Home > Uncategorized > Banks Should Offer Forced Savings Plans

Banks Should Offer Forced Savings Plans

Around this time of year lots of people talk about interest-free loans to the government. While it’s true that you can do better than getting a tax refund it’s not all bad as Preet Banerjee points out again in the Globe and Mail. Many tax refunds get wasted, but it’s a bit harder to waste a few thousand dollars once a year than it is to waste a few hundred dollars every month.

In fact some research I saw a few years ago pointed out that many people in poor countries and even here do similar things that cost money but let them work with larger amounts that they are more careful with and wouldn’t normally have access to every month. For example buying lottery tickets isn’t all that bad if you tend to spend bits of cash under $10 on silly things, but you have a chance to win $2000 and you would use at least half of it for something worthwhile like purchasing an appliance you need. The money you spent on the tickets would have been wasted anyways but the amount you win could lead to something better.

It strikes me that banks should really be offering an alternative. It’s clear that many people need the ability to turn a stream of small monthly or daily payments into a large amount that they can access all at once at irregular intervals, because they take notice of the large amount and they are more cautious. The economics of a lottery are terrible, and I’m sure that a bank could offer something better while making a profit.

From what I hear there used to be something called a “christmas account” that paid out once a year, but it seems very rare now and December is a more dangerous time to get access to a large amount. People really need an option that pays out every 1-3 years at a time that can change, but can’t be changed after they put the money in. It would have to have some kind of big penalty if you took out the money earlier (maybe paying in lottery tickets). It would be even more powerful if the payout time and amount was randomly determined since that would be a lot like a lottery and people would actually get hooked in to do it more.

Instead of advertising that “you can spend more than you think” banks could actually do something useful that helps people. What do you think? Is there any chance of that happening? Is this a business opportunity for someone to operate in the same market as the payday-loan / check-cashing places?

  1. Joe
    April 18, 2012 at 1:58 am

    You are absolutely right. Sadly, banks have zero interest in producing the product to which you allude because they wouldn’t make the bank any $$$.

    Take the banks out of the equation. No, I don’t mean stuff the money under your mattress. I mean, set up a pre-authorized savings plan at an internet bank, e.g. ING Direct or Ally. Get the money out of your sight. If you want to be wealthy, eschew debt and automatically save 20% of every gross dollar you make. If you want to be rich, do the same things but save even more.

    My system is not truly automated, because I love doing the transaction the day after each paycheque. I know exactly what I need to keep in chequing for my expenses BEFORE they’re expenses. Then I transfer out the rest of the money before I have any chance to fritter it away. Preventing the fritter factor is critical. I love the way the “fritter factor” sounds, so I just googled it, hoping I’d invented something. Apparently it’s already well known. 😦

    • April 18, 2012 at 11:48 am

      Lotteries seem to be an even bigger racket than banking (maybe not by much) so the banks could still make a good profit doing this. But maybe having an ING account is enough for some people since it’s inconvenient to access. And having a cool name for it like the fritter factor helps 🙂

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: