I have a few financial apps on my phone that I like and use regularly, but there are others that I don’t understand. Acorns fits into the second category. I’ve seen it recommended by some people, but it really doesn’t make much sense for me. I’ll be upfront about why I’m not a big fan: $1/month fee for balances under $5k, it’s not tax advantaged, and the advertised purpose is flawed.
As mentioned, they charge $1/month if you don’t have a balance of at least $5k. One dollar per month really isn’t that much, but it is likely a high percentage of your spare change. Looking through my credit card transactions over the past few months, the app would automatically invest about $17-18 per month for me. Taking $1 off that per month is like charging over 5.5% to invest my money on top of the %0.25 management fee. This is a pretty steep fee in terms of percentage.
You can invest more than just spare change on Acorns with one-time or recurring deposits, so if you’ve got $5k to invest then maybe it could make sense. However, if you’ve got that much, there are places with lower fees – for example Vanguard or Schwab. Investing other places may be especially smarter if you’re trying to save for retirement, which leads to my next point.
People who use this app probably aren’t maximizing their tax advantaged accounts. I’m referring to accounts like a 401K or IRA, which give you tax advantages when saving and investing for retirement. Acorns doesn’t have these types of accounts, so any money you save through them doesn’t give you tax benefits.
Unless you’re saving for something besides retirement, it makes sense to invest somewhere that you can take advantage of lower taxes on your investment returns. If you’ve already maxed out you tax advantaged accounts, you might be more interested in considering Acorns.
The main thing this app advertises is “Automatically Invest Life’s Spare Change.” Let’s look at two things in this statement – automatic investments and life’s spare change.
Automation for investing is great, but I automate my investing in other ways. Specifically, I’ve got automatic retirement contributions for my retirement account through work and also have automatic contributions for my Roth IRA. So, I’ve already got the automated part down with much more money going to places that do better with both fees and tax advantages.
Then there is life’s spare change. Saving spare change doesn’t gain me anything – here’s why:
I’ve got a budget and at the end of the month, I see how much money I have left over. This money is then split into extra charitable giving, extra money for investment, and extra towards short-term goals. The money that was rounded up would go to one of these categories that is important to me anyhow.
Not to mention, spare change of $18/month would be pretty small compared to how much I invest each month. If my spare change was more than $18, it would also probably mean that I’m making more purchases and thus saving even less.
Note that my budget is a benchmark – I try to keep below my budgeted amount, but I don’t try to spend more to use all of my budgeted amount. That wouldn’t make much sense.
Even with my criticisms, Acorns isn’t all bad.
The $1/month fee is waived for college students, and overall it seems as though it could be good for college students. I’m not sure about you, but I wasn’t exactly a great saver and investor in college. Part of that was because I didn’t exactly have a whole lot to invest in college or really have a budget (it probably would’ve been good to though).
With the monthly fee waived and the minimal amount that rounding up will cost per month, it shouldn’t affect a college student’s finances a whole lot. That said, if anybody carries a balance on their card, it is a really bad idea to have even more money put on the card – even if it is just rounded up change. The stock market very rarely returns more than the interest of a credit card, so a credit card should be paid off before investing.
If you save over $5000, the monthly fee is waived and a 0.25% management fee isn’t too crazy, so it might not be too bad place to invest. There are certainly lower fees with other funds, but 0.25% isn’t very high either. As mentioned earlier, they don’t have tax advantaged accounts, so consideration needs to be made whether the money you’re saving should be in a tax advantaged account.
Maybe Acorns works for some people, but will I be using Acorns? Nope – it just doesn’t make sense for me compared to other investment options.