In his 1978 classic Alice, Let’s Eat, Calvin Trillin introduced the world to his late wife Alice’s “Law of Compensatory Cashflow.” It goes like this: “Money not spent on a luxury one considered even briefly is the equivalent of windfall income and should be spent accordingly.”
Is there anyone in our society who doesn’t know the feeling? Just today, I was seriously thinking about buying some fancy new headphones. (My wife will confirm that I’m not given to luxury impulse purchases except, for some reason, when it comes to headphones.) The headphones cost about $100. I may or may not buy those exact headphones, but now I’m predisposed to spend $100 on something I don’t need. If only someone could harness this feeling and use it as a force for good.
Enter Putnam Investments and their innovative Price Check & Save app, available free for iPhone. (Yes, they’re definitely thinking about Android and Windows Phone 7, too.) The app is available only to participants in Putnam 401(k) plans, roughly 300,000 Americans.
Like another great innovation, the Reese’s Peanut Butter Cup, the Putnam app takes two ideas you’ve seen before and fuses them together to great effect. Here’s how it works. You’re at the store browsing headphones. (Okay, fine, I’m at the store browsing headphones.) Launch the app and scan the packaging barcode. If this sounds like the popular free RedLaser app, it’s because Putnam licensed RedLaser and embedded the technology in Price Check & Save.
RedLaser searches the Web to and shows you the lowest available price for the item you scanned. Putnam’s app shows you the highest price. Due to a powerful effect called price anchoring, your brain now assumes that these headphones are worth $100, and anything less is a discount.
Now, you can go ahead and buy the headphones. Or you can press the button that says “Save to 401(k),” and $100 will disappear into your retirement plan. Furthermore, the app will taunt you by showing you how much monthly income that $100 will turn into in retirement if you save it instead of buying your eighth pair of headphones. (The app can make a good guess because you’ve signed into your 401(k), which knows how old you are and what types of investments you hold.)
Or you can compare prices. Say Price Check & Save finds the same headphones at another store for $75. Now you can hit the button and save the difference, $25, to your 401(k). The money is withheld from your next paycheck along with your regular 401(k) deferral. Yes, your plan will make sure you don’t go over your 401(k) limit or try to save more than your entire paycheck.
The point, says Ed Murphy, Putnam’s head of defined contribution, is to “not necessarily discourage people from purchasing things—we’re all consumers—but help people understand the implication of those decisions for their retirement.”
Chris Farrell, author of The New Frugality, did a radio commentary about impulse savings in which he fantasized about a red button in your house that would instantly transfer $50 into your 401(k). I asked him whether the Putnam app fulfills the dream. “It looks very cool,” says Farrell. “Taking advantage of insights from impulse spending and translating them into encouraging impulse savings is a real advance.”
So crazy it just might work
Putnam deserves serious props for this cool idea. But it’s not the only savings innovation around. For several years, Bank of America has offered the Keep the Change program, which rounds up all debit card purchases to the next dollar and deposits the difference in your savings account. It’s not enough to fund your retirement, but it couldn’t hurt.
There’s also SmartyPig, which I seem to recommend pretty much every week. It’s a savings account that lets you easily split up your savings into individual goals. (It offers iPhone and Android apps.) One thing I like about SmartyPig is that it makes it much easier to make deposits than withdrawals. To add money to a goal, you just click a couple of times. To withdraw from a goal, you have to liquidate the whole amount, answer a series of questions, and then wait a couple of days for the transfer to process. It feels exactly like Mom saying, “Are you sure you want to spend your entire allowance on headphones?”
My friend Roger suggested another approach. “I’m imagining some sort of watch on your pay deposits (that’s something regularly-employed people have, Matthew),” he says. Thanks. “And if your pay exceeds the usual amount, the excess is automatically skimmed off into some savings account.” Some 401(k)s let you elect to automatically increase your savings rate over time, but I don’t know of one that automatically hijacks your bonus. Good idea.
You can, of course, implement a Price Check & Save-like strategy with your IRA or savings account. Check a price using the regular RedLaser app, then put down the shiny product box, switch to your brokerage or bank app, and initiate a transfer.
In fact, I could do that right now. But it’s just enough of an extra hassle that my good intentions are melting away, like the difference between one-click ordering and a shopping cart. Speaking of which, there’s only one click between me and some new headphones.