Saving in a low-yield world
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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.

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"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.

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