole. You choose how much of your invested money goes into each fund. If you want a long-term stable return, you can move the slider toward the stable fund. If you want a potentially higher gain over a shorter term, you’ll shift the slider toward the stock market fund.
There are other funds that essentially do the same thing as Betterment, but the difference that will probably appeal to geeks (and young people in general) is their obvious grasp of the web. Their site, as mentioned before, is very slick and it’s also very easy to use. The interface not only has direct controls for your money (and few decisions to make), but also offers advice based on your goals and shows you what other customers chose to do.
You’re probably asking by now, “How does Betterment get a cut?” Well you can’t get something for nothing. Betterment takes 0.9% of your yearly average balance as their one and only fee. Think of this as $9 for every $1000 you hold. As a person who likes to nudge and customize my settings, I like the idea of having a flat fee and no penalities (there is also no minimum balance, so you can move funds or even empty your account whenever you please).
Those are essentially the “facts” of the service. The question now is…should you go for it? Personally, I’ve already made the choice to try it out for a while, but I’ll give you my reasoning as well as some negatives I considered.
In favor of the service is its simple offer. The fee is fairly negligible if you have a small balance and the sole “choice” to be made is how you want your money divided between the two funds. The lack of any transfer or transaction fees gives you the freedom to draw from your account at any time (minus the standard time for an electronic transfer, which is 3-4 days to add funds and about 6 days to withdraw funds). Lastly, while you may not make a LOT of money, any return is likely to be better than the interest from a traditional savings account.
There are some downsides or cases where I’d say there are better options. If you don’t have ANY savings or you really can’t afford to have even a small loss, I’d rule out Betterment. It’s LIKE a savings account in many ways, but is NOT one because it is not protected from loss by the FDIC.
Also, if you have MORE than a few thousand dollars lying about, I would also veto the Betterment route. First of all, Betterment is brand new and does not have a long history upon which to base your confidence. I don’t think they’re going to vanish with your money, but there is some chance they could perform poorly, both financially and in terms of customer experience. Secondly, larger sums of money can probably be more wisely invested (essentially you’ll probably receive better deals from investment companies if you can offer up a lot of money).
Aside from the size of your savings, the other factor to consider is YOU. If you already pick and choose stocks (and LIKE doing that), then Betterment might not be for you. People who are already “in tune” with the market and enjoy trying to beat it may or may not be better off with something more stable like Betterment, but they certainly won’t enjoy it as much. This isn’t quite a “black box” which manages everything for you, but as I said before, it sits somewhere between a savings account and a CD or money market account.
So that’s the skinny on Betterment. They’ve still got that new company smell and there are no scratches on the paint job, but we’ve yet to see how they’ll perform in the long term. Also, they have mentioned plans for an automated transfer service (to automatically save a certain amount each month) as well as other financial products down the line (that might make more sense for larger sums). I can’t tell you whether to try them out, but for now I think they’re the right fit for me.
How does Betterment sit with you? Do you like/dislike their plan? Let us know in the comments below!