The Bank of America’s Keep the Change program freaks me out. Every time you make a charge with your B of A debit card it rounds the figure up to the nearest whole amount and transfers the change to your checking account.* Commercials for this service are all over the television and radio – tagline: “you don’t even have to think about saving” – and every time I see one I feel the gulf between me and the rest of humanity widening (MR readers excepted of course).
Look, I can understand Ulysses tying himself to the mast, I can understand locking the refrigerator and I can understand Christmas accounts but I will never understand how anyone can increase their savings by taking money from one account and putting it into another. I think I will write a book, I will call it Mental Accounting for Dummies:
The secret to saving more money is simple. In your right hand is money for spending. In your left hand is money for savings. Now take some money from your right hand and put it into your left hand. Tada! Wasn’t that easy?
Millions have signed up for Keep the Change and the program has been written up by Business Week as "a radically different product that broke the paradigm." Sigh.
* n.b. It is true that B of A tops up the amount transferred but this part of the program, the only part that makes any sense, is hardly advertised at all.
“…I will never understand how anyone can increase their savings by taking money from one account and putting it into another.”
They can’t, assuming that they spend from both accounts equally. But if most people are more hesitant to pull money from a savings account (as opposed to a checking account) for ordinary consumption, because they consider that a proxy for spending too much, why shouldn’t it work? Most people aren’t terribly rigorous about putting money aside. Why not let them pay someone else to save them the mental energy?
…and every time I see one I feel the gulf between me and the rest of humanity widening (MR readers excepted of course).
I feel this most intensely with respect to gift cards. When people suggest, say, a Best Buy cards a gift for their children, I tell them I’m going to give their kids a special new kind of Best Buy card:
They think that sounds great (clearly better than the regular gift cards). When the kid opens it, it’s a little paper gift-card shaped envelope with the Best Buy logo on the front and cash folded up inside.
Please clarify: is this a wash, with $.01 to $.99 making some silly circuit between accounts, or does the bank actually “give” you money? Does this mean when you tip you should always make it add up to $XX.01 so you’ll get $.99 back?
Aside from the first three months, the bank does not give you money. Instead, what happens is that whenever you use the debit card to pay for a purchase, the bank will round up the cost of the purchase to the next dollar. Whatever amount is rounded up is taken from your checking account and placed in your savings account. So, if you spend $16.15, the bank will deduct $17.00 from your checking account. $16.15 will go to the merchant, and $0.85 will go into your savings.
I think Luis Enrique’s comment above is indicative of how a lot of
people work their budget (including myself in weaker moments). Checking is
for spending, savings is for savings. If you put money in savings, it will
not be spent. You’ve “walled it off” mentally from your daily living
expenses. Stupid, but it works for a lot of people.
How is this hard to understand? BoA is taking advantage of the same psychological quirk that the government does with income tax witholding.
It’s really a trick to make people use their debit cards more for small purchases. BofA pockets more money on fees from merchants. In terms of actual savings, how many debit card purchases does one make in a month? Multiply that number by the expected change of 49 cents. The result is not a large figure.
Keep the Change is in the same category as bags of coffee with pictures of smiling well-fed looking growers on them, or “green” SUVs that get one or two more MPG than the usual. It’s a heavily-advertised placebo.
One part of the appeal of this BoA program may be that many dislike working with six or seven significant digits when they balance their checking and would like to cut off a couple of digits from tons of dinky little transactions. That’s one factor why I prefer to just use cash for most daily transactions: to simplify balancing the checking account.
Also, I don’t get what’s stupid about walling off medium- and long-term savings from funds used for current spending.
I don’t see the difference between this and automatically garnishing your own wages for a 401(k). Is there anyone who doesn’t think the automatic 401(k) savings plan isn’t a terrific idea?
Is Prof. Tabarrok similarly mystified by people who toss their pocket change into a jar at the end of each day?
Same thing, except that presumably the savings account is earning some trifle of interest.
Let’s see a post on the economics of excessively-mystified economists.
Slocum, I think like you do. All things being equal, I would prefer to keep track of one pile. For security and tax/interest reasons only, I don’t.
The real question is: why are people only able to do this with pocket change? If you can put $.34 in a jar after getting a coffee or buying a pack of gum, is it much harder to put $50 under the mattress every time you cash your paycheck? Whether physically or through some online mechanism?
This BoA program isn’t a *bad* idea per se, but is it really that beneficial? $.49 times however many transactions at let’s say 1.5% interest (which might even be high for a current traditional savings account) = underwhelming. If it made people see the light and begin to practice what I wrote in paragraph 2, I’d be much more impressed.
