Spending is not the way to save

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We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Friday, February 22nd, 2008

Monday’s Tip from Money Mom – Bank of America’s “Keep the Change” and Wachovia’s “Way2Save” programs aren’t the way to build up family savings. Instead, pick an amount to save from every paycheck and “pay yourself first” by making an automatic deposit directly into savings every time you get paid.

This week is “America Saves Week.” We have a long way to go to establish the consistent savings patterns that will reduce heartache for our families during times of economic uncertainty. Experts say that every family should have three to six months of expenses in savings.

One of the best ways to save is to just start doing it, and to automate the process as much as possible. Treat your savings account like a bill you pay every month or every pay period, with a direct payment from your paycheck to an credit union in your workplace, or a direct debit from your bank account on payday to your savings account, mutual fund, or other savings spot. Even if you are only saving $10 every pay period, once you establish the direct deposit to savings you can increase the amounts gradually over time.

Earlier this month, another bank announced a program to round up debit card purchases and put the extra amount into savings. These programs are interesting, but they aren’t going to solve the savings deficit for American families.

Bank of America’s “Keep the Change” program rounds up debit purchases to the next dollar and puts the funds into savings. Now, Wachovia has announced Way2Save, which takes $1 out of your account and moves it to savings when you use your debit card, pay a bill online from your bank account, or have an automatic debit taken from your account. Read more about these bank programs.

If you have to, or choose to, keep a low balance in your checking account, using this new program will require extra care to make sure that you don’t incur expensive overdraft fees. One or two overdraft fees or bounced check fees could wipe out a month’s worth of $1 here, $1 there, savings deposits. Since each payment could involve an extra dollar moving out of your checking account, you might use up limited funds in your checking account more quickly than you realize.

Money Mom thinks that a bigger risk in programs like these is that they allow us to trick ourselves into thinking we have a savings program when we really aren’t on track to build significant family savings. The experts said that as of last September, U.S. families owed about 133% of our annual income to debt, including mortgage debt, car loans, and credit cards.

The America Saves Campaign, spearheaded by the nonprofit Consumer Federation of America and joined by many other groups, offers tips to cut back on spending.

If you already have a direct debit going to a savings account or mutual fund, great. See if you can increase the amount just a bit. If you don’t have a regular monthly or every paycheck deposit to savings, it is like we tell our kids about their homework – “Just get started.”

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