How to Set and Reach Financial Goals with Betterment

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For many years, I have been resistant to the idea of setting financial goals; instead, I have opted to accumulate wealth so that I have the means to make purchases when needed. This wealth-building approach can be effective, and is certainly better than not saving, investing, and growing assets.

Still, there are at least a couple of shortcomings to general wealth building: 1) I'm not sure when my goal has been achieved; and 2) I'm reluctant to spend down the assets that I've worked so hard to accumulate, largely because I'm not clear about the purpose of my investments and the timing of withdrawals.

Goal setting can inspire me to save and invest, and make me feel happier and more secure about spending.

Betterment, one of the firms in the robo advisor space, has designed its website with a focus on setting and achieving specific financial goals. Though I could certainly establish and track your goals using a offline spreadsheet, it's easy to use Betterment's tools.

I'll walk through the process and share insights into how goal setting and monitoring works:

Review and Accept Recommended Financial Goals with Betterment

When I visit Betterment for the first time, I'm prompted to respond to a few simple questions regarding my age, retirement status, and annual income. Based on this information, Betterment may propose three simple goals in order of priority:

  1. Safety Net (which others may call an emergency fund)
  2. Retirement
  3. General Investing (wealth building)

All of these goals seem reasonable and helpful in getting started with investing.

Alternatively, Establish Unique Personal Goals

I can also develop personal goals unique to my own desires, such as a longer term aspiration that may require a significant amount of money.

For example, I could decide to save and invest for one of the following:

  • career-related dream, such as a business start-up or creative project
  • luxury vacation purchase, such as a second home, boat, or RV
  • major home project, such as a renovation or addition
  • worldwide travel, such as a bucket-list trip or extended stay overseas

In this situation, the important thing is to articulate my goal so I can pursue (and fund) the goal.

Translate Life Goals to Financial Targets

After defining my goals, I'll figure out the finances of achieving them.

As I covered in an article on basic formulas to achieve financial goals, the following information is useful:

  • future value (cash required to achieve the goal, such as the cost required to fund the project)
  • time horizon (the number of years from now until I need money to achieve the goal)
  • present value of investments assigned to this goal (the amount of money, if any, I've already saved to meet this goal)
  • planned contributions (the amount of money I plan to set aside on a regular basis to achieve this goal)

Though I can do certain calculations myself, Betterment has tools to facilitate this process.

Set up Goals in Betterment

There are two main ways to set up goals in Betterment. The first is to select one of the recommended goals presented when I first visited the site. That is, I can start saving and investing for my safety net, retirement, or wealth building.

The second method is to “Add a Goal or IRA” from the Betterment dashboard. Using this approach, I can choose the category into which my goal falls. These are:

  • Tax-Advantaged Retirement: Traditional IRA; Roth IRA; Roll over your IRA/401(k)/403(b)
  • Essentials: Safety Net; Build Wealth; Retirement; Retirement Income
  • Major Savings: House; Education; Other.

To establish unique personal goals, choose “Other” under the “Major Savings” category (unless I want to save for a house or education). Then assign a name to my goal; for example, I'll call my goal “creative project” if I'm saving money to produce a film.

Next, respond to the prompts by either affirming Betterment's recommendation or entering the following information:

  • the amount I want to have (future value)
  • when I'd like to have the money, expressed in the number of years (time horizon)
  • the amount I can deposit toward this goal today (present value, if any)

To proceed, click “Next.” Betterment will develop a recommended portfolio and indicate its stock-bond mix aka asset allocation.

Generally, the fewer the number of years associated with the goal, the more my portfolio will be weighted toward bonds. For example, when I specified a five-year goal of $8,000 for a “creative project,” the recommended portfolio contained 45% stocks and 55% bonds.

Strive Toward Goals

After accepting the portfolio recommendation, I'm taken to the “Advice” section associated with my newly established financial goal. Here, I can interact with the site to determine the best way of meeting this goal.

I can specify and adjust one or more of the variables consisting of a) time; b) monthly auto deposit; c) one-time deposit; and d) asset allocation (along the continuum of conservative to aggressive), and then see how certain recommendations adapt to the change. For example, if I increase my one-time deposit, then the recommended auto deposit will be lowered; if I increase the time allotted to achieve my goal, then the auto deposit and the allocation will be adjusted.

On this page, notice the “Recommended” amount of the “Monthly Auto Deposit” or “One-Time Deposit.” Click on the recommended amount to accept this suggestion or manually enter the desired contribution.

If I can't afford to set aside the recommended amount, I can consider lengthening my time horizon or making a one-time deposit either now or in the future in order to stay on track to reaching my goal.

After I've settled on the amount of my monthly auto deposit, I can click on the “Set” button to initiate regular deposits. These can be made on a monthly, twice a month, biweekly, or weekly basis (with the periodic deposit aligned with the monthly goal) to coincide with the receipt of my paycheck. I'll also select the start date of my first deposit; subsequent deposits will be made accordingly.

To ensure the auto deposits are started on time, I'll enter or confirm bank information and authorize the transfer of funds from my bank account to Betterment.

A few items to note:

  • I can make adjustments to the portfolio recommendations.

    For example, I can choose a more aggressive portfolio tilted more heavily toward stocks, giving me a better opportunity for a higher account balance during periods of “average market performance” while risking a potentially higher shortfall in times of “poor market performance.”

  • The recommended deposit amounts are calculated in a way to help me achieve my financial goal.

    If I choose the suggested amount, then the projected balance at the end of the goal's term should match the dollar amount of my goal (within 1-10%) if my investments are held during periods of average market performance. I'll have a shortfall if the market underperforms.

  • Even if I save diligently, I may not reach my goal.

    According to Betterment, the calculation of required monthly contributions associated with savings projections assume “a 60% likelihood of the portfolio reaching its goal target.” So, there are unknowns associated with future returns and no guarantees. However, it's useful to start saving with an optimistic outlook and then monitor the results as time passes.

Monitor My Goal

At any time, I can review my goals and see whether my savings and earnings are on track according to Betterment's projections. For each Betterment goal, I can check my account balance along with the projected balance. I can scrutinize the balance but Betterment offers a simple “on track” or “off track” guidance to alert me to changes that are possibly needed. Again, I have the option of making adjustments: I can edit my target, make a one-time deposit, alter my auto deposit, extend or shorten the timeframe.

Over longer periods of time, I may notice that my balance grows unevenly due to fluctuations in market returns. So, to be sure I'm on track, I'll need be patient and consider making adjustments periodically to position my investments to achieve my goal.

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