November 2008
Can you save money by spending?
Not really, despite the hype
Illustration by Isabelle Cardinal
Saving money is tough for many people, so bank programs designed to help you save every time you spend can be tempting. Under
those plans, money is deposited into your savings or money-market account when you make purchases with a debit or credit card.
But saving money by spending it is as unprofitable as it sounds. The Consumer Reports Money Lab, which crunched the numbers,
shows why:
Bank of America’s Keep the Change
The details
You set up a savings or money-market account and link it to a checking account with a debit card. With each purchase that you make with the card, the bank rounds the amount up to the nearest dollar and transfers the difference to your debit or credit card savings account. If you spend $332.49, for example, Bank of America will transfer 51 cents from checking to savings.
The bank also matches the transfer amount at 100 percent for the first three months and at 5 percent thereafter, up to $250 a year, which is taxable. Assuming the average transaction is 50 cents, you’d have to make 1,728 debit purchases in the first year to get the full $250, according to Bank of America’s online calculator. But because the amount matched drops, you’d have to make 10,000 transactions in the second year to get the $250.
The basic savings account recently paid a paltry 0.20 percent interest, and the money-market account paid 1.75 percent on deposits of less than $5,000, at a time when many online savings accounts were paying more than 3 percent. And if an automatic transfer results in an overdraft, you’ll be socked with a $25 fee unless you sign up for overdraft protection, in which case you’d be charged $10 each time.
Bottom line
You’ll do better saving in accounts that pay more interest.
Wachovia’s Way2Save
The details
You set up linked savings and checking accounts. Wachovia moves $1 from checking to savings every time you make a debit purchase or pay a bill online. The bank doesn’t match the transfers but pays 5 percent interest on the debit or credit card savings account for the first year and a 5 percent bonus on the savings balance at the end of the year. At the start of year two you’ll get 2 percent interest and a 2 percent bonus. Additional deposits into the account are limited to $100 a month.
If you transferred $100 a month into savings, you’d earn $92 in interest and bonuses the first year, in addition to the $1 transfers from debit transactions. But to get the maximum $300 bonus, you’d have to deposit $1,200 and make 4,800 transactions in the first year. The bonus is paid for three years and is taxable.
Bottom line
This program isn’t going to add much to your net worth.
American Express One
The details
This credit card pays you 1 percent cash back on purchases and a $50 bonus after your first purchase. The cash goes into a credit card savings account, which recently paid 2.75 percent. There’s no limit on the rewards you can earn. And the card doesn’t charge interest on new purchases, only on the previous month’s balance. But a $35 annual fee kicks in after the first year, so you’d have to charge $3,500 to break even.
Bottom line
You might do better with a card with greater rewards (some pay 3 percent or more for various spending categories) that charges no annual fee.
Bank of America’s Keep the Change
The details
You set up a savings or money-market account and link it to a checking account with a debit card. With each purchase that you make with the card, the bank rounds the amount up to the nearest dollar and transfers the difference to your debit or credit card savings account. If you spend $332.49, for example, Bank of America will transfer 51 cents from checking to savings.
The bank also matches the transfer amount at 100 percent for the first three months and at 5 percent thereafter, up to $250 a year, which is taxable. Assuming the average transaction is 50 cents, you’d have to make 1,728 debit purchases in the first year to get the full $250, according to Bank of America’s online calculator. But because the amount matched drops, you’d have to make 10,000 transactions in the second year to get the $250.
The basic savings account recently paid a paltry 0.20 percent interest, and the money-market account paid 1.75 percent on deposits of less than $5,000, at a time when many online savings accounts were paying more than 3 percent. And if an automatic transfer results in an overdraft, you’ll be socked with a $25 fee unless you sign up for overdraft protection, in which case you’d be charged $10 each time.
Bottom line
You’ll do better saving in accounts that pay more interest.
Wachovia’s Way2Save
The details
You set up linked savings and checking accounts. Wachovia moves $1 from checking to savings every time you make a debit purchase or pay a bill online. The bank doesn’t match the transfers but pays 5 percent interest on the debit or credit card savings account for the first year and a 5 percent bonus on the savings balance at the end of the year. At the start of year two you’ll get 2 percent interest and a 2 percent bonus. Additional deposits into the account are limited to $100 a month.
If you transferred $100 a month into savings, you’d earn $92 in interest and bonuses the first year, in addition to the $1 transfers from debit transactions. But to get the maximum $300 bonus, you’d have to deposit $1,200 and make 4,800 transactions in the first year. The bonus is paid for three years and is taxable.
Bottom line
This program isn’t going to add much to your net worth.
American Express One
The details
This credit card pays you 1 percent cash back on purchases and a $50 bonus after your first purchase. The cash goes into a credit card savings account, which recently paid 2.75 percent. There’s no limit on the rewards you can earn. And the card doesn’t charge interest on new purchases, only on the previous month’s balance. But a $35 annual fee kicks in after the first year, so you’d have to charge $3,500 to break even.
Bottom line
You might do better with a card with greater rewards (some pay 3 percent or more for various spending categories) that charges no annual fee.
Posted: October 2008 — Consumer Reports Magazine issue: November 2008
