Automatic round up?
Becky asks Dave what he thinks about bank automatic savings plans that round up each transaction and put the rest into savings. Dave urges her to save and invest on a much larger scale.
QUESTION: Becky on Twitter asks Dave his opinion of bank automatic savings plans that round up each transaction and put the rest into savings. Dave says he doesn’t mind these types of programs, but he worries that they give customers a false sense of accomplishment and security.
ANSWER: Do you know how you end up with money in investments? You end up with money in investments because you put money into investments. If you put a lot of money in investments, you’re going to have a lot of money in investments. If you put a small amount of money in investments, you’re going to have a small amount of money in investments.
All of these things that “round up” have you putting pennies into investments. You might say pennies add up. Yeah, they add up to a stack of pennies. You don’t need to be putting pennies into your investments. You need to be putting thousands of dollars into your investments. Try rounding that up! Get out of debt so that you’re putting the equivalent of a car payment or a student loan payment into investments.
It’s not evil to round up and have an automatic savings plan. But it’s like every time you buy a cup of coffee it puts four cents in there. Whoopee! It’s a pile of pennies. The problem is not that you’re putting money into savings, and the problem is not that it’s automatic. Saving is smart. The problem is when you’re looking at something like this it means you have an itch somewhere inside your brain that you need to scratch. The itch tells you that you’re not saving for retirement, and that not saving money is stupid. Then when you sign up for a bank round up thing, all you’re doing is scratching the itch with pennies. You need to scratch that itch with thousand dollar bills.
If something like this is your only retirement vehicle, you’re going to retire broke. You’re scratching the itch emotionally, but mathematically it’s a joke. So it’s okay to do it if you want, just make sure you’re still stressed out and worried that you don’t have a retirement plan. Your round up plan at the bank is not going to cause you to retire with dignity. It’s ok to do it, but it really isn’t doing anything.