The pros and cons of apps for saving and investing
When it comes to personal finance, tech can be a double-edged sword. The ability to automate savings and bank online were game changers. Same with the various budgeting apps like Mint. But sometimes, tech can give us a false sense of control—and, if we don’t read the fine (digital) print, cost us money when it’s supposed to be helping us save it.
That brings me to a range of products I’ve been seeing more and more of lately—and getting questions about from readers: Saving and investing apps.
These apps (and their related websites) can do everything from automatically funnel money you’d never miss to a savings account, to trade stocks for free. Sounds great, right? Unfortunately, many have a deadly combination of relatively high fees and low guardrails for responsible money management. For example, the ability to make trades for free could encourage you to trade more than you should. (Research shows that frequent traders tend to earn less than infrequent ones.) I’ve listed the details of a few of these apps below, ordered from focus on saving to focus on investing.
My advice: Use them only if you’re sure that fees or a lack of guidance won’t trip you up.
What it does: Using an algorithm, Digit analyzes your cashflow—including your checking account balance, recent spending, and upcoming income and bills—to create customized, recurring, automatic transfers to a savings account. The algorithm identifies money you won’t need and funnels it—typically $10 to $30, two or three times a week—from your checking account to a savings account provided by the app.
Where your money goes: a savings account (that pays no interest)
Pro: Because its unique algorithm tries to maximize saving, Digit may bank more of your money than the usual (very sound) personal finance practice of simply funneling a predetermined portion of each paycheck to savings. You can also set personal savings goals (e.g., for a down payment, vacation, or emergency fund).
Con: Digit’s default savings account pays no interest. (It does offer a 1% annual savings “bonus,” but that may only be redeemable for gift cards or merchandise.) Digit’s algorithm can make mistakes, leaving you with an overdrawn checking account. (If this happens, Digit will reimburse charges it causes.)
Focus: saving and investing
What it does: Makes automatic saving and investing into a kind of game. You select from a set of savings rules (or create your own), such as: Round up to the nearest dollar every time you use your credit card and transfer the change to your savings; “penalize” yourself by transferring $5 to savings each time you go to Starbucks; or, send a set amount toward your savings target every time you achieve some sort of personal goal, like going to the gym. For a monthly fee, Qapital also offers premium services, including a Qapital Visa debit card with a checking account, and Qapital invest, which offers portfolios of ETFs (exchange-traded funds). But it offers no tax planning or access to a certified financial planner (CFP).
Where your money goes: a savings account (0.10% interest), a checking account (0.10% interest), or a taxable investment account
Fees: $3/month (saving only), $6/month (saving plus checking/investing), $12/month (saving/checking/investing plus webinars and free ATM network). Qapital’s fees are in addition to any fees charged by ETFs for taxable investing accounts.
ETF expense ratios: ~0.04% to ~0.15%
Pro: You can customize your goals or rules. Behavioral scientist Dan Ariely, a Duke psychology professor, helped design the product, so it’s smart. You can save for both the short-term (in a savings account) and the long-term (in a taxable investing account).
Con: The monthly fees ($6 or $12) are inordinately high for the checking/investing services. The linked savings account pays almost no interest and the service doesn’t support retirement accounts. Plus, Qapital’s website is not especially user-friendly.
Nov 10, 2017 |
What it does: Automates small contributions to investment accounts, based on your spending habits. Every time you make a purchase with any debit or credit card you choose to connect to the app, Acorns rounds it up to the next highest dollar and automatically invests the difference in one of five portfolios of low-cost exchange-traded funds (ETFs) based on your risk profile. It offers IRAs as well as taxable investing accounts, but no tax planning or access to a CFP.
Where your money goes: a taxable investing account or IRA
Fees: $1/month for taxable accounts only, or $2/month for both taxable and tax-free retirement accounts. Fees are in addition to the underlying expense ratios of ETFs.
ETF expense ratios: 0.04% to 0.15%
Pro: It’s free for college students. The retirement feature, Acorns Later, allows you to send money to a Roth IRA, a Traditional IRA, or a SEP-IRA.
Con: If you start with minimal amounts of money to save/invest, the fee of $1 or $2 will take a relatively large bite out of your Acorns funds each month, at least in the early stages.
What it does: This beginner’s investing platform offers a “curated” list of around 120 individual stocks and 40 ETFs. It offers little guidance beyond giving its ETFs nicknames. (For example, Stash calls the iShares Core Growth Allocation ETF [0.25% expense ratio] its “Aggressive Mix,” and the iShares U.S. Aerospace & Defense ETF [0.43%] is dubbed “Defending America.”) There’s no tax planning, and no access to a CFP.
Where your money goes: a taxable investing account or IRA
Fees: $1/month for taxable accounts only, or $2/month for both taxable and tax-free retirement accounts; 0.25% for accounts of $5,000 or more. Stash’s fees are in addition to those charged by ETFs.
ETF expense ratios: 0.07% to 0.95% (average: 0.39%)
Pro: Easy-to-use interface. Stash offers retirement accounts and socially responsible investments (SRI).
Con: The $1 to $2 monthly fee and relatively high underlying expense ratios make account growth difficult. Also, the lack of guidance could get beginners in trouble.
What it does: This stock-trading app is essentially like day trading from your phone. It’s free to open an account—and there are no trading or commission fees. This ease of trading could encourage novice investors to trade more often than they should. Also, there’s no consideration of personal factors like age and tolerance for risk, no tax planning, and no possibility of access to a CFP.
Where your money goes: a taxable investing account
Fees: $0. Investments purchased may have underlying expense ratios. (Premium subscriptions starting at $6/month offer off-hours trading, quicker withdrawals, and trading on margin.)
ETF expense ratios: 0.03% to 1% or more
Pros: No trading fees. Offers a wide selection of more than 5,000 individual stocks and ETFs, and, in most states, the ability to buy cryptocurrency like Bitcoin and Ethereum. Easy-to-use interface, including a web version.
Cons: No retirement accounts. No account management provided. Robinhood encourages frequent trading and individual stock picking for novice investors. Speculating on cryptocurrency is particularly risky.