As a 25 year who had just finished paying off their student loans, I knew nothing about investing, but suddenly had extra cashflow. There were no popular personal finance YouTuber’s at the time so I had to do some of my own research on investing. I decided to enroll for a Roth IRA with Betterment. Betterment is a hands-off service that helps you manage your money through guided investing, retirement planning, and cash management. They offer Roth IRA’s, 401k’s, Safety Net Investment Accounts, Cash Reserve Savings Accounts, HSA’s, and more.
Getting Started With My Roth IRA
I started with a modest $300/month target to invest with Betterment. Now that I have made 68 deposits in just over 5 years, I have invested $20,400 and have made just over $7,000, giving me an annualized internal rate of return of 9.4% and an annualized time-weighted return of 7.92%. As you may know, you can withdraw your contributions tax-free and penalty-free at any time and you can withdraw your earnings from your Roth IRA after holding the account for 5 tax years. However, you will be penalized and taxed for withdrawing your earnings before 59½ years old.
The 5-Year Withdrawal Allowance
Now that I have held the account for 5 years, I can withdraw my contributions to pay off a chunk of my mortgage, pay off my car, put a downpayment on a property, or use my Roth IRA as a high risk, high reward savings account. I personally would not use my Roth IRA to pay for anything unless I have a real emergency and no emergency savings. Luckily, I was able to save up a 6 month emergency savings account. Any money you take out of your Roth IRA is lost growth potential.
The Growth of Your Money
A regular savings account does not earn enough interest to keep up with inflation. You are literally losing money by having your money sit in a savings account. At the same time, you should never replace your savings account with a retirement account. This is a mistake that many people make with their Roth IRA’s. Instead, consider Betterment’s Cash Reserve savings account or their “Safety Net” investment account that aims to beat inflation. Using an investment account as a savings account has some risk to it because it is not FDIC insured. You can lose money when the economy worsens and make money when the economy is doing well. If you read the fine print, no one can guarantee your money and most will limit the amount of withdrawals you can make each month. Since Betterment’s investing strategy is conservative, their Safety Net account is low risk. However their withdrawal limits make it a bad fit if you need to pull money in an emergency.
Stay tuned for an update on the progress of my Betterment account(s). If you are just starting out, I recommend you try Betterment, Wealthfront, M1 Finance, or any number of Roth IRA providers to start saving for retirement.
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