We all probably remember – or maybe some of you still have – the jar full of change that we would drop our coins into at the end of the day. I remember as a kid lugging big jars full of change to my local bank, watching them clink around the coin counting machine, and walking out of the bank with cold hard cash. It’s amazing to think that I had a couple hundred bucks sitting around in a jar!
This process of saving up small amounts is called microsaving. Basically, doing a small amount of saving over time (such as gathering up your leftover change) can add up to a pretty decent chunk of money in the end. Add up all your spare change over a year, and you can probably have yourself a couple hundred bucks without doing any work really.
I love microsaving! I think it’s a great way to save a little bit of money into your pocket without even noticing it. I don’t really use cash very often anymore, but I still collect my spare change. I just don’t collect it in a jar. Instead, there are a new wave of fintech apps that have hit the scene in the past few years that make it easy for you to save your spare change. Think of them like a digital piggy bank.
The biggest player in the microsaving app world is probably an app called Acorns. A lot of bloggers rave about it. Basically, the app takes your spare change and invests it for you in a diversified portfolio. Best of all, it has a tiny barrier to entry. You only need $5 to get started investing. That’s awesome, right!?
Well, it turns out its not very awesome at all.
Apps like Acorns have led me to the conclusion that your spare change should be saved, not invested. What do I mean?
How Acorns Works.
The way Acorns works is pretty simple. The app monitors your credit card transactions and rounds up each transaction to the nearest dollar. It then takes that spare change and invests it into a diversified portfolio of low cost ETFs based on your risk tolerance, which is determined from your answers to a number of survey questions you answer when you set up your account.
So for example, if you buy something that is $1.50, Acorns will recognize that transaction and will pull 50 cents out of your bank account and invest it for you in a number of ETFs. Once you reach $5 of spare change, it invests it for you. Pretty simple and straightforward robo-advisor type service in a gorgeous app. What’s the problem?
The Problem With Acorns. Fees!
The problem is pretty simple and known to anyone who is interested in investing. Keep fees low!
For accounts under $5000, Acorns “only” charges a management fee of $1 per month. That’s nothing, right?
It’s not nothing! It’s actually a ton of money!
If you’re paying $1 per month, that’s $12 per year. Let’s say you’ve got $500 of your hard earned spare change invested in Acorns. You’re now paying a management fee of 2.4% just for the privilege of having your spare change collected. That’s ludicrous.
Here’s an example of the management fees you are paying depending on the amount invested in Acorns, in intervals of $500.
$500 = 2.4%
$1,000 = 1.2%
$1,500 = 0.8%
$2,000 = 0.6%
$2,500 = 0.48%
$3,000 = 0.4%
$3,500 = 0.34%
$4,000 = 0.3%
$4,500 = 0.26%
$5,000 and above = 0.25%
As you can see, the fees are extremely high when you’re in the $1000 range and still pretty high until you get to a couple thousand dollars invested.
So while the minimum is $5 to start, that really isn’t a realistic minimum. In that first month, you’d pay 20% of your balance in fees. And I thought CoinStar was a ripoff!
You really need to start off with probably at least $3,500 to be considered paying reasonable fees. So why can’t you just do that?
If you imagine that you’re rounding up an average of 50 cents per transaction, how many transactions are you doing per month? Even if you did 100 transactions per month (which would be about 3 a day, which seems really high to me), you’d only be investing $50 per month. In year one, you’ve invested $600 dollars, and paid over 2% in management fees. That’s just too high and it will take you a pretty long time to reach $3500 using just your spare change. You’re throwing away your spare change to fees!
Couldn’t You Just Initially Put In More Money To Lower The Costs?
Sure you could just put in more money to start. But isn’t the point of an app that collects your spare change to be able to start out with an empty jar and watch it fill up over time?
Also, if you’re using Acorns, I’m willing to wager you’re probably not using it because you want them to be your Robo-Advisor platform. You’re probably really using it because you like the round-up feature and the idea of saving your spare change.
Finally, if you’ve got the money to put in several thousand dollars into an Acorns account, then I’d have to ask the question, is investing your spare change really enough for you to reach your goals? You’re not going to get rich putting away $50 per month, no matter what anyone tells you. The growth on that amount is just too small.
