It’s a truism that it’s expensive to hold cash, but for the most part it’s true. The average savings account pays 0.10% APY, and the average checking account pays 0.08% in interest, according to Bankrate.
If you’re lucky enough to have cash sitting unused, the current wisdom to alleviate the high opportunity cost of not investing it is to put it in a high-yield savings account. (These pay around 2% per year at the high end right now.)
But this week Betterment put forth a new solution: a tool called “two-way sweep” that would automatically balance funds between checking accounts and Betterment’s low-risk, high-yield product, Smart Saver, which is 80% Treasuries and 20% high-grade corporate bonds.
The tool is available to anyone who wants to use Smart Saver to park cash.
Betterment says that 30% of its approximately 400,000 customers have an average of $20,000 in cash that generates almost no interest, which is why it created Smart Saver as an in-house alternative to high-yield savings accounts, which are FDIC-insured, but usually pay a little less than Smart Saver’s 2.09%, which is net of Betterment’s 0.25% standard service.
At the same time, customer surveys indicated that above all they wanted advice, CTO Mike Reust told Yahoo Finance.
“They want advice on what to save. How much to have in checking?,” said Reust. “But also, please automate for me.”
Betterment figured this out by piggybacking on Smart Saver. When a customer links their checking account, Betterment’s algorithms look at their activity and construct an upper and lower bound of where their balance should be. If the balance goes lower, they will shift funds to checking from the Smart Saver account. When it goes higher, excess cash gets a 2.09% rate until it’s needed for checking duty or a different part of the portfolio.
“There’s enough conservativeness to cover your bills and enough aggression to encourage you to actually save and make the most of your money,” said Reust.
He stressed that a key part of the tool is the fact that it’s smart and will adapt to match your behavior, as well as being able to go both ways — something Betterment sees as big draws.
Reust noted that these new cash management tools are available to any customer who wants to have a Smart Saver account, as Betterment’s 0.25% fee is already factored into the 2.09% return on Smart Saver.
“There is no minimum or requirement to use any other Betterment vehicle,” said Reust. “You could sign up with Betterment, link your checking account and link, and watch cash-flow advice. You could just use Smart Saver.”
The cash flow analysis part is currently live, and the full automation will roll out in January.