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:
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?