Socking money away into a savings account is just a step above burying it in the ground and letting it rot. With the national savings account average interest rate at only 0.10% according to Bankrate, inflation will tear through your hard-earned dollars like a gale wind through a wet paper bag.
For January 2019, the Bureau of Labor Statistics reported an inflation rate of 2.2%. To stay ahead of inflation, you’ll need a savings account that pays at least 2.21%. That’s a tall order when most savings accounts pay just above 0%.
You can, of course, earn more by taking on more risk through stock investing. If it’s money you need immediate access to, a savings account is your best choice. Don’t lose hope though. Betterment has a solution that helps stave off the burn of inflation on your money.
Betterment Smart Saver Quick Summary
- 2.18% APY after fees for Betterment Customers (as of April 1, 2019)
- Offers the liquidity of a savings account
- Is part of your overall Betterment account
Betterment Smart Saver Details
2.18% APY net of fees
0.25% to 0.40%
Taxable, IRA, Trust
Fees waived up to 1 year
Who Is Betterment?
Betterment falls under the category of fintech or robo-advisor. They use technology to manage risk and returns on your portfolio. Techniques such as tax-loss harvesting and smart rebalancing are all done automatically without the intervention of a human.
Their products include retirement accounts; taxable accounts; automated, guided investing; and expert guidance with real people.
With Betterment, you can customize a portfolio to suit your risk and return profile. Or answer a few questions and have Betterment provide a portfolio allocation for you based on your responses. You also have the option to speak with a certified financial advisor.
Most all of, Betterment’s portfolio products charge a 0.25% to 0.40% annual management fee, depending on account size.
Why Smart Saver Is Different from a Savings Account
One of the products Betterment offers is called Smart Saver. It is similar to a savings account in that it is liquid and preserves capital while earning a small amount of interest. Smart Saver accounts currently earn a 2.18% APY (annual percentage yield) net of fees. That’s 20 times higher than a savings account that earns 0.09%.
It actually offers a current yield of 2.43%, which drops to a 2.18% net rate after management fees for Betterment customers in a Digital account (0.25% flat fee).
How does Smart Saver earn such a high rate of interest compared to other savings accounts? The Smart Saver account is invested in 0% stocks and 100% bonds. The bond allocations are made up of:
- U.S. short-term Treasury bonds — SHV — 80% of the allocation
- U.S. short-term investment-grade bonds — NEAR — 20% of the allocation
With a Smart Saver account, your interest is coming from interest earned on the bond holdings.
Unlike a savings account, Smart Saver accounts aren’t FDIC-insured. With an 80% Treasury bond allocation and the remainder in investment-grade bonds, the allocation is a conservative mix.
In the graph below, you can see how the Smart Saver rate has tracked the Federal funds rate.
Who Should Use Smart Saver?
If you are looking to mitigate the effects of inflation while also keeping your money liquid, Smart Saver is for you. Its 2.18% net of fees is virtually equal to inflation’s 2.2% rate.
You might be wondering what is meant by liquid in this case. If you deposit money into an account and need it a few days later, you’ll be better off using a traditional savings or checking account. If you have a few months to let the money work, Smart Saver is a great choice.
Liquidity and fighting the effects of inflation aren’t the only reasons for choosing a Smart Saver account. We all know how volatile the stock market is. The money you put into it today may decrease by 20% in only a matter of months due to volatility.
If you need that money in two or three months, the stock market isn’t the place to put it. It’s simply too risky. Smart Saver is a way to preserve capital without the added risk.
Is It Worth It?
Betterment charges a 0.25% annual management fee while Smart Saver currently yields 2.43%.
Is this a good deal? To find out, just subtract out the management fee: 2.43% − 0.25% = 2.18%. This puts the interest earned 0.01% below the 2.2% inflation rate. While a 2.18% rate won’t completely mitigate the effects of inflation, it’s far better than what a 0.10% rate will do. In that regard, Smart Saver is well worth it.
Betterment’s Smart Saver product does have competition from other accounts. Banks such as Marcus by Goldman Sachs and CIT Bank, to name a few, are all breaking through the 2.00% interest rate barrier. Be sure to check fees and the minimum required deposits and balance to maintain those rates.