Savings is really easy. You just spend less than you have, and voila! Savings!
Of course, talking about it, and doing it, are two different things. Recently, there have been several new products that offer to help make your savings easier. There are good reasons for this. Automatically saving money without you having to do anything is one of the most successful ways to save money.
Some people have been using the IRS to do automatic savings for years. The idea is simple. You give your employer a W-4 Form with less deductions on it than you actually have, and they take more money out of your paycheck than necessary. Since the money comes out before you get it, you never have a chance to spend it, or even miss it. After a year, all of that extra money has built up into a sizable amount that you get back as a tax refund when you file your taxes.
The disadvantages to this method, are also its advantages. Changing your W4 is often difficult making adjusting your savings troublesome and time consuming. Of course, this also means it isn’t worth it to make changes just to have a little extra cash this weekend. Withdrawing the money early is all but impossible. Of course, this means that you won’t spend it impulsively either. The most common disadvantage financial professionals cite is that you are essentially giving an interest-free loan to the government. Then again, the average savings account pays so little interest these days, that the advantages of automatic, untouchable savings outweigh the tiny amount of cash you might earn.
How Does Round Up Purchases for Savings Work?
The idea of the round-up for savings account attempts to mimic the automatic nature of the IRS savings technique, along with the “you won’t know it’s missing,” aspect, while still giving you access to your money, and even paying interest.
These days, banks are getting in on the action. They have some advantages over other automatic savings services. First, you already have an account with them, so there is no reason to sign up for anything new, or pay any additional fees. The other advantage is that they have actual access to your transactions and therefore can offer the service slightly differently.
All of these round up and save the change services use big bold marketing that describes the process like this:
- You buy something
- They round up the purchase to the next dollar
- They take that money and put it into your savings account.
None of them actually do it this way because constantly transferring a few cents every time is prohibitively expensive and difficult. It is still a legitimate service, and definitely not a scam, but the mechanics might not match up with your expectations.
Acorns, for example, keeps track of your ongoing charges, and once you have accumulated $5 worth of rounding-up THEN it transfers $5 to your Acorns investment account. Statistically speaking, every 10 to 11 transactions should trigger a $5 transfer. So, it might be more accurate to say that every time you buy approximately five things, they will transfer $5 to a savings account.
Your local bank or credit union may do the same thing, but they may be able to do an even smaller and quicker transfer because of the intimate nature with your account.
For example, a local credit union in Denver offers a round-up savings account where it takes every charge you make on your debit card, and rounds it up. Again, that does not mean that if you make 11 transactions, there will be 11 transfers of less than $1. Instead, they make a single transfer at the end of your day of your total round ups for the day. This is a lot closer to what those How It Works graphics look.
In fact, unless you check your account during banking hours, this version of Round Up Savings comes very close to the real thing.
Difference Between Round Up Savings and Acorns
The difference between Round Up Savings type of accounts and Acorns type of accounts is subtle. Assuming you manage your funds sporadically, or if you have plenty of cash flow, it won’t really matter. However, if you are the type of person who checks your account daily and manage everything down to the penny, the difference can matter.
You buy a bagel for $2.38. Your “round up” should be $0.62.
If that is all you buy that day, the bank version of Round Up mentioned above will transfer $0.62 to your account at the end of business.
The Acorns type service will do nothing.
Let’s just say for the ease of example that you do this every day, and spend no other money.
That means that the bank will transfer $0.62 every day, and your balance will drop by $3 every day.
But, with the Acorns version, nothing will happen for 8 days, except for $2.38 will come out of your account. On the 9th day, Acorns will transfer an extra $5.58 from your checking account.
Again, if you keep a $400 cushion in your checking account, then who cares? But, if you are the kind of person who checks to see exactly how much money you have left to spend each morning, this could be jarring.
Either way, automatically saving money is a great idea. Although to make real progress, you need to save more than a few pennies here and there. So, either link one of these services to your primary spending card and monitor your account closely, or just do the “pay yourself first” thing and transfer $250 (or whatever works for you) into your savings the day you get paid. Missing money is missing money, no matter how you slice it.
Beware of any additional fees or charges. A service like this is not likely to be worth even a $1 per month service charge. Find a free version of the service if you want to save your money this way.