While most of your excess cash should be invested in the market, everyone should strive to keep an emergency fund, as well as any short-to-medium term savings goals, somewhere safe, liquid, and non-volatile. For most of us, that means a savings account with an interest rate about a hair’s width above zero. But Betterment has another idea: Smart Saver.
If you aren’t familiar with Betterment, it’s a robo-advisor that automatically invests and rebalances your money in a diverse array of index funds and bonds according to your age and risk tolerance. People have strongly held opinions about robo-advisors, and there are valid points to be made for and against them, which are summed up nicely here. For transparency’s sake, I’ll simply say that a lot (though not all) of my investments go into Betterment, but if it’s not for you, that’s fine!
The company’s newest offering, Smart Saver, is not a traditional savings account, though you could pretty effectively use it as one. Rather than paying a meager amount of interest by loaning out your money to other customers, Betterment will invest your Smart Saver deposits into a mix of short term U.S. government bonds, and thus your interest rate will closely track the federal interest rate, rather than an individual bank’s balance sheet. Right now, Betterment estimates that you’ll earn a 1.78% annually on your money, which is far higher than pretty much any traditional savings account, and should (hopefully) come close to keeping you above water versus the rising tide of inflation.
So what are the catches? While you can withdraw money at any time from your Smart Saver account, you can’t write checks against it, and ACH transfers usually take 4-5 days to arrive in your bank account. If you think you may need cash faster than that, this isn’t for you. Smart Saver also isn’t FDIC insured, and since you are technically investing in bonds here, there is always some distant, hypothetical chance that you could lose money, though U.S. government bonds are about as safe as they come.
“But wait,” you scream, stomping your feet and blowing smoke out of your ears, “this is just fancy marketing jargon for a money market account!” And you’re on the right track, it is similar conceptually! But unlike most money markets, Smart Saver has no account minimums, and you can withdraw from it as many times as you’d like, rather than a maximum of six times per month.
The tradeoffs, however, are similar to those compared to a savings account. Namely, you can’t write checks, and your money isn’t FDIC insured. Money markets are great, and you may even be using one without realizing it, but depending on your priorities, Smart Saver may be a good alternative.