This is the Best Way to Invest your spare change

• James R


• 25 Jul 2017

Acorns is modernizing the old-school practice of saving loose change, merging the robo-advisor model with an automated savings tool. The app rounds up your purchases on linked credit or debit cards, then sweeps the change into a computer-managed investment portfolio.

That approach won’t get you to retirement, but it’s certainly a useful tool to save more. Acorns is free for four years for college students with a valid .edu email address. Other investors pay $1 a month until their account balance hits $5,000, then 0.25% of their account balance per year.

Acorns is best for:

• College students
• Hands-off investors
• People who struggle to save

Where Acorns shines

Free management: Acorns goes after its target market — young, would-be investors who have little money to actually invest — by waiving management fees for up to four years for college students who register with a .edu email address. College students, specifically those who don’t have earned income and can’t contribute to a tax-advantaged retirement account like a Roth IRA, are ripe for this kind of service and could wind up with a nice little pot of money after four years of rounding up. Being tax-free is one of the best junior isa benefits.

Automated approach: We’re behind any tool that encourages mindless, automatic saving. If you don’t have to think about saving, you’re more likely to do it. This is why 401(k)s, which take contributions directly out of your paycheck, work well, and why auto-enrollment in those plans has more people saving for retirement.

Though Acorns doesn’t manage 401(k)s — or offer any retirement accounts, for that matter — it piggybacks on this concept by sweeping excess change from every purchase using a linked account into an investment portfolio. You can connect as many cards as you want, though all roundups are taken from the same linked checking account. With each purchase, Acorns rounds up to the nearest $1 and gives you the option to transfer that change into an investment portfolio. You can do that either automatically, so every purchase is rounded up and the change transferred, or manually, by going through recent purchases on the app and selecting which roundups to transfer.

Although these roundups are the bread and butter of Acorns’ platform, you can also invest lump sums manually or set up recurring deposits on a daily, weekly or monthly basis. Lump-sum transfers can be as small as $5.

Minimum investment: There’s no minimum to open an account, but the service requires a $1 balance to start investing in one of Acorn’s five pre-built portfolios.

Found Money: The only thing better than building an investment portfolio out of a bunch of spare change is building an investment portfolio out of someone else’s money. Acorns’ Found Money program essentially lets you do that: It’s cash back for your investment account.

Acorns has partnered with a short but relatively mighty list of companies — including Jet, Blue Apron, Airbnb, Boxed and Hulu — to give you up to 10% cash back when you use a linked payment method at one of the partners. In most cases, you get the cash back automatically, without an additional step. You simply use a card linked to an active Acorns account to make the purchase, and the Found Money rewards will land in your account in 30 to 60 days.

Educational content: We found the website well-suited to new investors, as it defines key terms and uses clear language. Acorns also publishes Grow Magazine, an online personal finance site geared toward millennials with advice about side gigs, credit card debt, student loans and other financial topics in addition to investing. Grow content is also integrated in the Acorns app.

Where Acorns falls short

Account options: Like other apps that target millennials — namely Robinhood and Stash — one of Acorns’ biggest shortcomings is that it offers only individual taxable accounts. That might be fine for a college student who doesn’t have the income to qualify for an individual retirement account, but investors who do qualify for an IRA should prioritize maxing out that account or a 401(k) before directing any significant money into a taxable brokerage account.

IRA and 401(k) accounts are tax-advantaged, meaning investments grow tax-deferred or tax-free. More significantly, a 401(k) may come with an employer match, which is free money. (We stand corrected: Building an investment portfolio out of free money is even better than found money.) It’s fine to use Acorns to bank a little extra in the form of change, but you should do that in conjunction with regular contributions to a retirement account. Acorns should not be your sole savings strategy.

» Interested in IRAs? Learn about these accounts and if they’re right for you in our IRA guide.

The other issue with offering only taxable accounts is, of course, taxes. This is an issue not just with Acorns — it’s true of all taxable accounts — but younger, less experienced investors may not realize their account may have a tax impact, so we want to spell it out. Acorns does not offer the tax-loss harvesting assistance that other robo-advisors often provide, which can reduce capital gains taxes by harvesting losing investments to offset the gains from winning ones.

Management fee: Those who don’t qualify for the free management promotion for college students pay $1 a month on balances of less than $5,000 and 0.25% of their account balance per year on balances of $5,000 or more.

That 0.25% fee is roughly in line with what other robo-advisors charge, including the two leading independent services:

• Wealthfront waives its fee on the first $10,000 invested, then charges 0.25% on amounts over $10,000.
• Betterment charges 0.25% for its base Betterment Digital offering. The company has two other plans, Betterment Plus and Betterment Premium, that offer access to a team of financial advisors.

Those services have more account offerings, tax assistance, better user interfaces and more diversified portfolios.

That said, Acorns’ fees align with competitor Stash, and Acorns provides more value than that service by way of roundups and portfolio management. Our major gripe with the costs at both services is the same: The $1 fee sounds cheap, but $1 a month can be a high percentage of assets for investors with small balances. If you make only roundup contributions, you could hover in that zone for quite a while. An investor with a $500 balance will pay 2.4% in management costs.

Small portfolio: Like other robo-advisors, Acorns takes the investing reins from the user. The app considers your data — including age, goals, income and time horizon — and then recommends one of five portfolios that range from conservative to aggressive. You can accept that recommendation or choose a different portfolio that takes more or less risk.

The portfolios themselves, though, are smaller than the average robo-advisor-built portfolio, made up of low-cost iShares and Vanguard exchange-traded funds that cover just six asset classes: real estate, large-cap stocks, small-cap stocks, emerging markets and corporate and government bonds.

Is Acorns right for you?

If you want to make the most of your spare change and get the occasional retailer kickback, there’s really no better place to do that. The automatic roundups at Acorns make saving and investing easy, and most investors will be surprised by how quickly those pennies accumulate.

But until Acorns adds tax-advantaged retirement accounts like IRAs to its lineup, the service isn’t a serious investment solution by i