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Mental Accounting for Dummies
The Bank of America's Keep the Change program freaks me out. Every time you make a charge with your B of A debit card it rounds the figure up to the nearest whole amount and transfers the change to your checking account.* Commercials for this service are all over the television and radio - tagline: "you don't even have to think about saving" - and every time I see one I feel the gulf between me and the rest of humanity widening (MR readers excepted of course).
Look, I can understand Ulysses tying himself to the mast, I can understand locking the refrigerator and I can understand Christmas accounts but I will never understand how anyone can increase their savings by taking money from one account and putting it into another. I think I will write a book, I will call it Mental Accounting for Dummies:
The secret to saving more money is simple. In your right hand is money for spending. In your left hand is money for savings. Now take some money from your right hand and put it into your left hand. Tada! Wasn't that easy?
Millions have signed up for Keep the Change and the program has been written up by Business Week as "a radically different product that broke the paradigm." Sigh.
* n.b. It is true that B of A tops up the amount transferred but this part of the program, the only part that makes any sense, is hardly advertised at all.
Posted by Alex Tabarrok on July 13, 2007 at 07:20 AM in Economics | Permalink
Comments
"...I will never understand how anyone can increase their savings by taking money from one account and putting it into another."
They can't, assuming that they spend from both accounts equally. But if most people are more hesitant to pull money from a savings account (as opposed to a checking account) for ordinary consumption, because they consider that a proxy for spending too much, why shouldn't it work? Most people aren't terribly rigorous about putting money aside. Why not let them pay someone else to save them the mental energy?
Posted by: anon at Jul 13, 2007 7:42:13 AM
Sorry, am I missing something? How is it being transferred from one account to another? Don't debit cards take money from the checking account? So if the top-up is credited back to the checking account isn't the money just looping in and out of the checking account?
Posted by: Helen DeWitt at Jul 13, 2007 7:51:59 AM
...and every time I see one I feel the gulf between me and the rest of humanity widening (MR readers excepted of course).
I feel this most intensely with respect to gift cards. When people suggest, say, a Best Buy cards a gift for their children, I tell them I'm going to give their kids a special new kind of Best Buy card:
- it never expires
- you can use it at any store, not just Best Buy
- you can even return it for a refund
They think that sounds great (clearly better than the regular gift cards). When the kid opens it, it's a little paper gift-card shaped envelope with the Best Buy logo on the front and cash folded up inside.
Posted by: Slocum at Jul 13, 2007 7:53:26 AM
Please clarify: is this a wash, with $.01 to $.99 making some silly circuit between accounts, or does the bank actually "give" you money? Does this mean when you tip you should always make it add up to $XX.01 so you'll get $.99 back?
Posted by: mae at Jul 13, 2007 8:10:01 AM
Please clarify: is this a wash, with $.01 to $.99 making some silly circuit between accounts, or does the bank actually "give" you money? Does this mean when you tip you should always make it add up to $XX.01 so you'll get $.99 back?
Posted by: mae at Jul 13, 2007 8:11:34 AM
For the first 3 months, BoA will match the 'rounded up' sum 100%. Thus, in the first couple weeks of my enrollment into the program, I made about 260 1 cent donations to the united way's paypal account using my BoA ATM/Debit card. BoA rounded them up by 99 cents each.
1 year later, BoA deposited a 250 dollar bonus into my savings account - the max allowed per year by the program.
For anything after the first 3 months, the program is pointless. For the first three months, when they match 100%, it's quite useful.
Posted by: Chris at Jul 13, 2007 8:25:18 AM
Aside from the first three months, the bank does not give you money. Instead, what happens is that whenever you use the debit card to pay for a purchase, the bank will round up the cost of the purchase to the next dollar. Whatever amount is rounded up is taken from your checking account and placed in your savings account. So, if you spend $16.15, the bank will deduct $17.00 from your checking account. $16.15 will go to the merchant, and $0.85 will go into your savings.
Posted by: J. at Jul 13, 2007 8:31:31 AM
You really can't understand that? I use savings, households expenses and personal spending accounts to shuffle money around and fool myself, to take advantage of my own irrationality and compensate for my lack of self discipline.
This B of A thing sounds like a great idea to me - I'd find myself saving more money without noticing it. I hope my bank introduces it.
Yes, I appreciate it's illusory, but it would work for me. It's like setting your watch a little fast, so as to reduce tardiness - that shouldn't make any difference either, but it does.
You have trouble believing your fellow human beings are so dumb, as you see it. I have trouble believe you're really as rational as you claim (perhaps not in respect of your money management skills). I think we ought to both credit that there are people out there who ain't like us.
I also unplug my wireless hub when I'm trying to work to stop myself browsing damn economics blogs.
