SmartyPig: Your 2.0 Web Piggy Bank

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There’s nothing like a recession to painfully remind us of how much money we have and how much money we need.   After all, gone are the days where Americans from Sarasota, Florida to Orange County, California could refinance their mortgages and tap the equity, treating their homes like an ATM machine.

It’s encouraging however, to believe that we learned from our past mistakes.  The savings rate, which dipped below zero in 2005 and hovered near zero early last year, climbed back to 6.9% in May, the highest level since 1993.  This is a trend likely to continue due to the macroeconomic phenomenon that despite decreasing disposable incomes during a recession, household savings skyrocket.  During the 1981-1982 recession household savings were 12.5% of disposable income.  The last time the American household savings rate had been so high was in the 1940s World War II era where it totaled a whopping 25%.  So yes, it is a very interesting observation from an evolutionary, psychological and economic perspective that we most plan for our future precisely during the periods where we feel most threatened.

A financial start-up launched in March 2008 seeking to take advantage of this upwards trend in savings rates is SmartyPig.  SmartyPig is a 2.0 Web application which enables users to save for a particular goal and invite others to contribute to their account.  Users open an account for free, set a savings goal along with the date they want to reach that goal and deposit a minimum of $250 into the account.  SmartyPig looks at your amount and timeline and suggests a monthly automatic withdrawal from your checking or savings account that will satisfy that goal. If you approve, then you’re on your way to rediscovering that good old American Puritan value called “saving” which many had long ago thought disappeared.

But SmartyPig is not just another nifty app – it’s a savings bank as well.  SmartyPig is partnered with part-owner West Bank (the one in Des Moines, Iowa, not Israel), a 105 year old brick & mortar FDIC insured institution with $1.5 billion under management.

Although SmartyPig users can withdraw money at any time, the average user has a long-term savings goal and must contribute at least $10 a month.  This makes SmartyPig accounts less liquid and stickier than your standard savings account, allowing West Bank to aggregate SmartyPig’s deposits into CDs and giving users one of the highest savings rates in the industry.  As of July 4^th the savings rate stood at an industry topping 2.75% APY which certainly beats your mattress.

Once users meet their goals, they can withdraw the money via wire-transfer or buy whatever they’ve been saving for via a SmartyPig debit Mastercard.  Alternatively they can receive discounts of up to 5% if they use their savings to purchase a gift card from SmartyPig’s retail partners who include Amazon, Royal Caribbean, Overstock, Best Buy and Home Depot.

Founder Jon Gaskell is pleased with the aspect of goal-based saving at SmartyPig stating in an interview:

“Of our customers who have reached a goal, more than 80% of them have started a new goal. The average SmartyPig goal length is nearly 4.5 years, and our average user is depositing a little more than $200 per month toward his or her goal. Fifteen months after launch, our data suggests that a vast majority of our customers are staying focused on their predetermined goals, and the deposits are “CD-like” in nature.”

SmartyPig’s deposits currently stand at $100 million, having grown 10X since January.  The company plans to continue its aggressive pricing and marketing, hoping to grow an additional 5X to $500 million by year-end for a total of 50X growth in 2009.

SmartyPig’s stories are inspiring.  A soldier in Iraq recently created a SmartyPig goal to save for a plane ticket to get home to see his family when his combat tour is up. He placed a savings widget on his blog, which shows the percentage to his goal and updates automatically.  Hell, I’d contribute to that.  Another user created an account to help raise money to build a church for his community.  Many users are using SmartyPig to politely steer potential holiday, birthday, and wedding gift givers towards their own financial goal and specified gift.

San Antonio auto magnate and Clear Channel co-founder Red McCombs just deposited a lot of his own change into SmartyPig, although the size of the funding round was not disclosed.

McCombs, who will turn 82 this year, grew up during the Great Depression and can relate to the need to save to meet a financial goal, stating in an interview:

“I understood what the lack of savings meant to people. The hardships it caused. I joined the rest of America in saving for what we called war bonds. I guess at the end of the day, we’re trying to take things back to the way they used to be, back to a simpler time when you saved up before you bought something.”

It’s about time someone taught some good hard values to Generation Y.

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