The people at SmartyPig contacted me recently to offer a $100 gift card for use on their site to a Consumerism Commentary reader.

SmartyPig has been mentioned on a few personal finance blogs recently, and here’s the deal. SmartyPig is a savings account, FDIC insured, currently earning 4.30% APY. Depositors’ funds are held by West Bank, an institution based in Iowa (not the Middle East as the name might suggest). The draw of SmartyPig is that the account is tied to specific saving goals.

For example, if you are planning to buy an engagement ring, you can create an interest-bearing account with SmartyPig directed towards that goal. After creating the savings account, you can “share” the account with others, such as friends, who can contribute to your savings goal. The inspiration comes from 529 education accounts, which are designed with a specific goal in mind (education for children or another family member) and allow contributions from others.

My take

The philosophy behind SmartyPig is refreshing. Saving towards goals is important, and any method of “sharing” your goals with others, publicizing to the world (or your circle of friends), can only be a positive influence. There are many media reports across the United States about our average citizen savings rate, and in many ways of measuring, as a whole our society may be spending more than we earn. Encouraging savings can help to move this measurement in a positive direction.

Unfortunately, I don’t see SmartyPig as a perfect solution to the problem of savings towards goals. Customers should be aware of some fees that SmartyPig may charge. First of all, contributions towards your goals at SmartyPig are generally initiated through an automatic monthly contribution. Make sure your funding source always has funds available. Otherwise, you will be subject to a $25 insufficient funds fee. This fee itself is worth mentioning, although it’s fairly typical in comparison with other banks.

It’s worth noting that SmartyPig is designed to be most beneficial when savings towards a specific spending goal, like the engagement mentioned earlier or a high-definition television. If you have a savings goal, like an emergency fund, you might be better off placing your funds in a no-fee, high-interest savings account.

Here’s why. To redeem your funds from SmartyPig once your goal has been reached, you can opt for receiving either a pre-paid MasterCard debit card or a gift card at a number of retailers. The list of retail shops offering gift cards include Best Buy, Amazon.com, Marriott, Home Depot, and Babies ‘R Us. If you opt to redeem your savings in the form of a retail gift card, you will receive a bonus up to 5% of your savings.

That’s not a bad deal, but there’s a catch. If you’d prefer to close your SmartyPig account once reaching your goal and receive your funds in the form of a check, you will be charged a $25 fee. To withdraw your own money, you must pay $25. This is unlike any other savings account of which I am aware. Bank-to-bank transfers out of the SmartyPig account are not allowed to encourage sticking to your goals.

Although SmartyPig encourages sharing your goals with family and friends in the interest of motivation and progress, it’s actually in the company’s financial interest. Anyone who contributes to a savings goal other than their own, including your friends who contribute to your account, will be charged a $4.95 fee for the privilege. This fee will change to 2.9% for contributions funded by credit card and eliminated for contributions funded by a linked savings or checking account.

The bottom line

SmartyPig presents a unique approach to reaching and sharing your savings goals. Once you open your account and set your first goal, your contributions — and the contributions of your friends and family — will earn a high interest rate. The bonus of up to 5% when you redeem your savings is more than you can get from credit cards and is a contributing factor to my recommendation.

If you know that you need to save incrementally to spend a sum of money on an item that is accessible via one of the vendors that have “partnered” with SmartyPig, this account can be a fun and motivating way to save for your spending goal, if you’re careful to avoid fees. Other people, habitual savers for example, will get better bang for their saved buck in a more liquid savings account at a bank offering high-yield interest rates, where withdrawals are free at any time.

$100 giveaway

Is SmartyPig for you? If so, I have a $100 gift card for you, redeemable only in a SmaryPig account. Write a comment below to tell me about your savings goal, and I will choose a winner randomly in the near future. This offer is only valid for individuals with mailing addresses in the United States or Canada and only one entry per name, email address, or IP address is permitted. Please leave a valid email address so I can contact you if you’re selected. If you don’t want to write about your savings goal, that’s fine, too. Any comment here will contribute towards your entry in the giveaway.

Good luck!

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