Over the last several years, the financial industry has seen a significant surge in the number of automated investment tools available in the marketplace. While these services have helped simplify the process of saving and investing for many consumers, one relatively new company is taking it a step further by automatically investing your spare change.
That’s the idea behind Acorns, a smartphone app that rounds your purchases up to the nearest dollar and then invests the spare change into the investment portfolio that best suits your long-term goals.
The concept designed by father-son team Walter and Jeff Cruttenden aims to remove the complexities of investing and help millennials tiptoe into the market. But does it really live up to the hype? We break it down for you in this Acorns review.
How Does Acorns Work?
Signing up for an Acorns account is a relatively simple process that begins by downloading the app for Android or iOS and linking your checking account. You are then prompted to create an account where you will answer a few profiling questions in order to determine your goals and risk tolerance.
Based on your responses, Acorns will recommend an appropriate portfolio to invest in or, if you’re so inclined, give you the option to choose one on your own.
Once your account is established, Acorns will monitor the purchases in your checking account and accumulate the spare change into what they call “Round-ups.” Once you have $5 in round-ups it gets invested into your selected portfolio.
Where Does the Money Go?
The Acorns app allows you to make tiny investments into one of six Vanguard funds. Historically, these funds are well-known for being low-cost, worthy investments that are ideal for first-time investors.
Acorns investment philosophy is in line with Modern Portfolio Theory, the methodology behind most online advisors. MPT is a sound theory in the investment world that explains how risk-averse investors can construct their portfolios to maximize expected return based on their level of market risk.
In other words, they construct different portfolios based on your risk tolerance and invest into funds that align with your financial goals. This allows them to optimize returns without compromising the level of risk you are willing to accept.
How About the Fees?
Acorns charges $1 each month for accounts under $5,000. If your account has more than $5,000, then they charge 0.25% per year.
The company also bills itself as the app for the “next generation of investors,” and when it comes to serving that target market, they really put their money where their mouth is: if you’re under the age of 24 or a full-time student the management fees on accounts of any size are waived.
For a full explanation of their fees make sure to visit their website.
Pros of Using the Acorns App
One of the primary benefits of using the Acorns app is that it helps people automatically invest without having to spend a lot of time thinking about it. This is important because although saving and investing is a priority for many people, it’s very easy to get distracted and delay the process.
By utilizing the power of automation, Acorns eliminates that possibility.
Another pro is that you gain access to notable funds. If you’ve ever tried to invest in a Vanguard fund directly through Vanguard, you may have noticed the bar of entry is at least a few grand. Acorns makes accessing these funds much easier for a generation that may not yet have a lump sum of cash to invest.
Understand the Downsides First
If you’re not really making purchases with your checking account then you won’t see your account grow very quickly. This is my current situation.
First, I don’t spend a whole lot of money in my personal life. Second, I use a credit card for everything to consolidate and get travel points.
But it is nice knowing I have this app in place during those instances when I do use my debit card or make a credit card payment.
There’s also been some controversy over their fee structure. Essentially, $1 a month is a nice chunk to pay if you’re investing spare change every month. It would take a while before you see this starting to balance itself out. Some also fear that the spare change model will make people spend more/
While Acorns won’t really make you rich, they are making it easier than ever to invest. Overall, it’s a great option for those who are new to investing and a tool that is definitely worth trying.
About the Author: Amanda Abella is an Amazon bestselling author, speaker and personal finance expert who helps millennials make money their honey through online business. She has built an online brand that touches thousands each month and has been featured in Forbes, The Huffington Post, Seventeen Magazine and more.