Keep The Change works on the same principle as Pay Yourself First. It’s a small amount of money that you won’t miss. So yes, it’s a forced savings plan like the old Christmas Clubs. By transferring it to your savings account, it becomes money you normally would not spend. The effect is that you end up increasing the money in your savings account while your checking account stays at around the same levels it usually does (spiking high on payday, and being low after big purchases like rent/mortgage).
Even a low frequency of use will net on average a buck a day for about $30/month. So you are adding to your savings account about $360 a year. That is money that would usually be lost in the cushions or spent on trivial things.
The match is only impressive for a short time. BoA matches 100% of the money transferred from your checking to savings during the first three months. After that it is 5%. Now 5% is good for a savings account, but since we are not talking about big figures here it won’t amount to much. 5% of $360 means you get $18. The match is paid on the yearly anniversary of joining the program. So after you’ve been on it a year, the match will never be big. And as mentioned, BoA limits their potential yearly match to $250. Of course, you also get the usual savings account rate which is a pittance.
Doing it for the match doesn’t make sense outside the first 3 months. However, by the end of a year you now have several hundred dollars that you wouldn’t otherwise have. For lower income families, that might be money they can use for fun. Or to help pay off credit debt. Or as seed money to eventually purchase a better investment with required minimums. For higher income families, it might still be something they can use to max their IRA or transfer to a higher interest money market account.
Keep The Change won’t substantially change someone’s financial situation. But it probably will pony up several hundred dollars after a year. This works whether you are already paying yourself first through 401(k) contribution, IRA, or a money market. It’s just another tool.
$0.34…. $0.08…. $1.25…. ??? Savings ??? It’s like putting ketchup on a hamburger and calling it a vegetable. What, are they kidding? Don’t even start about the tax consequences. Hey, where’d my vegies go? Mmm, burgers :-d
Alex I do not understand your mystification with “the asking someone else to do it” aspect of this thing. Isn’t trying to put a decision out of our own hands part of what all these tricks we play on ourselves are about?
After all, if I was able to write a macro for my online banking account, I could set one up to do this “round up and move the change into my savings account” thing myself. But the bank if offering to do it. So fine.
Pinkston-
I know this is off-topic, but can you be more specific in your criticism of Dave Ramsey?
When they first started the program they were matching your money, that’s why I signed up.
But, I split my pay check between multiple accounts. Part of my pay check goes into my standard checking account, and the rest goes into different savings or investment accounts.
I don’t have debit cards for the savings or investment accounts, but I do have checks. I do have a debit card for my standard checking account.
I find I’m less likely to dip into my savings that way, and I’m more careful with what I’m spending.
What I need for the month is in the account I have easy access to, plus some spending money, for whatever.
Basically, it’s a way for me to budget, but still not think. I just never see much of what I make, it vanishes into my hard to access accounts.
Justin
What if one account, the savings, pays interest, while the other, the checking account, doesn’t?
This is a perfect example of being penny-wise and pound foolish. If you want to save money, open an online savings account (it will pay much higher interest than BofA’s accounts which, last time I checked, earned a fraction of 1%), get your paycheck direct deposited and then commit to transferring a fixed amount of money into the savings account each month. With this silly program, you might save $30 a month and even then only by spending.
It is a brilliant move on Bank of America’s part, though. With millions of account holders signing up, it gives the bank access to millions of dollars worth of extremely cheap loans.
Rich,
Ramsey’s extreme aversion to any debt and advice like paying off the smallest debt first (not the one with the highest interest rate) will only help people who are the equivalent of alcoholics with credit cards, and paying off the lowest balance first probably isn’t the best idea even for them. Any reasonable person who is capable of understanding what credit cards and other debt mean will clearly be better off ignoring Ramsey.
But I also must note your suggestion to mental economics isn’t really applicable for most people. I personally keep personal finance records (and budgets I rarely keep, but I’m purely irrational) – the thing is, keeping them all in one account makes it hard to keep track of it all.
After all, I don’t have my laptop opened whenever I’m at the ATM. And for many, keeping accounts in itself is a daunting, difficult task. And usually because they don’t know how to.
Separate accounts helps in that regard.
I thought economists already had an apparatus for reasoning about this kind of behaviour? At least I’m sure I’ve heard the term “mental accounting costs” somewhere.
I signed up online. To get out of it you need to make a phone call or fill out a paper form. It isn’t worth it. I just transfer the money back every few months.
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