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 on a Form W-4 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 invisibly. 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.
Some 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 (not to be confused with personal finance apps, which help you manage your money better) are bad math but good personal finance.
So, if you want to jump on the automatic savings app bandwagon, here are a few options:
- Acorns – They will save your spare change and let you invest it.
- Daily Budget – Free budgeting app
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 that bad for automatic savings?
What do you think about the rise of these types of saving apps?
My worry is security. So many of these apps ask for you to connect to your bank account in order to be able to read your transactions and your details. You end up giving them so much info that while their servers are intact and protected, it may well be alright, but when a hacker gets in that’s a totally different story. So there’s lots of apps now, but still a big red flag stopping me from diving straight in.
I’m one of those people who get a refund check. For me it’s not easy to figure out what the right withholding is. I play it safe by giving them more. Then I use the money for something financially prudent as you say.
I’m a big fan of the automatic saving apps, but only if they are free. Once I have to start paying to save it loses its luster.
Same. I also have a few side hustles I make money on the side so keeping my tax withholding high I usually break even and don’t have to pay at the end of the year.
I’ve been using the acorns app for a few years and have almost $200 in it. I like it because I don’t really feel it much. Yeah I could do it on my own but I probably wouldn’t and would use the money on dumb things.