I am constantly looking for new and innovative financial technology apps. Fintech is a very interesting space, and in many cases very helpful for consumers. The other day I stumbled onto a new financial technology app called Acorns. I downloaded the app and setup an account. I’ve used Acorns for the last few months, so I thought I would take the time to write a review for MPF.
Some people avoid investing for two reasons.
1) They think it’s complicated
2) They think you have to have a lot of money to get started.
But neither of those things are true and there is an app called Acorns that proves anyone can start investing.
Early and Often
The most important thing you can do if you want to retire with enough money is to start investing early. Even investing large sums of money later can’t always make up for lost time. Here’s an example;
Three people each invest $12,000 a year for ten years. Person A invests from age 25-35. This person stops investing at 35 but leaves the money in a retirement account that gains an average of 7% a year. Person A leaves the money untouched until retiring at age 65.
Person B invests the same amount per year from age 35-45, stops and leaves the money untouched until 65.
Person C does the same from age 45-65.
At age 65 Person A has $1,444, 696.00 Person B has $734, 549.00 Person C has $373,407.00 The reason that Person A has more money than the others isn’t merely because they had their money invested longer. It’s also due to the power of compound interest.
Compound interest is when the interest earned on an investment, so the 7% that was being earned in our example above, is added to the initial amount invested, the $120,000 that was invested over ten years, and the new interest payment is added to our total each year. In short, your interest earns interest!
That is why you should start investing as soon as you can. Compound interest works but it needs time to do its magic.
The concept behind Acorns is that investing small amounts of money can grow your wealth the way a small acorn grows into a big oak tree. You link your checking account and credit cards to Acorns. Each time you spend money, the app rounds up to the nearest dollar and invests that amount for you automatically. (The money is taken from your checking account, not your credit card even when the transaction was done on a credit card.)
If you spend $10.08 at lunch, Acorns will round up and invest .92 cents for you in $5 increments. Once your round ups reach $5, the money is withdrawn from your account and invested. You can also set up recurring deposits daily, weekly, or monthly and always deposit any sum into your account at any time.
Acorns had help designing their investment choices from Dr Harry Markowitz, a Nobel Laureate, who is known as “the father of modern portfolio theory.” There are six funds and the fund you will be invested in is determined based on the level of risk you indicate you want to take.
The portfolios are ranked according to risk; Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive. The more conservative portfolios will be more heavily weighted towards bonds and the more aggressive weighted toward large cap and real estate stocks.
The risk level is determined based on your answers to questions including your age, your cash flow, and your reason and time line for investing. You can accept the recommendation or choose yourself from all the offerings.
There is no minimum to invest with Acorns. The fee is $1 a month for accounts under $5,000 and 0.25% per year for accounts over $5,000. Because Acorns wants to encourage investing by young people, there are no fees for college students with a valid .edu address for four years after they sign up for an account.
The low entry barrier to start investing with Acorns is one of the big benefits. There is no minimum to open or maintain an account and you don't have to know much about investing to get started. Because the investing is automated, you can “set it and forget it” which means you're investing and saving for the future with very little effort.
All of Acorns stock funds are ETF's by Vanguard. Having access to Vanguard investments is another big plus of Acorns. To invest with Vanguard independently you need at least $1000 to start so Acorns is a good way to get your foot in the door.
The biggest con that Acorns has is that you are unlikely to be investing enough money to make a big difference if you are just using the round up feature. Ideally you are saving 20% of your income and that isn't likely to happen if Acorns is your only investing platform. If you are using Acorns, you might want to take advantage of recurring deposits the feature. You can make additional deposits on top of your roundup deposits. There are no additional fees for setting up recurring deposits. But you will need to setup an ACH transfer with your checking account.
The company also does not offer tax advantaged retirement accounts like a Traditional or Roth IRA. Acorns fees for accounts under $5,000 are steep. The $1 per month fee for those accounts doesn't sound like a lot but percentage wise it's pretty high. If your round ups total $25 per month, that $1 means you're paying a 4% fee.
Should You Use Acorns?
Acorns is great for young investors or those who have been afraid to get started investing because they think you need a lot of specialized knowledge. Think of Acorns like training wheels for investing. For more seasoned investors or those looking to save long term for retirement, Acorns doesn't really fit your needs.