Finance Challenge 2017 – Week #4

Week #4 is here! Firstly, the budgeting component for the Finance Challenge will need to be delayed for a couple of weeks. As one can imagine, it takes more than one week to test out a budget, especially since it is a monthly budget. Don’t worry though, that write up is definitely coming soon! This is a similar situation to last week, where I racked my brain to see what I could possibly do to positively impact my financial situation with minimal effort on my end. Since last week was about maximizing credit card rewards and cash back, a logical thought to have is, “where do you put the cashback?” This week I’m introducing Acorns!

Acorns is an app designed to increase the amount of money you invest each week. It does this by investing your spare change. How does it determine what spare change to invest? Well, you link your credit and debit cards to the Acorns app, along with a checking account. The app monitors the purchases made on the credit and debit cards. The app rounds of the cents of purchases to the nearest dollar, for example if you bought a $2.95 coffee, then Acorns would record a nickel, rounding the transaction up. At the end of each week, Acorns adds all the transactions up to a sum of money, which is then withdrawn from your checking account. In my experience, this tends to be around $5 to $12 each week that is invested.

In full disclosure, I have had the Acorns app since it’s launch in 2014. I’m including it in this week’s post because I have been neglecting my account for quite some time now. I only have one credit card linked to it, despite having several others that get more use. I now have nearly all of my credit cards linked and changed my checking account to one I use more frequently. I did have an issue trying to link my Capital One and Fidelity credit cards that I will follow back up on after reaching out to the Acorns support team. I would advise against linking the Acorns app to withdraw from a savings account, as discussed in week #2, savings accounts are limited to six withdrawals per month and with four weeks in a month, that’s four of the six allowed.

The money deposited with Acorns is invested in a portfolio of Exchange Traded Funds (ETFs). This is also called a robo-advisor. When you set your account up with Acorns, you’ll need to decide on your investment goals (what the money is for and when do you need it) and whether you are willing to take on high (aggressive), medium (mild), or low (conservative) risk to meet those goals. Acorns does all of the investing for you, so there’s no need to pick individual securities. The robo-advisor technology also re-balances the portfolio back to it’s target allocations of each security you are invested in that is in line with the answers you provided about your risk appetite during account opening. Keep in mind that investments are not FDIC insured and can lose value.

The market has been roaring for the last couple of months. In fact, the Dow Jones Industrial Average just hit an all time record high price of 20,068.51 on January 25th, 2017. To put that in perspective, one year to the date prior, it was 15,5885.22, which is a really tremendous rally. My fellow millennials that will actually chat about investing with me are even more discouraged to invest now, since most fear that a market crash is a certainty. No one wants to invest right at the very top. Unfortunately, no one knows where to top actually is though. I like the Acorns app because it teaches and automates some basic investing fundamentals with very little money at risk. Firstly, the old saying goes, “the best time to plant a tree was 20 years ago, the next best time is now.” The point being that the best time to start is now. Start small and build up gradually, especially if you are skeptical or unsure. It is wise to be cautious of the market, but it’s not wise to be paralyzed with fear. Other than getting comfortable with putting real money at risk for investment profit, Acorns also teaches and automates the process of dollar-cost averaging. In short, this concept constantly puts cash to work by investing no matter what the cost of the instrument, or what the market is doing. That means investing a fixed amount (or very close to fixed) and buying a share of stock when it is priced at $10 or $100, it just means that more shares are purchased at $10 than at $100. This is the coolest part about dollar-cost averaging, in the long run it usually produces the lowest average price paid for your position in an investment. If you’re interested I highly check out the results from a google search of “Dollar-cost Averaging Harmonic Mean.”

On a final note, let’s talk about fees. The good news is that students can use Acorns for free. Hopefully, that will encourage younger people to invest earlier on, (I certainly wish I had started when I was in college). Everyone else will be charged, $1 per month to use the service. Eventually, when you’ve accumulated $5,000 in your Acorns account, you will be switched from the $1 per month fee schedule to a 0.25% fee on the balance of the account. This is the only part of Acorns that I am sour on; until the $5,000 level is reached the $1 per month fee is a large drag on portfolio growth.

Speaking directly to the non-students, the $1 fee can have a very large impact on the growth of your portfolio.Referring back to the $2.95 coffee example a few paragraphs up, the round up amount is only a nickel ($0.05). If that was the only transaction during that month, you’re technically in the red by $0.95, once the service fee is charged. A higher number of transactions each month would likely produce more round-ups that would sum to an amount greater than $1, but even if you had 100 transactions and each ended in $0.99 (like $4.99, $10.99, etc) that is still only $1 in round-ups, which would then be wiped out by the fee. In reality, both of these scenarios are very unlikely, but they do exist. To match the same fee 0.25% fee that $5,000 accounts are charged would require $400 in round ups invested per month. As I stated above, I averaged about $5 to $12 per month in round-ups that were deposited. That works out to be about 20%-8% fee for a robo-advisor. Unfortunately, there are cheaper robo-advisors out there.

Acorns does allow users to round-up the change of a transaction plus a whole dollar amount, e.g. if set to a whole dollar round up of $1, the coffee example would actually deposit $1.05 (3.00-2.95=0.05, +1.00=$1.05). This may help to minimize the negative effects of the $1 fee on growth, but this will not make the fee or it’s impact go away completely.

In conclusion, Acorns is great for students since the $1 per month fee is waived. At the $400 per month in round-up deposits level, it is on par in cost with competitors like Betterment and Wealthfront, without the minimum balances that these competitors charge. The performance of the actual portfolio was intentionally left out of this post since my crystal ball is no better than anyone else’s at making predictions. Acorns allows us to start investing now and to start investing small, but not without some fees. Besides, what would you have done with that change at the end of the month anyway? Putting it to work is probably a better option than any alternative.

If I haven’t scared you away and you’d like to learn more, you can click the link here for Acorns.

Remember, investments are not FDIC insured and may lose value. Investing involves risk and investments may lose value. Please consider your objectives and Acorns fees before investing. Past performance does not guarantee future results. Investment outcomes and projections are hypothetical in nature.





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