advice

Beware of spare change investments

Est. 4 min read

You may have heard of the Acorns investing app. It’s 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 base of 650,000 members. Acorns recently raised $23 million in its third round of funding, just eight months after the app launched.

The Acorns app works by encouraging 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 automatically take $.25 and invest it.

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.

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Unlike competitors Betterment and Wealthfront, who offer similar robo-advising services, Acorns was built to be mobile-first. At the moment, it’s only available as an iOS or Android app, though Acorns says a web version is on the way. 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 CEO Jeff Cruttenden told CNN Money 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 Acorns safe? 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 have 50 transactions every month with an average of $.25 rounded-up per transaction, you’re only investing $12.50 every month. At that point, Acorns’ monthly fee is taking away 8% of your monthly contributions to your investment portfolio.

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

Cost of Acorns Fee (final)

While you can set up recurring deposits of larger amounts in Acorns, this isn’t a feature they heavily advertise. Acorns pushes the idea of “spare change” investing in their press releases and on their website, encouraging users to invest small amounts of money.

Acorns vs Betterment vs Wealthfront

The misleading fee problem isn’t constrained to Acorns. If you can’t contribute at least $100 per month to your Betterment portfolio, they’ll charge you $3 per month (on accounts with a balance of less than $10,000).

However, if you can afford to put aside $100 per month, Betterment only charges .35%/year on accounts with less than $10,000, amounting to a fee of mere cents per month while you are building up your portfolio.

And what about Wealthfront, another robo-advisor? They require a minimum balance of $5000**, putting it out of reach for many budding investors. They do, however, manage the first $10,000 of every account for free.

**Update, February 2016: Wealthfront has reduced their minimum balance to $500.

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Acorns is positioned as the best choice for millennials looking to dip their toes into the waters of investing, but this doesn’t mean it’s the best choice for you. If you can’t afford to put at least $100 per month into an investment account, consider putting that 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 $5000 minimum or a point in your life where you can afford to put aside $100 per month–you can revisit the idea of putting that money in an investment portfolio instead.

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*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.

Photo: JD Hancock

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.

Published on May 11, 2015

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Adam Cecil writes for PolicyGenius, a digital insurance brokerage trying to make sense of insurance for consumers. You can read more of his writing on his site.
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