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Spend to Save? A good idea or not?

couple_paying_plastic.jpgOctober 2010

Have you seen the ads for the various debit card savings promotions? Many financial institutions are now offering some form of a debit card savings program. Some offer to round the amount of your purchase up to the next dollar and transfer that difference into a savings account. Others offer to transfer a fixed amount from your checking/debit account into savings. Some promise to match certain amounts of savings. All promise to help you save without having to think about it. Can programs like this make sense for you? Can they really help you reach your savings goals? This report profiles such programs to help you answer these questions and more.

What are spend-to-save programs?

In such programs, a qualified purchase with your debit or check card results in the transfer of an amount of money from your checking/debit account to a savings account. In one approach, the amount transferred may be $1. In other popular programs, the transaction is rounded up to the next dollar and the "round up" amount is transferred from your checking account. For example, in a round up plan, if a transaction amount is $12.55, then it is rounded up to $13 and the additional 45 cents is transferred to your savings account.

A few programs also include some of the following: transactions using online bill pay, automatic payments from checking accounts, and credit card purchase.

What is a qualified purchase?

That is determined by each program. It may be a PIN transaction or it may be a non-PIN (credit) transaction. If you consider any program, be sure you understand exactly what types of transactions will trigger the transfers.

What types of savings accounts are associated with such plans?

Most programs typically feature a low interest savings account or possibly a money market savings account but not a high interest rate account. Interest rates for these types of account have recently ranged from 0.05 percent for a regular savings account to 0.15 for a basic money market account. In addition, the account usually requires a minimum balance, which typically ranges from $200-$300. If the account drops below that balance, you'll be charged a maintenance fee. Given the low interest rates on the accounts, such maintenance fees (averaging $5) will typically wipe out any earnings and usually cut into your principal, too.

In some plans, if a specified amount of money isn't transferred to the savings account each month, you'll be charged a maintenance fee. For example, if the qualifying $1 transfers must add up to $25 each month, that means you must make at least 25 transactions each month to avoid the maintenance fee.

In at least one plan, for the first year, the only deposits that can be made to the savings account are though the $1 per transaction transfer and automatic transfers from the linked checking account that cannot exceed $100 per month. The bonus this plan offers is an interest rate of 5 percent for the first year, after which the interest rate drops to the regular savings rate (which at the time of writing was 0.05 percent).

IQ Tip: Educators has a similar program called Change Up®. It applies to non-PIN transactions, has no strings, and currently offers 2% interest. If you're interested in this approach to savings, start here!

Do these plans have incentives?

Some plans include matching a percentage of the transferred funds. Some of these plans will match only 5 percent of the transferred amount. Others start by matching a "teaser" percentage for a set period, then drop the percentage much lower. For example, one round-up plan will match 100% of the transferred amount for the first 3 months, then the percentage matched drops to 5 percent. The matching funds are typically paid into your account once a year with a maximum amount of $250-$300.

Earning the maximum match, however, takes a lot of transactions. For example, to earn the $250 match in one round up program, you would need to make 144 transactions per month, assuming an average transfer of 50 cents, in the first year. This includes a 100% match for 3 months. In the second year, it would take over 830 transactions per month or 27 transactions per day. Not very realistic, right?

Is it a good way to save?

To decide if these plans are a good way to save let's look at the pros and cons.

Pros

  • It's a simple and convenient way to stash away some cash.
  • You're saving money that you might not save.

Cons

  • It will take a lot of transactions to build up your savings. For example, in one year, if you average 1 debit card transaction a day (365 transactions for the year) at a $1 per transfer, the maximum amount you will have saved is $365.
  • The interest earned on the savings is very small. For example, the interest rate for the savings account in the example above is 0.05 percent which means that the $365 will have earned 18 cents.

Are there better ways to save?

Yes, I can recommend two easy ways that will build more savings faster. If you have your paycheck deposited directly into your checking account, you may be able to have a percentage or specific amount deposited directly into your savings account or into an IRA (if retirement savings is your goal). Or you can setup an automatic transfer to have a specific amount transferred from your checking account to your savings account on a regular basis. Check out the savings options from your credit union on this website.

For more ideas, check out my earlier report, Tips to Enhance Your Plans to Save More.

Bottom line: If you are serious about building your savings, you'll want to choose a savings plan other than spend-to-save plans.


Prepared by Remar Sutton and Associates and licensed to Educators Credit Union. Copyright 2010. All rights reserved.