Except now I'm in the uni computer lab and cannot disconnect myself. Get back to Stata dammit!
Posted by: Luis Enrique at Jul 13, 2007 8:33:15 AM
I think Luis Enrique's comment above is indicative of how a lot of
people work their budget (including myself in weaker moments). Checking is
for spending, savings is for savings. If you put money in savings, it will
not be spent. You've "walled it off" mentally from your daily living
expenses. Stupid, but it works for a lot of people.
Posted by: cljo at Jul 13, 2007 8:56:59 AM
Do people still use Christmas accounts? I remember, as a young kid with a paper route, doing this one year at the suggestion of my mother. This is back in the day of (shudder) passbooks. Are those still used too?
At the time it seemed silly to me just as this does.
I think Tyler understands that people are different from him in terms of fiscal management but, like me, he doesn't understand WHY.
Posted by: fustercluck at Jul 13, 2007 9:22:41 AM
How is this hard to understand? BoA is taking advantage of the same psychological quirk that the government does with income tax witholding.
Posted by: Christina at Jul 13, 2007 9:38:00 AM
I regularly transfer money from one account, let's call it checking, to another account, let's call it savings. This is an age-old time-honored custom and carries with it the mental command "Dip into Savings only in an emergency or for Very Big Jobs." I also have a second savings for annual bills such as taxes and insurance. That way I know the money will be there when needed.
Now, the irrational thing about the program you mentioned is that the money is going right back into checking to be spent, not into savings. Otherwise, it sounds OK to me.
Note: a lot of people do things for bookkeeping convenience, such as carrying a gas company credit cars and using it only to fill their cars, rather than use the debit card. Or sticking money in envelopes with their use written across the face. It's all in what helps your mind work better. I'm sure your mind has no ned of such artificial aids. Mine, however ... oh, look, ae bird!
Posted by: Pat Mathews at Jul 13, 2007 9:39:43 AM
It's really a trick to make people use their debit cards more for small purchases. BofA pockets more money on fees from merchants. In terms of actual savings, how many debit card purchases does one make in a month? Multiply that number by the expected change of 49 cents. The result is not a large figure.
Keep the Change is in the same category as bags of coffee with pictures of smiling well-fed looking growers on them, or "green" SUVs that get one or two more MPG than the usual. It's a heavily-advertised placebo.
Posted by: James Grimmelmann at Jul 13, 2007 9:44:09 AM
Note that what is bizarre about the program is not even or alone the idea of different mental accounts for saving and checking but rather the idea that people want *someone else* to move money from one of their accounts to the other account.
Posted by: Alex Tabarrok at Jul 13, 2007 9:51:22 AM
One part of the appeal of this BoA program may be that many dislike working with six or seven significant digits when they balance their checking and would like to cut off a couple of digits from tons of dinky little transactions. That's one factor why I prefer to just use cash for most daily transactions: to simplify balancing the checking account.
Also, I don't get what's stupid about walling off medium- and long-term savings from funds used for current spending.
Posted by: John Mansfield at Jul 13, 2007 9:54:18 AM
Spend $4.50. BofA takes $5 from the account. The extra $0.50 is moved to the higher interest savings account.
It's a win-win, unless you overdraw the checking account—and I know no one who manages the balance in their checking account so closely that even $0.99 would make a difference.
It's "the miracle of compound interest" applied to personal microfinance.
Collaterally, it makes it easier to balance your checking account.
It is, in short, the clearest example of Marginal Utility available to the consumer.
Posted by: Ken Houghton at Jul 13, 2007 10:11:15 AM
I don't see the difference between this and automatically garnishing your own wages for a 401(k). Is there anyone who doesn't think the automatic 401(k) savings plan isn't a terrific idea?
Posted by: Joshua Holmes at Jul 13, 2007 10:14:27 AM
Slocum: That's very clever, and yes, you're correct, cash has strictly more utility than a gift card of the
same face value.
(I think Rothbard made one time about how "we already have health-care vouchers: they're called dollars.")
Wise people notice this very quickly. Why not just give cash every time, since it carries a
zero-strike call on the otherwise-intended gift *plus* a zero-strike call
on anything else in the world?
This curiosity just goes back to the question of why gifts are given in the first place, and
why some gifts are chosen over other. The reason is that a *good* gift is not just the transfer of something
of value, but a personal expression of affection. The gift cannot solely be reduced to the asset
transferred, since it also includes the personal expression. A George Foreman grill as a gift is not just
a George Foreman grill, but the message, "Hey, based on my consideration of your life, I think you would
benefit from using a George Foreman grill, and I'm going to take the steps to facilitate this."
The best gifts I have given or received have either been a unique expression of affection, or an intro-
duction to a new activity like that. Since gift cards can still partly embody a suggestion ("hey, maybe
Best Buy has something you want") they persist when cash is clearly more useful.
