Spend-to-save accounts: helpful or hoax?

Children are taught that saving and spending are opposite behaviors. But thanks to a bevy of new programs, consumers can now stash cash for their future just by … consuming.

Designed to help customers save money without missing it, programs such as Bank of America’s Keep the Change and Wachovia’s Way2Save transfer a small amount of money ($1 or less) from checking to savings every time consumers make a debit or check card purchase.

These banks also match up to 5 percent of money saved — during the first year in Way2Save and each year in Keep the Change.

“If you’re using your debit card a lot for daily purchases, these programs can save you $3 or $4 a day, and that adds up.”

Other programs, such as Bank of America’s Add It Up, allow consumers to receive cash rebates when making online purchases through partner retailers.

Ori Pagovich, managing partner at Gotham Financial Services in New York, says such programs can benefit consumers with the right spending habits.

“If you’re using your debit card a lot for daily purchases, these programs can save you $3 or $4 a day, and that adds up,” he says. “That’s a couple hundred bucks a year that’s in savings that wasn’t there before.”

However, critics say there are more effective ways to stockpile funds than using spend-to-save programs.

Better ways?

Banks that promote spend-to-save programs say they offer an easy way for consumers to accumulate modest savings.

“Keep the Change was designed to help with small-scale savings goals, such as a special purchase or unplanned expenses,” says Bank of America spokeswoman Anne Pace. “We’ve found that the easiest way to help consumers save is to make it automatic.”

Sheila Walker Hartwell, a personal financial planner and founder of Hartwell Planning LLC in New York, acknowledges that spend-to-save programs may provide a small boost to savings.

However, she says these programs often don’t make financial sense, particularly for consumers who are in debt.

“If people are carrying credit card balances, the interest rates could be up to 30 percent,” she says. “So, to put money into a savings account where you’re earning point-seven-five (0.75) percent doesn’t make sense. It also doesn’t make sense to put money into a low-interest savings account if you have other debts like a car or student loan.”

There are better ways to save money, she says, including paying off unsecured debts and sticking excess funds into a savings vehicle that provides a cash match (like a company-sponsored 401(k) plan) or a higher-interest account like a CD or money market fund.

“You don’t want to have a ton of money in regular savings accounts because the interest rate is tied to the (federal funds) rate, and that’s practically zero right now because of our credit crunch,” Hartwell says. “You have to stop and say ‘Where can I earn better interest?'”

Matt Davis, director of public relations for Members Credit Union in Winston-Salem, N.C., also is critical of spend-to-save programs.

“If you want something that makes it quick and easy, lets you fool yourself into thinking you’re actually saving, (spend-to-save) programs are good,” he says.

Instead of trying to save by spending, he advocates putting money into an account where the saver can’t touch the money without paying a stiff penalty. Examples of such accounts include CDs, 401(k) plans or 529 plans.

“If you really want to build capital, put it where you can’t spend it,” he says.

“If you want something that makes it quick and easy, lets you fool yourself into thinking you’re actually saving, (spend-to-save) programs are good.”

Davis also lauds programs like SmartyPig.com, which allows consumers to set up an account with a specific savings goal, calculate how much they’ll need to contribute each month to make that goal, set up an automatic transfer from checking and even accept additional contributions from friends and family members who want to help.

“(SmartyPig) is the kind of program that focuses on changing consumer behavior rather than just transferring funds,” says Davis, whose credit union offers a similar program to its members. “It’s making savings automatic and it’s getting people to talk about how to change their lifestyle to effectively save.”

Back to basics

Jerrold Mundis, author of “How to Get Out of Debt, Stay Out of Debt, and Live Prosperously,” says the very nature of spend-to-save programs encourages people to spend more than they save.

“The problem is that these programs want you to use your ATM card and practically every study indicates that people who pay for things with plastic will spend 10 (percent) to 15 percent more on everything than they would if they were using cash,” Mundis says.

Instead of using spend-to-save programs to encourage savings, he advocates a more basic approach: keeping tabs of all expenses for at least 30 — and ideally, 90 — days.

“Usually that alone causes people to spend 5 (percent) to 10 percent less because it causes people to become more conscious about where the money is going,” he says. “That’s going to be much more effective in the long term.”

Once consumers have a clearer idea of their money-flow, they can save additional cash by tightening up budget leaks and switching from plastic to cash.

Mundis adds that while spend-to-save programs tout how much consumers can pocket, they frequently obscure hidden costs such as monthly maintenance fees on savings accounts and annual fees on credit cards.

For example, to have the monthly $5 maintenance fee waived, Keep the Change requires customers to maintain a minimum daily balance of $300 or set up an automatic transfer of $25 from checking to savings each month. Although Way2Save has no minimum balance, it does require consumers after the first year to make a check card or online bill pay purchase at least once a month to avoid a $5 monthly maintenance charge.

Instead of looking at small, daily savings, Mundis encourages consumers to focus on financial vehicles that target long-term savings goals and provide high rates of return while continually building savings.

“That’s preparing for the future and doing something that’s going to make a real impact in the way of accumulating assets,” he says. “It’s an illusion to think you’re going to build significant savings any other way.”

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