I have a friend, we'll call her Susie, and every year she gets a massive tax refund check. (to be fair, I have many friends like this and so do you)
I've never told her that she can adjust her withholding to avoid giving the Federal government an interest-free loan. I don't tell her because:
- I don't like giving unsolicited advice unless it's serious and,
- It's probably good for her to save this way.
It's good because it forces her to save in a way that's invisible. She doesn't notice her paycheck is smaller than it could be because her paycheck has always been the same.
She takes the refund check and usually does something financially prudent, like pay down debt or put it towards a savings goal.
It's bad math but good personal finance.
There are some who say that you can't cater and offer feel-good advice at the cost of offering good advice. And they're right… to a certain extent.
The debt snowball is a popular idea because it gets better results for some people than the debt avalanche. It is not mathematically optimal if you follow everything exactly, but it could be optimal for your personality. Let us remember that credit card debt, in the first place, is not mathematically optimal! No one says “hey, I want to pay 18% interest on a slice of pizza!”
That's what I mean when I say the automatic savings apps are bad math but good personal finance.
So, if you want to jump on the automatic savings app bandwagon, here are a few options:
- Dobot – My pick for the best option to replace Digit, which was king until they started charging a fee (Dobot now has a fee too though, $1.99/mo with a 30 day trial for new users). Dobot gives you $5 just for signing up.
- Digit – A solid app but with a $2.99 monthly fee, it makes it pricy. (read our Digit review)
- Chime – More than an app, it's a bank account but has automatic savings features. (and you get $5 for opening a new account and deposit funds)
- Acorns – They will save your spare change and let you invest it.
- Levelmoney – More fully featured than the others, you can create a financial plan and recommend savings
- Simple – A full bank account with an app and a Visa card, this is more budgeting than simple automatic savings
- Daily Budget – Free budgeting app
- Qapital – A free banking app and account that helps you automate savings based on your transactions.
Not all choices are mathematically optimal. The software engineer in me wants to believe that everyone can pick the right thing to do all the time… but it's not always possible. Sometimes it's valuable to put systems in place so computers make sure you do the right thing (why do you think Fitbits are so popular???) because we are fallible.
In a fallible world, having automation and technology pick up the slack isn't a bad thing. Retirement savings would be far worse and household net worth would be far lower if we didn't have automatic contributions. So is it really that bad for automatic savings?
What do you think about the rise of these types of apps?