Posted by: Person at Jul 13, 2007 10:19:37 AM
Is Prof. Tabarrok similarly mystified by people who toss their pocket change into a jar at the end of each day?
Same thing, except that presumably the savings account is earning some trifle of interest.
Let's see a post on the economics of excessively-mystified economists.
Posted by: Anderson at Jul 13, 2007 10:46:02 AM
Person: Since gift cards can still partly embody a suggestion ("hey, maybe Best Buy has something you want") they persist when cash is clearly more useful.
Sure -- but little paper envelopes with 'Best Buy' printed on the outside carry the same meaning without all the disadvantages.
And, actually, if you just went to Best Buy and bought some product totally at random that cost what you wanted to give, *that* would be better than a gift card too, since it might just happen to like it and, if not, they actually can return the physical product for a refund (which they can't do with the gift card).
Joshua Holmes: I don't see the difference between this and automatically garnishing your own wages for a 401(k). Is there anyone who doesn't think the automatic 401(k) savings plan isn't a terrific idea?
It's a great idea only because of the tax differences between 401(k) dollars and after-tax dollars. I also move money between checking and savings (or money market) accounts, but only because of interest rate differences. In the abstract, I'd be happier with one big pile-o-money (invested in a variety of ways) than this, that, and the other account.
But I understand that I'm unusual -- I don't really have to fool myself into not spending money (It's not that I have steely discipline, it's just that I don't feel the temptation very strongly).
Posted by: Slocum at Jul 13, 2007 10:47:34 AM
Slocum, I think like you do. All things being equal, I would prefer to keep track of one pile. For security and tax/interest reasons only, I don't.
The real question is: why are people only able to do this with pocket change? If you can put $.34 in a jar after getting a coffee or buying a pack of gum, is it much harder to put $50 under the mattress every time you cash your paycheck? Whether physically or through some online mechanism?
This BoA program isn't a *bad* idea per se, but is it really that beneficial? $.49 times however many transactions at let's say 1.5% interest (which might even be high for a current traditional savings account) = underwhelming. If it made people see the light and begin to practice what I wrote in paragraph 2, I'd be much more impressed.
Posted by: fustercluck at Jul 13, 2007 11:08:27 AM
The success of this program is hardly a mystery in a world where Dave Ramsey, who gives advice that anyone who can do basic arithmetic should know is wrong, is a popular personal finance guru.
Posted by: Pinkston at Jul 13, 2007 11:57:20 AM
Keep The Change works on the same principle as Pay Yourself First. It's a small amount of money that you won't miss. So yes, it's a forced savings plan like the old Christmas Clubs. By transferring it to your savings account, it becomes money you normally would not spend. The effect is that you end up increasing the money in your savings account while your checking account stays at around the same levels it usually does (spiking high on payday, and being low after big purchases like rent/mortgage).
Even a low frequency of use will net on average a buck a day for about $30/month. So you are adding to your savings account about $360 a year. That is money that would usually be lost in the cushions or spent on trivial things.
The match is only impressive for a short time. BoA matches 100% of the money transferred from your checking to savings during the first three months. After that it is 5%. Now 5% is good for a savings account, but since we are not talking about big figures here it won't amount to much. 5% of $360 means you get $18. The match is paid on the yearly anniversary of joining the program. So after you've been on it a year, the match will never be big. And as mentioned, BoA limits their potential yearly match to $250. Of course, you also get the usual savings account rate which is a pittance.
Doing it for the match doesn't make sense outside the first 3 months. However, by the end of a year you now have several hundred dollars that you wouldn't otherwise have. For lower income families, that might be money they can use for fun. Or to help pay off credit debt. Or as seed money to eventually purchase a better investment with required minimums. For higher income families, it might still be something they can use to max their IRA or transfer to a higher interest money market account.
Keep The Change won't substantially change someone's financial situation. But it probably will pony up several hundred dollars after a year. This works whether you are already paying yourself first through 401(k) contribution, IRA, or a money market. It's just another tool.
Posted by: Chris Durnell at Jul 13, 2007 12:16:19 PM
FWIW, one of the arguments I hear when I suggest people rent (rather than buy a home) and invest the savings
in the stock market is that when they have the mortgage, that "forces them to save" because they don't have
the discipline to actually invest the difference each time. Go fig.
Posted by: Person at Jul 13, 2007 12:34:22 PM
$0.34.... $0.08.... $1.25.... ??? Savings ??? It's like putting ketchup on a hamburger and calling it a vegetable. What, are they kidding? Don't even start about the tax consequences. Hey, where'd my vegies go? Mmm, burgers :-d
Posted by: Ed in the Silicon Valley at Jul 13, 2007 1:11:52 PM
