No sooner than had I finished my Digit review, than I saw an ad for another automated savings app on Facebook that takes a different tack for building up your savings automatically with the help of an app and online financial service.
This one is called Acorns. Whereas Digit monitors your bank balance and transfers off money its algorithm determines is “extra” into a savings account for you, acorns rounds up the change on every purchase you make and automatically saves that money for you. Another difference is where Digit sends your money off to a savings account somewhere, Acorn, invests your money in a “personalized investment portfolio.”
Is Acorns Legit and Safe?
First up, we’ll want to make sure that Acorns is not a scam. Again, the company is backed by some big name investors, so if it is a scam, some other people got scammed for a lot more money than you ever will.
According to the website, your money is transferred to an SIPC insured account. (SIPC is the investing world’s equivalent of FDIC insured.)
How Acorns Works
Acorns doesn’t work exactly the way you might think it does based upon the headlines and bold print. It’s not that Acorns is a scam, it’s that the actual mechanism it uses to operate doesn’t match up with the concept that is boldly advertised by the company.
This online money service actually has no way to “round up” your purchases. That kind of transaction adjustment can really only be done by the merchant (like when Safeway asks if you want to round up for cancer research), or by the payment processor themselves. Instead, the actual mechanism of Acorns is that you link whatever accounts you want to use for your rounding up and investing, and then the Acorns software keeps track of what you would have rounded up. Then, by linking your checking account, Acorns then makes a transfer of that amount at a later time, once all of your round ups totals at least $5.00.
So Acorns really works like this:
- You link your Capital One Rewards credit card to Acorns
- You buy lunch for $6.37
- Acorns calculates the round up as $0.63
- You keep buying stuff, and Acorns keeps adding the amounts up
- When you have at least $5.00 of round up, THEN, Acorns transfers $5 from your checking account, no matter where you made the charges originally.
So, if you expect to see each one of your purchases rounded up to the nearest dollar, that won’t happen.
If you expect to see a few cents transferred out of your checking account every time you make a purchase, that won’t happen either.
Instead, depending on how often you make transactions, what you will see is the occasional transfer of $5 from your checking account, a few times every month. There is nothing wrong with this, it just isn’t exactly what you might expect to see.
Currently, Acorns only works as a smartphone app. This makes me nervous security-wise, but with services like Apple Pay, this kind of thing is clearly the future, at least until the first major rip off of people occurs and then the security gets better. However, none of this is Acorns fault. According to their website, they are working on a web app, but it isn’t ready yet.
Acorn Fees
Here is where you want to really be careful with Acorns. The company has done something really great by not having minimum account balances or minimum investments. However, investing your money isn’t free, and Acorn does charge some fees, which they are refreshingly up front about.
First, if your account balance is less than $5,000, you will pay a $1 per month fee. On the one hand, this doesn’t sound like much, but as a percentage, this is actually pretty steep, especially when you first start using the product. For example, if your round ups for the first money total $25, then a $1 fee is 4 percent. But, don’t forget that’s for one month. Annualized, that same fee is something like 48 percent. (That’s not entirely accurate, especially if your account balance is growing, but the point is the same.) Accounts with over $5,000 in them are charged a much more reasonable (actually pretty darn good) fee of 0.25% per year.
It’s too bad you can’t give Acorns $5,000 up front and get the better fee, and THEN start using the product to round up and save your money.
Where Does Acorns Put My Money?
The most interesting thing about Acorns is where it transfers your money to when it scoops out $5 at a time from your checking account.
Instead of putting your money in a savings account, Acorns invests your money in a stock-based investment portfolio. We’ll cover what Acorns investment portfolios look like in the next article, but it is important to understand what this means from a personal finance standpoint.
A service like Digit puts your money in a savings account with no fees. They also pay no interest. On small amounts that you plan to spend anytime in the next three to five years, this is much better than investing your funds in an account like Acorns does where the balance will fluctuate and you will need some time for your earnings to out pace your fees.
However, if you consider Acorns to be money you are setting aside for the long-term, like a kid’s college fund, or even for your retirement, then this is a very intriguing idea. Just don’t forget, your balance will fluctuate with the markets. The stock market is NOT where you put your short-term savings.
Acorns Review Automated Investing Made Easy? originally published at Personal Financial Advice Blog FinanceGourmet.com