Acorns is a new smartphone app that automatically rounds up the cost of any credit card purchase you make and invests the difference into a low-cost investment portfolio. This makes it easy, painless and even fun to get into the habit of investing. It might be just the push many people need to jump-start their retirement portfolio.

How Does It Work?

Acorns makes it easy to put aside money you know you can afford to do without. The idea is that if you can afford to pay $4.89 on a latte, or $58.20 on a meal, you can surely afford to pay $5 and $59. This investment method sets your daily investment contribution as a rate of your daily expenditure. Of course, if you want to, you can also invest additional lump sums.

The concept is powerful because it brings down many of the psychological barriers people set up when it comes to investing. For instance, you don't have to invest a minimum amount to start the fund, and there is no commitment to contribute a monthly amount.

By itself, the idea is nothing new. Bank of America's “Keep the Change” program and Wells Fargo's “Way2Save” are similar programs that have been around for a while, and are also designed to encourage clients to deposit money into their savings account. In fact, Way2Save is a little more aggressive; it transfers a dollar for every transaction.

On the other hand, Acorns has the advantage that it can round up purchases from all your credit and debit cards, not just those with a bank or credit union offering this feature.

Acorns also allows you to invest your spare change into a low-cost, well-diversified portfolio that has been designed following Modern Portfolio Theory. An investment method that uses the latest economic studies to maximize returns and minimize risk.

This is a huge benefit, because putting money into a savings account is about as productive as stuffing it into a mattress. A well invested portfolio, on the other hand, can grow a small fortune, even with modest contributions. To illustrate, just investing $50 every month for 30 years will generate $56,684, assuming an average annual APR of 6 percent.

An additional advantage of Acorns is that, because it is linked with your bank and credit card accounts, it can look for rebates and reward bonuses and encourage you to deposit them into your investment fund.

How Much Does It Cost?

Downloading the app is free. Once you start using the app you will have to pay a $1 a month, a 0.5% annual commission on your first $5,000 and 0.25% on any additional funds. For instance, if you invest $5,000 in Acorns, you will pay $3.08 a month, $37 a year. There are no fees for accounts with $0 so you don't have to worry about going into the red if you end up not using your Acorns account. These fees are comparable to those charged by other automated investment services, such as SigFig, Wealthfront and Betterment, but they aren't cheap. For instance, Wealthfront, a leading automated investment service, doesn't have a monthly fee and charges 0.15% of your savings for managing the first $10,000 and 0.40% for anything over $10,000. The catch is you need to have $5,000 to start an account with Wealthfront.

Is It Worth It?

As a psychological trick to motivate people to invest, Acorns is a neat concept. The fees are not high and there is no minimum investment amount, which is often an obstacle for those looking to open a fund. If you don't have a retirement fund, stop what your're doing and setup an Acorns account.

Having said that, if you are already a motivated investor and you have already started a fund, it is a bit of a useless gimmick, even with the relatively low fees. I did like the idea that you can always afford to increase your savings by the change you would get back if you paid for things in cash. So I estimated how much I would save if I used Acorns. The total came to $50 a month (100 transactions a month and an average of 50 cents in change per transaction); and I simply added $50 to my automatic monthly transfer to my Vanguard Target Retirement Fund (0.17% total management cost), which gave me the same advantages without the extra cost.

  • Free
  • Additional Monthly Fee
  • Budgeting Tools
  • Credit Reporting
  • Online Bill Pay
  • Personal Investing
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