"Making your money work smarter for you."
That’s the purported goal of today’s robo-advisors, but understanding how that benefits you is crucial.
When a lot of people think about their financial life, they often focus on the investing aspect. Let's be honest, it is fun to focus on how much your money is growing.
But, there is another hugely important aspect, and that is your savings. There are many cases where it does not make sense to invest your money in stocks, bonds or real estate. For example, if you have an emergency fund (which you should!). Or, if you are saving up a down payment for a car or home purchase for example.
A general rule of thumb to follow is not to invest money that is needed in the short term, say 5 years or so. The question becomes, what do you do with this idle cash? One of the most popular options today is the FDIC insured online savings account.
In this review, we will be comparing this new offering from Betterment to Ally, a popular online savings account.
Gone are the days when banking transactions required a trip to a brick-and-mortar building, standing in line or waiting to use the drive-through. Online banks let people access their accounts anywhere there’s the internet.
Online banking is passive income at its best; once you make the initial deposit, you will be earning interest while you sleep, eat and go about your daily routine.
You don’t need to expend any effort into watching your investment grow. Better yet, these online banks pay significantly higher interest than traditional banks. That is why it is so crucial to get the highest rate possible.
Let’s take a look at two online banking entities and see what’s offered and how they compare.
|Monthly Maintenance Fee||$0||$0|
|Monthly Transfer Limit||6 Transactions||Unlimited Transactions|
|Excessive Transaction Fee||$10 Per Transaction||None|
|FDIC Insurance||Up To $250,000||Up To $1,000,000|
Ally had its early beginnings almost a century ago when they focused on auto financing. Fast forward to today, when their products include online banking, credit and lending and wealth management.
With a goal of "changing the online banking landscape," Ally still supplies people with auto financing (they are one of the largest auto loan companies in the country) and home loans. They launched online banking to make the process faster and less complicated.
How successful is the company? As of June 30, 2019, they had an impressive $180.4 billion in assets from consumer, commercial and corporate customers.
Ally Bank has a menu of products including savings, money market and checking accounts, as well as Certificates of Deposit (CDs) and Individual Retirement Accounts (IRAs). For many people, the CD is a great option for your savings. However, most CDs lock you in for a set duration of time. If you withdraw your money early, you often pay an interest penalty of some kind.
These online savings accounts often give you the best of both worlds. That is, easy access to your money without being locked in as well as a decent return in terms of interest.
This online bank also has securities brokerage and investment advisory services. The wealth management and brokerage platforms have both self-directed and managed investment offerings for people with any amount of money to invest.
But you won’t have to track your account down to the penny or worry about fees piling up. There are no monthly fees or minimum balances required.
Customer service is available around the clock, just in case you have the need to check your account in the middle of the night.
Ally Invest also offers some other unique features, like options trading and forex trading for those who are interested. They have grown to offer a diversified collection of products and services related to your overall financial life.
They give people access to nearly 45,000 ATMs, all of them free of charge. They are FDIC insured up to $250,000 per depositor.
These are all positives, but there are several key points about Ally to consider that might make you pause before opening an account.
Ally limits customers to six withdrawals and transfers per statement cycle (this limit is set by federal law for electronic and telephone transactions from all U.S. savings and money market accounts).
If you go over six, Ally will charge you $10 for each overage, and what’s worse, if you habitually exceed that number, Ally will boot you out when they close out your account.
Then there’s the Annual Percentage Yield to consider. Check that rate here.
While once considered outstanding, there’s a new player in town called Betterment.
It’s something we can all get excited about in a sea of online banking platforms.
First and most astonishing is the APY (check the rate here).
Betterment helps people plan their financial goals and make smart investment choices in the short and longer-term. In 2018, they came out with a product known as Betterment Smart Saver. After receiving much needed feedback from customers, they decided to switch over from a high yield bond fund to an FDIC insured savings account. Down the road, they plan on adding a checking account too!
This checking account will have ATM fees reimbursed worldwide, no overdraft fees or other banking fees as well as the standard $250,000 of FDIC insurance.
Betterment Cash Reserve Savings has no fees on your account balance and no minimum balance.
However, the minimum deposit is $10.
When compared to Ally, Betterment has no transaction limit, and the FDIC insures savings accounts for $1 million*.
Then there’s Betterment’s online financial advice option available to customers for 0.25 percent per year with no minimum balance. This is their digital option because all communications are made online through email or your mobile app.
Up to that fee to 0.40 percent per year and you’ll gain the added advantage of telephone access to a team of financial experts for more in-depth consultations. For this premium plan, you will need a minimum balance of $100,000.
The Betterment robo-advisor is their original claim to fame. Similar to how Ally bank got started with auto loans, these companies often dominate one product and then expand elsewhere. Betterment has disrupted the traditional financial advisor industry in a major way. As of April 2019, they have over $16 billion in assets under management.
There are two primary ways to move money to Betterment:
Betterment also offers traditional and Roth IRAs.
If you roll over 401(k) or IRA assets to Betterment, your previous provider will typically sell the investments without tax fees, then transfer the cash value to Betterment.
The rates for Betterment Cash Reserve, Ally Bank and all other financial institutions change all the time. That is why we do not post the rates here on this article, we always point you back to their sites to check them.
The reason for this constant rate change is because of the federal funds rate. This is the rate at which the banks can loan money to each other. These banks essentially serve as the middleman. This rate often changes incrementally each day, say 0.01 to 0.03%. However, it is also common for the federal reserve to increase or drop rates by 0.25% increments.
If the federal funds rate goes up, your rate goes up shortly after.
If the federal funds rate goes down, your rate goes down as a result.
Both Ally Bank and Betterment Cash Reserve are offering online bank accounts that blow the traditional savings account out of the water.
However, when you are looking to maximize your interest income, every percentage point counts.
Betterment tends to pay a better APY than Ally bank.
The rates change often, so you can look on their sites to see what that updated rate is.
Beyond that, Betterment is offering up to $1,000,000* in FDIC insurance while Ally offers the standard $250,000.
The third key difference is the transfer limit.
Ally limits you to 6 per transaction cycle. After that, they charge you $10 per transfer.
Betterment allows unlimited transfers with zero fees.
Based on the hard numbers, Betterment is a superior option for savvy savers.
Online banking platforms are extremely competitive, so take a look at all your options and read the fine print. There’s something out there for everyone, and one thing’s for certain: you will never have to stand in long lines at the bank ever again.
*$1,000,000 in FDIC insurance is a goal and not a guarantee. Betterment uses 4 member banks to hold cash deposits. Each bank covers $250,000 in FDIC insurance, but it is not guaranteed your account will be spread across these 4 banks proportionately.