If you’re investing, you need to be saving much more than just your spare change. Instead…
Save Your Spare Change. Don’t Invest it.
I like the concept of microsaving, but your spare change is too small of an amount to realistically invest with it. The real value of saving your spare change is to use it to help fund your short term goals, not as a way to bolster your investment portfolio. That’s because investing isn’t free, it costs money. When you’re investing your spare change, you’re just not putting enough money in for the returns to really outweigh the costs of investing.
You know what is free though? A bank account (if you’re paying a fee for your bank account, please drop that account!)
The way I use my spare change is to fund my “sinking funds” accounts. These are expenses that you know are coming up every single year. Think of things like Christmas gifts, travel, insurance, parking tickets or other stupid mistakes you know you’ll make. You know these things are coming. Wouldn’t it be nice if you could use your spare change to pay for some of this stuff?
The app I use to save my spare change is called Qapital. It has the exact same round up feature as Acorns, but instead of investing it, the money goes into an FDIC insured savings account. It’s completely free and takes 10 minutes to sign up. Every time I make a purchase using my credit card, Qapital rounds my purchase to the nearest dollar (exactly the same as Acorns), withdraws that spare change from my bank account, and puts it into an FDIC insured bank account. Every couple of months, I take that money out (a hundred bucks or so at a time) and stick it in my emergency fund. It costs me nothing and I still get the benefit of saving my spare change!
I was one of the early users of Qapital, so I get a tiny amount of interest on my savings. I don’t think new users are receiving interest anymore. Oh shucks, you lose out on a few cents! Really, the interest doesn’t matter when you’re talking about your spare change, since you’d only be gathering a few bucks of interest per year in a standard high yield savings account anyway. It also really doesn’t matter because you’re using your spare change to fund your sinking funds accounts, which should be set budget expenses that come up each year. In other words, you’re using your spare change within a year anyway, so the interest doesn’t really matter.
I’ll have a more thorough post in the future about Qapital, why I recommend it for anyone who likes the concept of microsaving, and how I use it in my day to day life. If you have any interest in opening up a Qapital account, feel free to use my referral link and we’ll both get $5. If you’d rather not use my referral link, just go to Qapital’s website and see if it’s for you.
- Your spare change can add up over time.
- Management fees from microsaving apps, like Acorns, are way too high if you’re only investing your spare change.
- Save your spare change and use it for regular annual expenses (your sinking funds accounts). Don’t invest it.
Note: I don’t work for Qapital and have absolutely no affiliation with them. I just discovered this app sometime last year and thought it was a superior alternative to Acorns for those of us that like rounding up our transactions and saving our spare change. This post was inspired by a Twitter conversation I had with Super Millennial, who can be found at his terrific blog, supermillennial.com.
What do you think? Do you invest your spare change or do you just save it?
Dollar Engineer says
I save my spare change and after reading this post will continue to do that. I love looking at things in terms of percentages rather than the raw number. Oh $1 is nothing right? Then you turn around and look at it from a percentage standpoint and the number is massive as you just showed.
Apathy Ends says
Totally see your point on this post – however I do use Acorns and the main reason is I have the next 2.5 years of fees covered by referral commissions – that combined with the convenience/automatic nature makes it worth it for me. If you can refer a few people (definitely not getting rich off the app) it doesn’t seem quite as unreasonable.
The fee is high if you don’t get referrals and even then is high for low balances
One thing that needs to be weighed is the cost to dollar cost average small amounts of money, trading costs range form $5-10, acorns invests multiple times a month for a buck – if you look at it that way it doesn’t seem as crazy
The Financial Panther says
If you’ve got your fees covered, then sure, it’s just essentially another microsaving app. My guess is most people don’t have that many referrals and aren’t in a position to put several thousand dollars into the app to make the fees reasonable.
You make a good point that there really is no other way to DCA tiny sums of money like in Acorns.
One thing is, how much is really saved per month from roundups. If you are like me, it’s probably around $30 or so of change. I guess to me, I’d rather use the spare change to fund more immediate needs. Maybe I just don’t see what investing $30 or so a month really does. It just doesn’t seem like enough money to do anything in the investing front, even when stretched out really long term.
