Beware of spare change investments

Beware of spare change investments

Updated April 15, 2019: You may have heard of the Acorns app. The investing app has been lauded by investors and journalists alike for finally getting millennials interested in investing. Millennials – notoriously skittish when it comes to the market — make up the majority of Acorns’ user. Acorns is currently valued at $860 million, closing its latest round of funding in January 2019. As of April 2019, it had more than 4.5 million users. Its sister retirement app Acorns Later, which launched in April 2018, has brought on over 350,000 investors who have invested $40 million to date.

How does Acorns work?

The investing app encourages you to invest your spare change using a system they call "round-ups." Acorns monitors your bank account and automatically invests the change from your daily purchases. For example, if you buy a coffee for $2.75, Acorns will round up to $3.00 and automatically invest $.25.

This is Acorns’ key selling point, along with simplicity. Acorns automatically invests your money in "smart portfolios," built with the help of Harry Markowitz, father of the Modern Portfolio Theory. Acorns lets users choose between five different portfolios on a scale of conservative to aggressive.

Unlike financial tech startups Betterment and Wealthfront, who offer more robust services, Acorns was built to be mobile-first. It was originally available only as an iOS or Android app, though Acorns launched a web version in July 2015. Part of being an app means making the investing process as simple as possible. While Betterment and Wealthfront give you a wide variety of options to customize your portfolio, Acorns forces you to choose between their five default portfolios.

Acorns founder Jeff Cruttenden told CNN Money in 2015 that people like the idea of investing spare change. The typical idea of investing, he said, is that you need a lot of money to do it. But is it safe?

Acorns review

You won't see many Acorns reviews telling you that there's a danger to investing too little. Acorns fees are $1 per month for all accounts with a balance under $5,000 and .25% of the balance per year on accounts over $5,000. Compared to traditional management, mutual funds, and DIY ETFs, this fee is incredibly low. Other portfolio advisory services, like Amerivest, charge as much as 1.25% and require a minimum investment of $25,000.

While Acorns’ fees seem low on the surface, Acorns’ traditional competitors aren’t encouraging would-be investors to build a portfolio around their spare change. When you’re dealing with just a few dollars every month, that $1 fee starts to make less sense.

If you make 50 transactions each month with an average of $.25 rounded up per transaction, you’re only investing $12.50 every month. At that rate, Acorns’ monthly fee is taking away 8% of your contribution to your investment portfolio in your first month.

The more transactions you have (the more you’re spending, perhaps multiple small purchases like coffee or fast food) this percentage will go down. At 100 transactions per month with an average of $.25 per transaction, you’ll invest $25 the first month and give 4% to Acorns. At 150 transactions, you’re investing $37.50 and giving almost 2.7% to Acorns.*

Acorns $1 fee

You can set up recurring deposits of larger amounts, get referral bonuses and earn extra cash to invest by shopping through the app’s rewards program, though these features aren’t as heavily advertised as the opportunity to invest your change.

The services are popular, however, says Acorns CEO Noah Kerner, with a typical customer investing over $60 per month.

“The majority of our customers take advantage of Acorns’ full suite of tools and services, making the small $1 per month subscription quite reasonable,” Kerner told Policygenius in a written statement.

Kerner intimated Acorns' fee structure might change when a new retirement product — Acorns Later — launched in April, but did not disclose any details as to what that might entail when he spoke to Policygenius reporter Myles Ma earlier this year.

Acorns Later allows app users to open tax-advantaged retirement accounts and set up automatic contributions to them. These contributions can be small — as little as $5 to start an account. You can learn more about the Acorns Later here.

→ Want to save rather than invest? Learn about other online banking options.

Acorns vs Betterment vs Wealthfront vs Wealthsimple

Betterment only charges .25% in fees per year for its baseline price tier, amounting to mere cents per month while you are building up your portfolio.

And what about Wealthfront, another robo-adviser? They require a minimum balance of $500. They do, however, manage the first $10,000 of every account for free. Canadian roboadvisor Wealthsimple has relatively higher fees of up to .50%, but also offer a human touch.

Robo-advisor Betterment Wealthfront Acorns Wealthsimple fees compared

Acorns is positioned as the best choice for many millennials looking to dip their toes into the waters of investing, but as this review shows it doesn't mean it’s the best choice for you. If you can't afford to fork over $500 right now and start your journey toward full-fledged investing, you might consider putting some money into a savings account instead. A high yield savings account is usually free and will allow you to grow small amounts of money over time. Once you’ve reached a self-imposed threshold–either reaching Weathfront’s $500 minimum or some other savings goal–you can revisit the idea of putting that money in an investment portfolio instead.

Want to learn more about new ways to invest? Check out our roundup of investing apps, comparing Betterment, Wealthfront, Acorns, Robinhood, and Stash.

Intimidated by investing? Here's how to get started.

*Note that none of this takes into account the money you already have in your account, slowly (or quickly) growing (or shrinking) because of market changes. If your portfolio grows a few bucks and Acorns reinvests it, that effectively adds to your monthly contribution. However, until your portfolio grows to be thousands of dollars, your portfolio growth is unlikely to make a noticeable difference to your bottom line month over month.

Disclosure: We may use affiliate codes when linking to third parties. These codes earn us a small commission, but their presence does not influence which services or apps we choose to recommend, or our reviews of them.

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