If you’re a millennial interested in personal finance, chances are you’ve been told Acorns is the best app ever for you. The concept of Acorns is that it automatically rounds up your purchase to the nearest dollar and invests it for you in what they see as a good mix of investments. The process is all automated.
Based on the round-ups, each purchase you make could put between 1 cent and 99 cents into your investments. On average you’ll probably end up with around 50 cents per purchase unless you shop at places that use round numbers or sell things where the price tag ends in .99 which typically is a sign you should NOT purchase it.
There are a couple of reasons this saving concept is silly when you zoom out onto an economics scale. First, 50 cents holds a different purchasing power depending on the value of the dollar. For instance, let’s say Acorns was around 70 years ago when a dozen eggs cost 5 cents. If you then deposited 95 cents into your savings account, you just saved 19 dozen eggs worth of money.
Or let’s say Acorns is around in the US 70 years from now and a dozen eggs costs $12.50. It then invests 50 cents, which isn’t enough to buy you half-an-egg let alone build much wealth at all. The more inflated a currency is, the less valuable Acorns is.
The US dollar today is closer to the “inflated example” where the amount you save from Acorns is just not going to cut it.
There was another investment plan this reminded me of where you start at 1 penny and increase your investment by 1 penny a day for the entire year. On the last day of the year you save $3.65. In total this plan saves you $667 a year. First of all, the average household should probably save more than $667 per month, let alone per year. The savings plan aims so low and again, the worth of that investment depends on the value of the currency being saved.
Most investing gimmicks and creative savings plans have this same sort of problem. They aim way too low and rely on the user not having a financial plan. Clearly the best option is to have a financial plan together, and execute on that plan.
What Acorns will hopefully do is get people with NO financial plan interested in investing. We will talk about ideal numbers to invest in another investing post, but I want to stress that if you make 1 transaction a day, at an average round-up of 50 cents, you’ll save at most $183 a year. Assuming an average return of 8%, your account value will be $22k in 30 years.
That might sound like a lot to you now, but $22k isn’t enough to sustain most people’s expenses for an entire year let alone a retirement.
Acorns does offer the options of recurring investments, so you can choose an amount and have Acorns take that money out of your account monthly to invest. This is the method of investing I like. But if you are involved enough in your finances to decide on an amount to invest each month, you should be involved enough for a slightly more powerful platform.
We will expand upon automated investing platforms in another post, but note that humans are notoriously bad at picking stocks, while set systems of passive investing perform really well.
I’ve been researching and exploring a lot of different platforms to see which one is my favorite. The early leader so far is the platform M1 Finance, which offers low fees, fractional shares, and automatic rebalancing which essentially means you can create a perfectly balanced and diversified portfolio.
Who Acorns is for:
You might need an investing gimmick if you literally do no other investing. If you are the person who spends every paycheck no matter what, which is surprisingly a lot of people, you should start off today with something that actually forces you to invest. The amount Acorns ends up taking out of your account is so small, you probably won’t notice it. But really if that’s you the first priority with your finances is to cut back on spending. I’d recommend you find out what your cash flow is, it is one of the most important metrics in personal finance. Also use Personal Capital to start tracking all of your finances and find areas to improve.
Even that little amount is a good idea to start investing. It will compound and grow into a nice chunk of money eventually, but definitely not enough to sustain you through retirement or make you wealthy. At least you have a head start, something in the account.
Who Should Avoid Acorns
There are two categories of people who should avoid Acorns. 1: Those who are paying off debt and need to invest all of their money into paying off debt. 2: Those who are want to invest more than $200 a year.
In the first category, if you are attempting to pay off debt and are using every extra penny to do so, it is much better to use those few dollars a month to accomplish your goal than to put in an Acorns account. Part of the reason you go into debt in the first place is that you do not have enough cash on hand, so taking cash and putting it into Acorns while getting out of debt seems to be a bad idea. You need to have some level of cash at all times, even in debt I’d recommend a $1,000 buffer so that you don’t go further into debt and can tackle small emergencies.
Anything over that should be used to accomplish your debt repayment goals rather than a small investment account. However, if you are the kind of person who isn’t actively repaying debt, just making the minimum payments, you should probably install the investing gimmick in question right this moment and start getting some money invested out of your sight. Then dedicate yourself to improve your cash flows in any way possible and put all extra cash flow into reducing debts.
Now let’s say you’re actually serious about getting your personal finances in shape and building a wealthy future. You’re going to want to invest far more than $200 a year. The typical retirement advice is to invest 10-15% of your net income into a retirement account. The philosophy at EarnTrackInvest is that you’ll eventually be able to invest more than 15% once you take care of debts and cut out unnecessary spending, but for now note that $200 a year would be an acceptable investment amount if you made $2000 in income a year.
Overall I did not present a positive picture of Acorns, but I am glad they exist. They are a helpful program for people who have absolutely no plans to get their financial picture together. If they end up with $30k at the end of their working life, that’s better than $0.
But I expect better of myself and all of my readers. With enough dedication, we can do 100x better than our peers using Acorns by investing far more money and getting the best returns possible. Keep your eyes open, and focus on the important areas of life which are often free of monetary charge.