Read This Before Using a Micro-Investing App

Friday, September 25, 2020 8:07 AM | Nick Dey

Round-up micro investing is a popular investing strategy that aims to build investing into everyday transactions.

This should help new investors make, and stick to, their saving goals. However, due to monthly fees and the tiny increments of money that get added at a time, micro investing is at best a secondary investing strategy and at worst, a rip-off to these investors.

What is Round-Up Investing?

Round-Up investing is a form of micro investing made popular by Acorns. It is an app-based investing strategy that allows users to passively invest their money throughout their everyday life. This is achieved by rounding payments up to the nearest dollar and putting those fractions of a dollar into a separate investment account.

While this may seem like an insignificant amount of money, it truly does add up. According to Acorns, the typical person invests more than $30 a month through the rounding service, which equates to $360 per year, excluding market gains or losses. It’s not a lot, but it is certainly a start for those who have struggled to put money aside for investments.

However, it is important to note that "typical" and "average" are not likely to be interchangeable terms. Meaning, this could be based on average spending patterns across the country and not their user's actual savings rates. With this in mind, single and younger individuals are likely to be somewhere below that figure, on average.

Fees:

Acorns, Chime and other round-up micro-investing apps are free to download, however there is a monthly charge once you begin investing. With Acorns, fees range from $1 to $5 monthly, depending on which plan you choose. And while this doesn’t seem like too much, it is a lot proportionally when you consider that you are only saving around $30 a month through the app. This means investors are paying the app 3.33% to 16.67% of their investment. That’s a crazy high expense ratio when compared to the approximately 0.75% found in other actively managed portfolios.

Investors are also given the opportunity to make one-time deposits, which the app will invest alongside your spare change. However, because of these high expense ratios, it is probably a better idea to invest that money somewhere else to maximize the amount of money that makes it to your interest-earning balance.

Retirement:

Additionally, through apps like Acorns, individuals can quickly and easily create an IRA, or Individual Retirement Account. This means the apps can help investors plan for retirement without thinking about having to make deposits. However, the returns, net of fees on $360 per year will not get the investors nearly as far as the matching funds provided by many employer-sponsored retirement plans.

Experts suggest as a general rule of thumb that individuals should plan to save around $1 million for retirement or twelve times your pre-retirement salary. For this reason, it is pretty safe to assume that an IRA in a micro-investing app should be a secondary account and not your sole fund for retirement.

Using Nerdwallet’s retirement calculator and assuming age 30, $45,000 starting income, and $25 saved monthly from our passive investments, we calculate that at retirement age of 67 an individual could net around $50,000. We started at $25 because this tool assumes a salary increase of 2% per year. This means that $25 per month will increase and could help us account for how individuals tend to have more transactions as they age and assume more responsibility in life, including spouses, kids, and pets among other things.

What is Found Money?

Found Money is a redeeming feature found in Acorns that may help users to maximize their savings on the app. Acorns partners with over 300 companies that invest a percentage of your sale with the company into your Acorns account and includes some big names such as Nike, Airbnb, and Walmart. This acts much like cash back with a credit card, except this money gets invested for you rather than given back to you in a check.

Who is Micro Investing Good for?

Micro investing with apps such as Stash Invest and Acorns are expensive approaches to investing when considering the high expense ratios. However, the apps do make investing incredibly easy and can be a great way to save extra money for retirement or otherwise. The app can be a great addition to your existing saving plan, but only so long as it remains passive and the investor does not lower their existing monthly savings to "account" for money they now save passively, as those investments tend to be more expensive on a percentage basis.

If micro investing sounds like it would make a beneficial addition to your portfolio, then below is a list of some of round-up apps out there:

Acorns and Chime both function as pretty straightforward round-up investing strategies.

Qapital operates similarly to the two above, however the app aims to gamify saving while rounding up purchases made on your Qapital card.

Additionally, below are two other apps to explore if you are looking to bring more tech to your spending:

Digit does not contain a roundup feature, however the app does use AI to track your spending patterns and automatically saves the "perfect amount everyday" for you.

Qoins is actually a round-up app with a twist. Instead of rounding your purchases to invest, they round up your purchases to help you pay-off debt faster.

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