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Managing Your Money

Introducing Smart Saver: A Low-Risk Account for Unused Cash

Providing a clearer answer for what to do with extra cash sitting in your checking and savings accounts: Smart Saver.

Articles by Adam Grealish

By Adam Grealish
Senior Quantitative Researcher, Betterment
Published: August 15, 2018 | Updated: December 4, 2018

At Betterment, we’re driven to help people answer a broad, challenging question that nearly all of us face day to day: “What should I do with my money?”

We often hear that it’s easier to know what you don’t want to do with your money than to nail down exactly what the right investments might be. Our advisors hear this story in financial planning conversations. Our data scientists see it when analyzing investor behavior. And you, yourself, probably see it show up in your bank account in the form of unused cash.

Today, we’re providing a clearer answer for what to do with extra cash sitting in your checking and savings accounts. It’s called Smart Saver.

Put Your Unused Cash to Work with Smart Saver

While a small amount of extra cash can be important in case of normal fluctuations in spending, people who hold extra cash month to month may not understand that they’re losing value. There’s a risk to leaving cash in a checking or low-yield savings account: Inflation will continually eat into your money’s value, which means you can do less with your cash the longer you take to use it. To combat the effects of inflation, we suggest that any account where extra cash is held should have a way of growing that money.

Smart Saver aims to earn income similar to a savings account, but rather than putting your money in a bank that returns interest by loaning your money out, Betterment puts your cash in an ultra-low-risk bond portfolio that yields income through bonds.

One advantage of this approach is that, as a bond portfolio, Smart Saver’s performance generally tracks prevailing federal interest rates, rather than being influenced by a bank’s circumstances. Banks set accounts’ annual percentage yield (APY) based on the margin they can earn on loans. The yield of the ultra-low-risk bond portfolio underlying Smart Saver is determined by the prevailing rate in the market, not by Betterment.

Hypothetical Historical Performance:
Smart Saver vs. the Average Saving Account

The above chart shows growth of a hypothetical $10,000 deposited since January 1, 2016 in 80% SHV and 20% NEAR (the funds that comprise Smart Saver) net of both fund fees and Betterment’s 0.25% fee for the Digital Plan. This assumes all dividends and interest payments are reinvested. “Federal Funds rate” represents the prevailing Federal Funds interest rate at the time. “Average savings account” represents a $10,000 investment in a hypothetical account that earns the FDIC’s national average savings account interest rate for deposits under $100,000 during this period. The time period chosen for this illustration was due to the period of rising interest rates beginning in 2016. The source for both “Federal Funds” and “Average Savings Account” is the Federal Reserve. Yields used to grow $10,000 are assumed to be accrued daily.

How Does Smart Saver Work?

Every Betterment customer can access a Smart Saver account. Aligned next to your other financial goals, you can think of Smart Saver as the place for cash you might spend, or you might later invest for a specific purpose. We’ve even outlined specific scenarios for when we’d recommend using Smart Saver. Either way, Smart Saver keeps your money earning a yield that mitigates the effects of inflation, while setting you up to easily invest for your longer term goals when you want to.

Smart Saver’s built-in portfolio is the Betterment Portfolio Strategy’s allocation at 0% stocks, 100% bonds. In our recent optimization of the portfolio, we’ve developed an ultra-low-risk yield composed of two asset classes:

  • U.S. Short-Term Treasury Bonds – SHV – 80% of the allocation
  • U.S. Short-Term Investment Grade Bonds – NEAR – 20% of the allocation

This two-fund portfolio has an ultra-low volatility profile, so we expect performance to be almost entirely comprised of income yield, rather than price changes. At present, the expected yield is 2.09%. Read more about our ultra-low-risk portfolio in our full methodology.

Behind the scenes, Smart Saver is defined as part of a taxable personal investing account. Since the underlying funds are mostly U.S. government bonds, they are not subject to state taxes, which means you can take home more of the yield you earn, compared to a bank account offering a comparable interest rate.

Why Smart Saver vs. a Savings Account?

We expect you might compare Smart Saver to your bank’s savings account because that’s where many people keep unused cash today. So, what are the advantages of Smart Saver versus the advantages of a savings account? And what are the disadvantages for each?

In our overview of how we suggest using Smart Saver, we offer a full set of comparisons between Smart Saver and other cash savings vehicles. Here we’ll just lay out the highlights:

  • Smart Saver could earn 20x higher yield than the typical savings account, as defined by the national average savings account rate provided by the FDIC.
  • Smart Saver’s yield is structured to track the market (in correlation to interest rates). Banks will sometimes use a temporary, promotional rate to attract customers. With Smart Saver, your rate generally tracks with federal interest rates, and any promotion would provide a benefit on top of that.
  • Smart Saver has no minimum balance, unlike some savings accounts, money market accounts, and CDs, and there are never any penalties for withdrawals.
  • Smart Saver has unlimited withdrawals at no additional cost. Other account types may force you to accept limits on the number of transactions you can make in your account in exchange for earning a higher yield.
  • You can seamlessly move all or part of your Smart Saver balance into a taxable Betterment goal or initiate a transfer back to your linked bank account when you wish to.

Of course, there are tradeoffs with any financial product. Here are a few to know about Smart Saver.

  • Smart Saver is not an FDIC-insured account. On the other hand, Smart Saver invests your money in an ultra-low-risk bond, mostly made up of U.S. treasury bonds, which have the backing of the U.S. government.
  • Smart Saver will make it easier to move your money to a different investment goal, but it can take the same time (4-5 business days) to transfer back to your bank account as a withdrawal from any other Betterment account.

By introducing Smart Saver, our hope is to help you better manage your unused cash. We think that if you handle cash more effectively, you’ll be one step closer to meeting your longer term financial goals. As with everything we do, we’ll keep working on innovative ways to manage your cash alongside your investments.

Start using Smart Saver today to begin enjoying the benefits of an ultra-low-risk account managed by Betterment. If you haven’t yet opened an account, get started here. Otherwise, log in to make a Smart Saver deposit.

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