I didn’t mention this either, and haven’t looked into it, but another issue I thought of is Acorns could potentially complicate your taxes due to all the tiny transactions?
How tiny are we talking about? Loyal3 lets you invest in partial shares with as little as $10 at a time with no fees, so why not use that?
I agree, though, that I don’t side the purpose of continually investing small amounts, except in my 401(k) where it’s just 3% of the paycheck or whatever.
it does seem like an extra headache a tax time with something like Acorn, but TurboTax import generally takes care of that.
Financial Panther says
I actually use Loyal3 for some of my play money. I couldn’t resist buying some twitter stock, so I actually just bought a tiny amount using Loyal 3. You won’t get rich investing a few hundred bucks into stocks on Loyal 3, but it is a way to be able to not feel left out when people talk about their genius stock picks.
Now that I’ve used Acorns for a bit, I can comment on the tax side of this. You don’t have any tax complications UNLESS you cash out your account or make any withdrawals. So long as you don’t withdraw any money, you don’t have any tax obligations. When you make a withdrawal, that’s when you get tax forms from them. I’ve been with them for about 5 years, and the only tax form I got was the one time I pulled money out. At that point, it’s like you sold stocks. And, just to be clear, this form you get forces you into the more expensive version of TurboTax as the free / cheap levels are too basic to apply to you if you have that stock tax form (1099-DIV, I think). All those mini transactions they do on your behalf don’t count as any kind of tax liability unless you take cash out.
We're All Poor Here says
I use my quicksilver cash-back card for my round-ups, as well as my checking account. I pay the balance on the cc twice a month, so I’m not paying any interest. The money I make from my cash back covers my annual acorns fee in just a few weeks. I’m very new to investing and for me, I think it’s a decent decision.
Financial Panther says
I will say that if it gets you investing, definitely not a bad idea. I just haven’t been able to figure out how you can make money if the fee basically takes away all of the spare change.
Maryann Farrell says
Hi can anyone tell me about Qapital? I want to save my spare change there, but it looks like or at least I think . I have to open a debit card with them or put so much of my money besides spare change in the account in order to use the Qapital app, but I may be misunderstanding what I’m reading. Can I just out my spare change in Qapital and have no other connections as in debit card with them?
Financial Panther says
Qapital is no good now. They charge a monthly fee to use it, which is stupid. I need to update this post.
If you’re looking for a roundup app, consider trying Astra Finance. That app is awesome so far. Dobot is another app that is worth using.
Qapital seems to have wised up. They don’t charge, after all. I got all the notices that I was going to start getting a fee, but then it never happened. 🤷🏽♀️ I was ready to yank my money out, but I guess I’ll leave it be for now.
Unfortunately, Dobot is gone now. By 6/30/2021, it’ll be officially pulled from the app stores. Their affiliate savings bank apparently now does the same thing so they no longer feel the need to exist.
The Wallaboo says
I was hesitant to sign up for Acorns because of the fees you mentioned. However, I finally saw something rarely mentioned. If you sign up using a school email (ending in “*.edu”), then there are NO fees for 4 years. So my intent is to use Acorns for four years (I am a returning college student). As a free app, this is totally worth it. After four years, I will withdraw all funds, close the account and reinvest in probably another Wealthfront account since they manage your first $10k for free (plus an additional $5k for each referral). This way I get the benefits of the round-ups, the return rates of investments, and all without the fees. After 4 years, I’ll probably try out something different like Qapital or maybe something new that’s surfaced by then.
**Side note: Wealthfront is one of those hands-off investment accounts for people who want to invest but don’t want to do the legwork – all fully-automated, no human investors, based on your personalized risk factors, etc. If you read this and want to give them a try, please use my referral link and we both get an extra $5k covered for free: https://wlth.fr/1WLip2w (I know, shameless plug, but hey, we both benefit!).
Very, very interesting. I have been thinking of getting into investing and after reading the comments I am sold even more. I just don’t know where to start I am not a ruch man by any means in fact I do not work because I am disabled. But I would like to invest small amounts of money here and there hoping in the long run it would wind up building into something significant. Any idea of where to start. I would like the leg work to be done as my disability limits my abilities in that area.