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Research

Two-Way Sweep Methodology

Betterment aims to help its customers manage their cash and investments more effectively by analyzing external accounts and making smart suggestions about how they could potentially be earning more or saving on fees. In this methodology, we’ll describe how Two-Way Sweep—an automated feature that works with Smart Saver accounts and built in cash analysis recommendations—helps make every day cash management easier to handle.

Here’s how it works:

  • Our recurring analysis determines whether your checking account holds enough cash to meet expected cash expenses for the next 21 to 35 days.
  • If extra cash is found, Two-Way Sweep will automatically transfer money from your checking account to your Betterment Smart Saver account.
  • If your checking account balance falls below the balance we predict you’ll need in the next 21 days, we will automatically move money back into your checking account.

A Recurring Analysis

The goal of Two-Way Sweep is to seamlessly move your extra cash from your linked checking account to Smart Saver—and back when you need it. Two-Way Sweep combines a daily recurrent cash analysis with an automated cash transfer between your checking and Smart Saver accounts.

We believe that a checking account must have enough cash reserves at all times to meet expected future cash expenses, yet this cash amount should not be excessive. Ideally, excess cash should be put to work to earn a yield that’s safe, yet higher than what’s typical in an average savings account. Two-Way Sweep monitors your linked checking account daily and aims to keep the account balance between the lower and the upper bounds.

How are these bounds defined? The lower bound is computed as an aggregate of 21 days of projected cash expense and recurring account transfers, while the upper bound is computed as an aggregate of 35 days of expense and recurring account transfers. You may also add additional padding to these bounds, which we discuss later in more detail. The range of 21 and 35 days is chosen to minimize the amount of extra cash in your checking account while also providing enough cash to meet expected cash expenses in the near future.

Each day, Two-Way Sweep will estimate the lower and upper bounds. By balancing what we predict you’ll need in your checking account in the next 35 days with the objective of not holding too much extra cash, Two-Way Sweep helps you earn more on your extra cash by shifting it to a Smart Saver account. No cash transfer takes place if your checking account balance already falls between the lower and upper bounds.

Sweeping in to Betterment

Two-Way Sweep’s movement of cash into Betterment is essentially automating our cash analysis and using Smart Saver as our default destination for your extra cash. As we’ve articulated in this comparison, there may be other products you might also consider for earning a high yield on extra cash, but Smart Saver’s advantages in terms of risk, yield, tax advantages, and liquidity make it an ideal spot for your extra cash within Betterment.

Betterment uses cash analysis to repeatedly analyze how much extra cash you may have in your checking account. The decision to sweep money into Smart Saver is based on whether your linked checking account balance is greater than the upper bound, calculated as the amount of cash needed for the next 35 days of cash expenses. When Two-Way Sweep is activated and extra cash is found, Betterment will move your extra cash, up to $5,000 per sweep, into Smart Saver. After the sweep into your Smart Saver account is complete, another sweep into Smart Saver will not occur again for at least seven days, as a rule. If you initiate a manual withdrawal from your Smart Saver to your checking account, Two-Way Sweep will be automatically paused for two weeks, with the assumption that you plan to use the funds and don’t want them to be swept back to Smart Saver right away.

Sweeping Out of Betterment

Although our automated sweep to put your extra cash to work in your Smart Saver is innovative, the true innovation of Two-Way Sweep is its ability to also sweep cash back into your checking account when you need your extra cash.

Identifying When You May Have Too Little Cash

If, on any given day your linked checking account balance falls below the cash amount you‘ll need in the next 21 days (the lower bound), Two-Way Sweep will transfer cash back to your checking account from Smart Saver in order to restore the upper bound balance.

Because we want to be cautious and ensure your checking account is in an ideal state, the sweep will transfer back enough cash to restore your checking account balance back to the upper bound (as calculated on the day of the transfer). The maximum that we will transfer to your checking account is the total balance of your Smart Saver account. If your Smart Saver balance is less than the amount needed to bring your checking account balance back to the upper bound, we will transfer your full Smart Saver balance back to your checking account. However, after the transfer your checking account balance will still be below the upper bound of 35 days of projected expenses.

Moving Cash from Smart Saver to Your Checking Account

If our daily cash analysis finds that you have less than 21 days of expected cash expenses in your checking account, Two-Way Sweep will start the process of automatically moving cash into your checking account from Smart Saver. This process begins by selling the underlying bonds in the portfolio, after which the trades must settle, and finally, the electronic transfer into your bank occurs. The overall process generally takes 4-5 business days to fully complete.

If, during the transfer period, our cash analysis finds that your checking account balance is now sufficient (or if extra cash is now detected), the transaction will still continue to process. While a transfer is in progress, we will not initiate any additional sweeps, either to or from your Smart Saver account.

If, on the day after a sweep into your checking account completes, our cash analysis again shows that your balance is low, Two-Way Sweep will initiate another sweep from Smart Saver to your checking account.

Additional Padding

Sometimes you may want an additional padding of cash on top of the bounds that Two-Way Sweep calculates, for example, if your bank imposes minimum checking account balance requirements.

To address this, Two-Way Sweep allows you to set padding around your lower and upper bounds. Both the lower and the upper bounds are parallel shifted by the padding. For example, if you set $1,500 of padding and our estimate of your bounds is $2,000 and $4,000 respectively, then the effective lower and upper bounds are now considered to be $3,500 and $5,500. Note that Two-Way sweep does not guarantee that your checking account balance will not drop below the lower bound.

An Automated Solution for Extra Cash

Two-Way Sweep is an automated solution for reducing cash drag in your checking account. It monitors your checking account and estimates future cash expenses on a daily basis with the goal of maintaining a checking account balance that’s within an optimal range while also putting any excess cash to work. Two-Way Sweep takes advantage of your Smart Saver account to invest your excess cash at a rate of return that’s above the usual rate offered by an average savings account.

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