This Special Wealthfront Account Could Solve a Big Problem for Your Savings

Having "too much" extra cash in the bank beyond what you need for your emergency savings fund is a good problem to have -- but it's still a problem. That's because keeping too much money in cash causes you to lose purchasing power to inflation, and miss out on investment growth. And the usual savings accounts and CDs aren't always the right choice if you want your non-emergency cash to actually grow.

If you want to invest extra cash for a short-term or mid-range goal, CDs or stocks are not often the right fit for this time horizon. What if you didn't have to lock up your cash in a CD, or risk losing money in a volatile stock market?

Now there's a better place to put your extra short-term cash. Wealthfront, one of our picks for best robo-advisors, is offering a unique type of investment account called the Automated Bond Portfolio. This taxable brokerage account gives you a higher potential yield than the best CDs or savings accounts, but with less risk than stocks. The Wealthfront Automated Bond Portfolio could be a good choice for short-term or "mid-range" financial goals.

Let's look at the details of the Wealthfront Automated Bond Portfolio, see why this account is so special, and who might be the right types of investors who could benefit from this account.

Wealthfront Automated Bond Portfolio: How it works

The Wealthfront Automated Bond Portfolio account lets you automatically invest in a low-cost, diversified blend of bond ETFs, chosen by Wealthfront experts. These bonds include:

• U.S. Treasuries
• Corporate bonds
• Municipal bonds
• Foreign market bonds

By investing in bond ETFs with Wealthfront, you can get the potential to earn higher yield on your savings, but without the higher risks of the stock market. The Wealthfront Automated Bond Portfolio is earning an approximate yield of 5.50% (blended 30-day SEC Yield) as of March 7, 2024, after subtracting Wealthfront's 0.25% management fee.

Wealthfront is "set it and forget it" investing for your short-term to medium-term cash. You'll get a personalized allocation of bond ETFs based on your tax situation, and you get automatic rebalancing, tax-loss harvesting, and tax-optimized reinvestment of dividends. And your Automated Bond Portfolio account is liquid, so you can withdraw your cash at any time without penalty -- unlike a CD.

Keep in mind that this account's 5.50% yield, while higher than the best savings accounts and CDs, is not guaranteed. Bond prices do not always go up. Bonds fluctuate in price depending on changes in interest rates and changes in the bond market, and bond ETFs can lose value just like stocks. But if you want a lower-risk investment option than the stock market, and want a different way to earn yield on your cash than CDs or savings accounts, the Wealthfront Automated Bond Portfolio could be a good choice.

Why the Automated Bond Portfolio is unique

As described on the Wealthfront website, here is a good framework for thinking about when, how, and why people should think about saving and investing money:

• "Now" money: Cash savings -- money you might need tomorrow (or today) for emergencies
• "Later" money: Investing in stock ETFs -- save and grow wealth for retirement

The Wealthfront Automated Bond Portfolio is a good fit for that hard-to-fit middle ground of "Soon" money -- for money that you don't need now or in retirement.

This account is for money that you might need in one to three years. By investing in a diversified, automated portfolio of bonds, people can improve their chances of growing their money in the short term, while avoiding the higher risks of stocks.

Who should invest in the Wealthfront Automated Bond Portfolio?

Here are a few situations where the Wealthfront Automated Bond Portfolio could be the right choice for your cash savings.

You're saving for a specific purchase in one year (or more)

Want to buy a new car next year or go on a dream vacation in two years? Save for those goals here. But if your goal is less than one year away, a high-yield savings account (or the Wealthfront Cash Account, paying 5.00% APY as of March 26, 2024) could be a better choice.

You need immediate dividend income

This account could be a good choice for retirees, because it pays a higher yield than most of the best CDs. And you don't have to worry about managing CD maturity dates; the Wealthfront brokerage team automatically handles all the work for you. Just sit back and earn money from your money.

You want higher yield than CDs, but with better liquidity

One of the best reasons to open a CD instead of a high-yield savings account is that it gives you the chance to earn higher yields for a longer duration, in case interest rates go down. The Wealthfront Automated Bond Portfolio gives you the chance of better earnings in case of lower interest rates (bond prices tend to go up when interest rates go down), but without early withdrawal penalties.

Bottom line

Wealthfront's Automated Bond Portfolio is an intriguing short-term investment option that helps you maximize the yield on your cash. Be aware of possible risk of loss; bond prices can go down, and this account's yield is not guaranteed. But if you want a higher yield on your extra cash without the commitment of a CD or the risks of stocks, Wealthfront can be a good fit for your "Soon" money.