Need an easy way to save money with low risk and high interest? Find out if Betterment Smart Saver is for you.
Published December 7, 2018|5 min read
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Establishing a healthy savings fund can help you avoid financial catastrophes in the future. Savings can be a lifesaver in the event of car repairs, home appliance replacements, job loss and other unexpected events. At minimum, it’s a good idea to have at least three to six month’s worth of expenses socked away.
But if you leave your extra cash in a traditional checking or savings account, it probably isn’t even keeping up with inflation. The average savings account only earns .09% interest, which means that inflation is eating into the value of your savings.
Online investment advisor Betterment has a solution for those who want to grow their extra cash at a faster rate: Smart Saver, a low-risk investment vehicle that can help your savings grow and retain value.
Smart Saver is a managed investment account that lets you deposit your extra cash for low-risk investments. These investments typically do a better job at growing and keeping up with inflation than traditional savings accounts.
“Banks set the interest rate that they pay savers on their deposits. It’s a zero-sum game between you and your bank - the less they pay in interest the more they make. Unlike a savings account, Smart Saver always tracks the prevailing interest rate because funds are invested directly in bond funds that track interest rates directly.” said Adam Grealish, Director of Investing at Betterment.
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Smart Saver’s investments are about as low-risk as you can get. Any cash you put in a Smart Saver account is invested in the following way:
80% in U.S. Short-Term Treasury Bonds
20% in U.S. Short-Term Investment Grade Bonds
To borrow money, the U.S. government issues these bonds to investors in exchange for a return on investment. When an investor purchases a bond, they receive a predetermined interest rate return until the bond matures. Because they’re backed by the U.S. government, bonds are low-risk and have low levels of volatility.
According to Betterment, funds in your Smart Saver account can currently earn a 2% yield after fees, which is more than twenty times what you’ll get from the average savings account.
You can easily move money between your bank account and Smart Saver account via automatic deposits or ad hoc ACH transfers. You can transfer your cash back to your bank account at any time without penalty, though the process will take around four to five business days.
Current expected yield is 2% after fees. Learn more about APY versus APR.
Basic digital account: .25% annual management fee, based on account balance.
Premium account: .4% annual management fee, based on account balance, with access to financial advisors. $100,000 minimum balance.
Short-term bonds are low risk and backed by the U.S. government, and they provide a higher yield than the typical savings account. Money can be easily be moved between Betterment and your bank account. There are no early withdrawal fees or penalties.
Like any investment, bonds do carry some level of risk. If you have an emergency expense and need your cash, moving it back can take four or five business days. Bonds tend to decrease in value as interest rates rise, but the short-term nature of these bonds minimizes this risk.
You want to grow your funds, but riskier investments make you squeamish.
You have extra cash sitting around in a checking or savings account, but you’re unsure what to do with it.
You think you’ll probably spend or invest money you currently have in a checking or savings account, but you aren’t sure when.
If the withdrawal delay has you worried, you can always keep a certain amount of cash in a traditional savings account for quick access and deposit additional funds in your Smart Saver account.
Unlike a savings account at a bank, your Smart Saver balance is not FDIC-insured for up to $250,000 - it has no such coverage.
“FDIC insurance is federal backing that protects savers against bank runs. This is necessary because banks take savers’ deposits and lend them out. In doing so, there is the risk that when customers want their deposits back, the bank does not have enough cash on hand,” said Grealish. “Smart Saver does not have this risk because we invest ... directly in short-term bond funds. In fact, 80% of the portfolio is invested in bonds backed directly by the US government.”
High-yield savings accounts also offer higher-than-average rates (often around 2% annual yield or higher) and are mainly available at online banks. They are FDIC-insured, and usually have low or nonexistent fees. Because online banks don’t have to support brick-and-mortar locations, they can afford to pay higher rates.
But since most high-yield savings accounts aren’t serviced at physical locations, and some don’t even offer checks or ATM withdrawals, moving your money isn’t any easier than with Betterment. Plus, some high-yield accounts have strict account minimums or reserve their best rates for consistent deposits and higher balances.
If you want to invest your funds in government-backed bonds, Betterment is the way to go. If you want to keep your funds in a savings account with a lower level of banking services, a high-yield savings account may be suitable.
Remember, under Regulation D, you are limited to making certain bank withdrawals and transfers from your savings account six times per month.
Read more about the different types of savings accounts.
Banks also offer money market accounts, savings accounts that offer a higher yield because the bank is allowed to invest your funds. Funds are still FDIC-insured up to $250,000. Some money market accounts also let you write checks and make ATM withdrawals.
However, money market accounts typically require minimum deposits, which vary between banks. The highest yield rates may be reserved for higher account balances, which means you’ll need a big balance to get the best rate.
Again, Betterment is a good choice if you want to invest your funds in bonds and receive the same yield no matter your balance. Money market accounts are suitable if you plan on holding a large balance to get the best rate, or you’re interested in checks and ATMs.
Regulation D also applies to money market accounts.
Whether you’re putting cash in a savings account, investment vehicle or something else, it’s always a good idea to look for opportunities to save more. Here are a few suggestions:
Establish (or revisit) your budget: setting a monthly budget (or revisiting your current budget) can help you identify more ways to save. You may find areas where you can spend less, or see how much you can save each month after expenses.
Get a side hustle: finding extra sources of income - such as starting a freelance business or driving for a ride-hailing service - can help you save more.
Set up automatic deposits: setting up automatic deposits into your savings account or investment portfolio takes the work out of saving, and helps you avoid choosing between savings and a new pair of shoes.
Limit your debt: don’t take on more debt than you can afford. An unaffordable car loan or high credit card balance can derail other financial priorities. Only take on debt with affordable monthly payments.
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