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Should You Let an Algorithm Do Your Saving for You?

An increasing number of companies want to identify—and whisk away—your excess cash

Setting up regular automated deposits that zap money from checking right into a savings or investment account is the easiest—and often, most painless—way to save money. Once it’s set up, you can save with zero effort every time a paycheck is directly deposited into your checking account. 

You might be shortchanging savings with that "set it and forget it" attitude. Even if you go in and make additional transfers now and then, odds are that there's some "extra" money sloshing around in checking. That prospect has a growing number of online financial companies offering up programs to "personalize" savings with software that assesses how much you need to keep in checking to pay bills and then automatically spirits the excess into savings or investment accounts. 

Basically, companies offering such products, including Betterment, Digit, and Acorns, are entities without bank charters that are trying to get customers to save and invest more of their cash with them. It's one step in an attempt to become one-stop financial shops for their largely millennial customers. It's all very convenient, but it comes with fees that cut into its appeal. 

Betterment announced a new SmartDeposit feature on Tuesday that lets customers set a ceiling for how much money they want in checking at any time. It then checks their account at least once a week to determine when it makes sense to transfer more money into an investment account of low-cost exchange-traded funds. Before it does that, it sends an e-mail giving users the option to skip it. 

As well as helping customers meet retirement goals, Betterment product manager Matt Salefski says the tool "will be great for just a safety net, to save for unexpected expenses." That might be a stretch for some users who want more liquid assets for an emergency fund. "We'd suggest a portfolio that's very heavy into bonds, as a conservative option with some of the benefits of a savings account," Salefski says. If users set up an automatic deposit of at least $100 into their account, Betterment charges a fee of 0.35 percent of assets per year for accounts of less than $10,000. Otherwise, small accounts pay $3 per month.

Giving a company discretion to move your money when it sees fit sounds scary. To alleviate fears, Betterment customers can set limits on how much money can be shifted at any one time, and they can turn off the tool easily.

The product follows similar services offered by Digit and Acorns. Acorns' investment app rounds up spare change amounts from debit and credit-card purchases and funnels it all into a portfolio of ETFs. It ordinarily charges $1 a month for accounts under $5,0001. On July 8, it announced that the fee would be waived for students aged 18 to 24.

Digit's algorithm, meanwhile, learns a user's spending and earning patterns, says chief executive officer Ethan Bloch. It uses them to figure out how much money the person could save without noticing it missing. Digit communicates with users (average age: 27) only by text message. 

The software looks at whether a user's checking balance is near its average level, is high, or is low, as well as when a user gets paid and whether the pay cycle is regular or irregular. It also looks for bills coming due in the next seven days to two weeks and examines recent spending. Then it tries to pick an amount to save that a customer won't miss. The service moved out of pilot mode in February; users are saving an aggregate amount of more than $1 million a week, according to Digit.

Users don't earn any interest because, as a non-bank, Digit can't offer interest. It is working on a product that will let people set up a time-based savings goal, which, if reached, will bring a cash bonus or a gift card.

Most people use the product to build a financial safety net, says Bloch. It's a peculiar kind of safety net, though: Users tend to think of the money as a safety net only until they meet a dollar goal they've set for something like a honeymoon or travel, he says. 

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  1. 1 For accounts with a balance of $5,000 or more it's 0.25 percent per year, charged monthly and computed daily.