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When I worked at a regional bank many years ago, I learned about overnight investing of excess cash. The bank earned interest by allowing sweeps of excess cash, which was returned to the bank for use the next day.
Today, I've learned that there are financial services that allow you to save or invest excess cash in a similar manner. You set or accept rules for allowing investment of excess cash and money is moved on your behalf by your financial services provider. With overnight investing, money is swept back and forth. But with this new kind of investing, money is swept one way: cash moves from your regular bank account to a savings account or investment account, but doesn't automatically return to your bank account the next day.
For some people, allowing this sweeping of extra cash could be helpful. For others, it could be annoying. Based on my understanding, here is how these setups work:
Robo-advisory firm Betterment has a SmartDeposit feature that authorizes the firm to sweep cash from your bank account to a specific goal (or sub-account).
To initiate this process, visit the Goals summary page, click on the circle with the dotted lines (presumably representing more actions you can take), and go to “Set up Smart Deposit” at Betterment.com and update your bank account records. (You should receive this prompt even if you've already set up a bank account link for auto-deposits or periodic one-time deposits.)
Next, specify the conditions under which Betterment can take action. State the maximum balance you want to hold in your bank account and the maximum amount you'll allow to be withdrawn and invested.
According to its website, Betterment looks at your account weekly to see if you've got money available to invest. The firm considers your stated maximums and pending auto-deposits. If the circumstances are right, Betterment starts the SmartDeposit process by 1) notifying you of a pending transfer (and allowing you to override this move and skip the deposit), 2) checking your bank account to make sure the cash is still available for transfer, and 3) making the transfer and then automatically investing your cash.
You can withdraw money anytime you'd like but generally there's a settlement period and processing time that takes four to five business days. Further, fulfillment of your request may trigger a tax liability (associated with the sale of investments to generate cash).
Digit Cash Transfers
Financial services firm Digit has developed and deployed a tool to transfer small amounts of money from your bank account to your Digit account, which acts like a savings account. (Money is held at Bofl Federal Bank or Opus Bank.)
You don't earn interest but you can receive bonus payouts every three months (five cents per $100 you hold on average).
Here's how the process of saving money via Digit works (according to the firm's website):
- You link your bank account to Digit.
- After the linkup, Digit analyzes the patterns of your income and expenses. The firm figures out when and how much money it can safely move from your regular bank account to the Digit account.
- Every few days, Digit initiates and processes cash transfers.
- On a regular basis, Digit texts you the balance it holds on your behalf. You can also interact with the tool via an app.
The firm proclaims confidence in its ability to know when you truly have excess cash. It guarantees that it will cover overdraft fees, up to two times for each customer.
There are no fees associated with the Digit account. There's a monthly fee of $2.99 to use Digit. Money is FDIC insured up to a balance of $250,000 though if you happen to have an account with Bofl Federal Bank or Opus Bank, then those holdings will count against the $250K maximum. You can request your money back via text any time you'd like; settlement times vary but are generally just a few business days.
Acorns is a robo-advisor like Betterment but encourages its clients to invest small amounts almost randomly rather than intentionally toward a specific goal. (Acorns' tagline is “Invest the Change.”)
Similar to Betterment, you can set up recurring deposits and one-time deposits with Acorns. But the advisory firm's signature method of socking away money is based on its round-ups that allow you to invest your change from various transactions.
Here's how the round-ups work:
- Link a debit card or credit card to your Acorns account (in addition to your bank account that funds your investment account).
- Make a purchase with one of these linked cards and a round-up amount is recorded (for example, spend $5.70 and a round-up of 30 cents is generated). Round-ups are accumulated until you meet the investment deposit minimum.
- When round-ups total $5 or more AND you've opted for automatic investments, money is transferred from your bank account to your investment account; if you haven't opted for automation, you can manually approve round-ups for investment.
This sweeping of cash from your bank account to the investment account at Acorns should generally happen in small increments. As a result, you may barely notice the removal of money from your account. Yet you are able to accumulate an investment balance (as long as fees don't erode the savings).
One of the reasons that Betterment, Digit, and Acorns are pushing the transfer of excess cash is that the firms perceive that many people hold too much cash. According to a study by financial-services firm UBS, “Millennials hold more than half of their assets in cash (52%), with less than one-third of their assets (28%) in equities. This is directly counter to traditional long-term investment allocation advice.”
Automated methods like Betterment's SmartDeposit could be useful to those who want to save and invest but feel paralyzed by the thoughts of initiating a transfer of funds to a savings or investment (or perhaps are too busy to handle these details). These nudges could help them overcome the hurdle of inaction.
I have accounts with Betterment and Acorns but have no intention of using the SmartDeposit or Round-Up methods of investing. I want more control over the timing of my investments. But I can see how these tools could benefit the hesistant, slow-to-act saver and investor.
Have you ever allowed auto-transfers using algorithms to determine when you had excess cash? Did this method of of saving or investing work for you?