We have all become accustomed to frictionless spending. To our detriment. Thank you, Amazon One-click, Prime, and Dash!
Now some apps are offering us frictionless savings, taking similar advantage of our inherent laziness and aversion to planning to help us save more. A few of the more prominent ones:
I initially had a negative knee-jerk reaction to these apps. Just didn’t square with my protestant work ethic (if I had one). But as I worked through this blog post, I came around to quite a solid appreciation. Of both their potential and their limitations.
I think these apps are great for smaller, short-term goals. But I don’t think you should rely on them to achieve life’s bigger goals, and I’m a bit fearful they’ll even get in the way of that effort.
Admission: I don’t use any of these apps. But that doesn’t stop the opinions!
Grasshoppers in Ant Clothing
You know the fable: the ant prepares for the upcoming winter, the grasshopper does not, and then the grasshopper has to come begging for food. Well, we humans are pretty much grasshoppers. We’re terrible at planning for the future!
Savings apps give all us Grasshoppers a nice Ant suit to wear.
It’s hard to reduce spending. Tried using a budget lately, anyone? But these apps bypass that issue altogether and focus on savings, letting reduced spending come along for the ride. The apps require some initial setup, but from then on, saving is invisible, painless, automatic, simple.
These apps are just the latest salvo from the behavioral side of Economics, first popularized by the book Nudge, by Professors Richard Thaler and Cass Sunstein, in 2009. Behavioral Economics recognizes that humans do not always act in a strictly rational way, the way a computer might. And instead of denying, bemoaning, or fighting against that reality, practitioners of behavioral economics and finance seek to take advantage of it.
It’s from this discipline that we get things like automatic enrollment in our 401(k)s and automatic investment of our 401(k) contributions in a target-date fund. Left to our own devices, we’d never sign up, and if we did, we’d leave the money in cash.
Similarly, these savings apps take advantage of our laziness by making it incredibly easy to set up and, importantly, effortless to continue (letting it continue is in fact easier than stopping). And they appeal to our love of games and constant input by giving us regular updates about our savings.
Why are you saving, that is.
Don’t let Lewis Carroll mock you:
“If you don’t know where you are going, any road will take you there.”
If you’re saving mindlessly (or doing anything mindlessly), you’re not going to get nearly as much benefit out of than if you did it with intention. How would you answer “why?”
- A house down payment?
- Paying for your kid’s college?
- A new car
- A trip to New Zealand
- Taking a year off of work?
Some of these apps encourage you to answer the question (that is, to set up goals). Qapital, for one. But others don’t. With those apps, clearly you’re just saving because, well, we’re supposed to, right?
I believe that having that explicit goal makes the process of savings easier to start, easier to continue, more satisfying, and more likely to succeed.
Human psychology is a tricky thing (my official diagnosis as a non-psychologist). These apps take advantage of some of our human foibles in order to make us do something virtuous that we’re bad at (saving), but I fear our psychology could bite us in the butt here, too.
Conflating Spending and Saving
Not all of these apps do it, but some make the savings contingent on you spending money. Acorns and Qapital, for example, save money each time you make a purchase.
If we conflate spending and savings, might this scenario arise? I save a bit of money every time I buy something. Which makes me feel better about buying stuff. Which means I do more of it. Which also means I save more. Now I’m both saving and spending more, but, ummm…my income hasn’t changed. Where is this “more” money coming from to both spend and save? Credit cards to rescue! That way lies disaster.
Complacency about Bigger Savings Needs
I don’t have any evidence of this, but I have this brain that is just as prone to self-delusion as any other. I fear that if you set yourself up to be virtuous in this one nice, but let’s admit it, small way, you could deplete all your savings virtue/mojo/motivation and therefore not doing as much to save in a larger, more meaningful way.
Kind of like drinking Diet Coke to save on calories…while eating a cheeseburger, because you’ve already done The Diet Thing with the soda.
How much does it cost to save?
Many of these tools are free, or “free” (Digit, for example, makes money by taking the interest from your savings account. Perhaps a pittance to you, but aggregated across all its customers, meaningful). Acorns explicitly charges a fee: $1/mo or 0.25% per year for accounts over $5000.
You need to know what you’re paying, either directly (Acorns) or indirectly (Digit).
Then figure out what that fee represents as a percentage of the money you’re saving. If you’re saving $50/mo, then Acorns is taking 2% of your money. Forgoing your interest (a la Digit) means you’re possibly paying 1%, which is what Ally would give you in your savings account.
Still a better deal than frittering that money away, but not cheap!
I often recommend a similar approach (without apps) to my clients: It boils down to setting up your paycheck and bank accounts to automatically shove money into savings accounts for each of your goals.
- Figure out what you want out of life: your goals. This is the Why, the hardest part. And the part that can’t be avoided, no matter what tool you use.
- Figure out how much that goal will cost, and how much you need to save each month. Oh my gosh, this is starting to sound like… a PLAN!
- Set up a savings account for each shorter-term goal (say, under 5 years). Online banks like Ally and CapitalOne make it dead easy to set up a separate account for each goal.
- Set up your checking account to automatically push money into these savings buckets.
- Arrange your paycheck to divert the money you figured out in Step 2 directly to your checking account, whence it is automatically pushed to your savings accounts.
For longer-term goals (say, 5+ years), you could bypass bank accounts entirely and have money sent directly from your paycheck to an investment account.
Why do I like this?
- It still takes advantage of the “set it and forget” appeal.
- It’s free.
- You don’t have to add Yet Another Tool to your technology and financial arsenal. Simplicity begets understanding begets action.
- You can make progress towards your goals a lot faster because you can save a hell of a lot more money with each paycheck than you normally would with one of these “a little bit here, a little bit there” savings apps. Tech industry employees often have enough income to divert a significant amount to savings.
Question: Are you using one of these savings apps? What effect has it had on your finances? You can leave a comment below.
Do you know you should save, but can’t quite get yourself to do it? Do you want to save for something meaningful in your life? Reach out to me at firstname.lastname@example.org or schedule a free 30-minute consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner and/or an accountant for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.