For a 20-year-old to accumulate 1 million dollars by the time they are 65, they should be saving or investing $293 every month. For a college student with an unpaid internship or a minimum wage job, that is a little bit of a stretch. However, in a starting position out of school — with a median salary of $57,000 for the Boston College class of 2016 — that is only about 6% of yearly earnings.
Say that person were to wait until they were 35 to get started saving. In this case, they must save almost three times as much per month, or $824, to reach the same amount at 65. The earlier someone gets started in saving, the easier it will be to retire and grow assets. Unfortunately, young people’s perceived invinvibility makes it difficult to plan that far ahead. The future is simply not on their minds, but by using the thing that is always on millennials’ minds — their phones — app developers have been finding ways to get people to focus on their finances.
Acorn is among the increasing number of micro investment apps available for your phone, now with competition from JP Morgan, Charles Schwab, TD Ameritrade and others. Micro investing is defined by the small amount of capital invested, and it allows people to invest for themselves on a more regular basis. After creating an account and allowing access to your credit or debit card, Acorn begins investing into the portfolio type you have chosen — somewhere between moderate to aggressive. It offers an auto-investment feature that will invest a specified amount daily, weekly or monthly, and has recently created partnerships where companies that a user buy products or services from invests directly into their portfolio as a reward.
One of the most used and easiest features of Acorn lets the user forget they are investing in the first place. This is the round-up feature. When a cup of coffee is bought from Starbucks for $3.67, Acorns automatically invests $0.33 into the portfolio. This seems small, but if that coffee habit is a daily occurrence, by the end of the month $10 will have been invested without the user thinking about it once.
Many of the micro investing apps offer a number of similar features, accumulating money until it is enough to invest, but Acorn stands out in one way that makes it great for beginners. Acorn uses a method that allows ownerships of partial stocks, or fractional share investing. Although the technology behind this isn’t revealed, it is safe to assume that a collection of other Acorn users also own partial shares, eventually making up enough capital to buy a full share. In this way, Acorn is dependent on having a fairly high number of users. If only one person is investing with them, their ability to break up shares and allow smaller investments is no longer possible. Since Acorn works as it does, as round-ups accumulate, users don’t need to wait until they have $100 to buy a single share. An amount as small as $5 can be added to a portfolio. This money is put into six types of exchange traded funds like large companies or government bonds which will hopefully yield returns.
Although Acorn’s niche is with smaller accounts, and their fees seem small, the numbers aren’t great for the user when they are examined. To start a portfolio, a $5 investment is needed. Up until the portfolio gets to $5,000 the monthly fee is $1, after it exceeds that threshold the monthly fee becomes 0.25%. These numbers seem small, and 0.25% isn’t much once the portfolio has grown. However, if the portfolio only contains the needed $5, the fee would be 20% of the portfolio value. Any returns that happen at this point will not begin to make up the monthly fee. So unless the initial investment is more significant, the fee of using the app makes it worthless.
At the end of the day, Acorn is just putting money into the markets, and although saving is a good thing, investing through an app doesn’t protect users from market crashes or smaller falls in stock prices, and any returns or dividends will still be taxed.
Tell Me Something Sweeter…
If you aren’t sold on this type of app, there are also different, lower-stakes ways to save a little extra cash here and there. If you don’t have it already, download Honey, an add-on for browsers that automatically scours the internet for any possible promo code that can be added to your purchase from a number of online retailers. The add-on uses an algorithm to test each promo code on your order and automatically inputs any that apply. It even works for Amazon, but in a slightly different way. Since there are very few promo codes that apply to Amazon goods, Honey compares product prices for you, but calculates them including the tax and shipping cost to avoid the surprises at checkout.
Honey can partner with companies to use promo codes on their goods due to some convenient shopping behavior. When consumers feel that they have exhausted all the resources to get a better deal, they are more likely to buy an item, and Honey streamlines this process. Additionally, “One of the app’s more counterintuitive findings is that even when there isn’t a coupon that works available, the shopper is still more likely to buy after running the codes through the app — they’re seeking the validation of knowing they tried.”
Acorn and other micro investing apps have huge potential to make the finances of everyday people easier. The app gives people the tools to access markets with only the internet and a credit/debit card. Especially when people are young, the tiny things add up. Saving $0.33 from your coffee every day for a year is over $100 automatically saved without a thought. Giving everyone with a phone the ability to begin planning their own finances will put a lot of people in a more financially secure place later in life. Even if they don’t make millions off their Acorn investments or savings from Honey’s coupons, creating a way for people to become financially minded while making the experience user-friendly gets people on the right track to success.