By: Jessica Zimmer, Debt.com Financial Fitness Trainer
Banks and credit unions offer a number of ways to “round-up” purchases. Participating in a round-up plan allows you to build a savings account. If you use an eligible credit or debit card often, a round-up plan can pay off. Some financial institutions offer extra incentives, such as a bonus to match the annual total of your round-ups or eligibility for a new credit card.
The main disadvantage of a round-up plan is that you may not earn a great deal in interest from your round-ups. Also, it can be hard to keep track of your round-up transfers. If you keep too low a balance in your checking account, you may be fined. The simple alternative to a round-up plan is to transfer money from your checking account into your savings account every month.
Most round-up plans require that you have a checking account, savings account, and debit or credit card with one financial institution. Debit cards are preferred, and business debit cards are often ineligible.
The basic formula for a round-up plan is that every time you use your debit card, the bank rounds up the amount of your purchase to the next whole dollar amount. The amount that exceeds your purchase price is transferred from your checking account to your savings account. If you do not have enough money in your checking account for the transfer, the transfer is not made. If you have multiple savings accounts, you may be able to transfer the round-ups to an account other than your primary savings account. This is useful if you are a parent who wants to build a savings account for a child or grandchild.
There are many variations on the basic formula. Some banks transfer the round-up amount to a special savings account that is separate from your regular savings account. Usually, you can only withdraw money from this account a few times a year. Round-up plans may also allow you to round up an amount to the nearest nickel, round up an amount between $1 and $5, or up to the next whole dollar amount plus an additional amount between $1 and $5.
Some banks will match the amount of your round-ups every year up to between $200 and $300. This bonus is typically deposited quarterly in your savings account. You are required to report the matching funds to the IRS through a Form 1099. Banks can vary this bonus by only matching a certain percentage of your round-ups, such as 10%, or limiting the time that they will match the round-ups, such as for the first six months. Other rewards include offers for credit cards and the waiver of monthly fees for a savings account.
A round-up plan can be beneficial if you do not have a high-yield savings account, use a credit or debit card often, and keep enough money in your checking account to cover the transfers. If you have a high-yield savings account, making regular transfers into it may be a better option.
© June 24, 2011 // Copyright all material 6/24/2011 by Jessica Zimmer