Round it up
Technology has made spending dangerously frictionless – but it is also starting to offer easier ways to save, too.
One of the options is round-ups – where your spending is rounded up to the nearest $1, $2, or $5. For example, if you spent $4.30 and were rounding up to the nearest dollar, 70c (less any fees) would be diverted to savings.
ASB is the only major bank I could find offering this itself, through Save the Change, but there are non-bank alternatives. Otto offers round-ups as part of its $5-a-month paid plan; Feijoa sends them to KiwiSaver and charges a transaction-based fee; while Sorted’s free Buffer Builder can round up spending into savings or automatically skim money from your account when you get paid.
Sorted Buffer Builder is great (and free always appeals), but I utilise my emergency buffer as a mortgage offset, so it’s not quite what I’m looking for. I decided to download Feijoa to give it a try because, as I’ve written about before, finding anything close to the frictionless KiwiSaver experience that employees benefit from is tough.
Feijoa helps overcome the inertia that can often be a barrier to saving, but there are a couple of things I’m cautious about.
The fees are small in dollar terms, but less so when expressed as a percentage of what you’re actually saving. Feijoa charges 0.5% of the purchase price, capped at 15% of the roundup or 20c. Co-founder Mark White-Robinson told me the average user rounds up $2.47 a day, saving about $900 a year, and pays average fees equivalent to about 4.7% of those contributions.
Put another way, you’re paying roughly $42 to save $900. You could of course do this directly, for free – but the value proposition is behavioural. What you’re paying for is taking it off your financial admin “to-do” list, which may be a price worth paying if otherwise it would never get done.
I’m also aware it could give you a false sense of security. If your retirement goals mean your KiwiSaver really needs 8% of your overall salary, don’t confuse small change with actually hitting the contributions that requires. I’m thinking of it as a bonus, not as my primary contribution.
And lastly – if you don’t have an emergency fund yet, locking away more money in KiwiSaver isn’t where you should start. That’s where the other options like Sorted’s Buffer Builder could be useful.
Rethinking reward schemes
I’ve always been wary of schemes that reward spending. They exist to encourage more spending, many are attached to credit cards, and annual fees can mean you need to spend a considerable amount just to match the cost of the card. Then, often, the reward itself is just something else to spend.
But I like Sharesies’ spin on them – Investback. It’s a debit card rather than a credit card, so you’re only spending money you actually have, which should help short-circuit the negative spending psychology associated with credit cards. Fees are low – $25/year (or $12 if you’re on the Sharesies investment plan) – so with a 1% reward you only have to spend between $1200-$2500/year to break even. Plus, if you’re going to be rewarded for spending, surely the most useful reward is one you don’t then also spend – here you invest the reward. The (hopefully obvious) caveat here is that it must be money you were planning on spending anyway!
Tap and pay: Paywave, which requires no contact and no Pin, will cost you more in surcharges.
There are, of course, some things to be aware of. If you use the card to pay via tap and go and the merchant charges a surcharge of 1.5%-2.5%, that will more than offset any benefit you get from using it. Why would you spend $2.50 to earn $1? While you can opt to invest your rewards in either KiwiSaver or more readily available investment funds, this shouldn’t be confused with a savings account. This is investing, and investing comes with risk. Your $1 of rewards could become 80c rather than grow. Once again, if what you’re after is an emergency buffer, this probably isn’t where you should start.
Boring options also work!
You don’t need an app or a financial product to automate good behaviour – a good old automatic payment that goes out to your savings account the day after you get paid can also be effective. Provided you’ve done the sums and what’s left over can cover all your expenses, ‘paying yourself first‘– that is, saving first then spending the balance rather than the other way around – is a good way to prioritise the outcome you want.
None of these options will fix a budget where there simply isn’t enough money left over to save. Micro-savings are also not a substitute for working out how much you actually need to put aside for retirement. But if it’s the frailties of human nature that keep getting in the way, and demanding more discipline from yourself isn’t solving that – setting up a system that doesn’t rely on it just might.
Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.