Saving money is hard
for most people. A relatively new approach at solving this problem is
automatically investing spare change.
The way it works is
all your purchases are rounded up to the nearest dollar, and then the
difference between the rounded up amount and the actual purchase price is put
into an investment account where it can grow. The appeal is that you won't even
ever miss the money being saved. Say you buy something for $13.50. It is
rounded up to $14, and the $0.50 difference is taken from your account and
invested. It's as if you paid that extra fifty cents, which you would have done
anyway had the item you bought cost that much more.
It's a great
concept, and a neat trick to save some extra cash. The problem, however, is the
fees. Acorns, the leading firm in this field of micro investing, charges
between $1 and $3 dollars a month, depending on the account you have (college
students are supposed to be free). This doesn't sound like a lot, but it could
be a rather large percentage of how much one is saving.
For example, suppose
all these round ups save you $100 per year. With the $1 monthly fee, you'd be
paying 12% for this service and actually saving $88. It's better than nothing,
but why pay so much? Why pay anything?
June was a typical
month for me. Rounding up all my credit card purchases to the nearest dollar
and then taking the difference yielded $6.05. Having to pay Acorns $1 out of
that amounts to a 16.5% fee. I'd basically be paying Acorns a dollar to save
$5, instead of just saving $6.
If you already track
your expenses, you can replicate Acorns' services for free with just a few
clicks and key presses at the end of the month in your favorite spreadsheet
program. Better yet, you can figure out how much Acorns would have saved for
you on a typical month (say $10), and then have that amount automatically taken
from your checking account and deposited into a brokerage account by setting up
a monthly funding transfer.
Investing the Spare Change
Acorns invests the
spare change into a diversified set of low fee ETFs. To replicate this on your
own, you need to find a brokerage where you can deposit small amounts and have
them buy fractional shares of index ETFs or mutual funds.
Two great options
are Fidelity and M1 Finance.
Fidelity
Fidelity is great
because it has no minimums or fees to open a regular individual or retirement
account. It also offers no transaction fee, no minimum investment amount index
mutual funds. For example, you can divide your investment into the Fidelity Zero Total Market Index (FZROX) fund,
which tracks the total US stock market and has no fees of any kind, and the Fidelity US Bond Index Fund (FXNAX), which
tracks the aggregate US bond market and has an expense ratio of just 0.025%. If
you would like international stock exposure, consider the Fidelity Zero International Index (FZILX) fund,
which tracks stocks of companies based outside the US and has no fees of any
kind. Just decide on your allocation to each fund. If you're not sure, make
your age the percentage of your bond holdings and put the rest into the stock
fund. For example, if you're 34 years old, put 34% into the bond bund and the
rest (66%) into stocks.
In the Fidelity
account you can set up automatic transfers from your checking account, then set
up automatic investments on a monthly, quarterly, or custom basis, so that the
money taken out of your checking account is invested into the mutual funds of your
choice.
The one limitation
that Fidelity has is that transfers from your checking account to Fidelity must
be $10 or more.
M1 Finance
M1 Finance is also
great, at least in concept (I haven't used it long enough to have an opinion
yet), to replicate an Acorns style spare change investment strategy with no
minimums or fees apart from the low ETF expense ratios.
M1's investment
style is with something called "pies" that are made up of
"slices" of stocks or ETFs. You can construct the pies yourself or
choose from the many expert created ones, which consist mostly of low fee
Vanguard ETFs. The expert pies are based on different themes, like general
investing, investing for retirement, responsible investing, income earning,
replicating hedge funds (at least the long portion, I don't think M1 has pies
that have short positions), and so on. Each of these themes has a number of
different pies to choose from, like "2060 Moderate," which is
composed of 16 funds and is intended for someone retiring in 2060 that has a
moderate risk tolerance, of "Berkshire Hathaway," which "seeks
to replicate Berkshire Hathaway by matching the allocation in the most recent
13F filing. Berkshire Hathaway, run by legendary investor Warren Buffett, is a
holding company engaged in many diverse business activities." This pie is
composed of 24 stocks (which for some reason doesn't include Berkshire itself).
As with Fidelity,
you can set up a recurring transfer from your checking account. Once the money
hits your M1 Finance account it is automatically invested in whichever pies you
selected. Piece of cake and you're only paying the low ETF fees.
If You Track Your Spending and Would Like to Round Up
Monthly
If you use a
budgeting program like YNAB, Personal Capital, or Mint, you can export all your
transactions in a .csv file (comma separated values). If you don't use a
budgeting program to track your spending, you can download your transactions
from your bank and credit card providers the same way. The file can be opened
with Excel, Google Sheets, LibreOffice, or any other spreadsheet program.
Once you open your
transactions file, create a new column called "Round Up." In the
first cell below, create the formula "=roundup(xx,0)" where xx is the
cell location of the transaction amount in that row. So, if the transaction
amount is in cell E2, your formula would be "=roundup(E2,0)". Drag
this formula down or double click in the lower right corner of the cell the
formula is in to make it propagate down through all the rows.
Next, create a new
column called "Difference". In the first cell below, make the formula
"=xx-yy" where xx is the location of the round up cell and yy is the
location of the transaction amount. So, if the round up cell is in F2 and the
transaction data is in E2, your formula would be "=F2-E2". Double
click on the lower right corner of this cell or drag it down to have the
formula propagate down.
Finally, sum up the
difference column for whatever period you want. If you do it for the month,
this is the amount Acorns would have saved for you (minus their fee). Transfer
this amount to your brokerage and you have Acorns for free.
