Why Acorns Can’t Replace A Financial Plan

August 24, 2017

It’s always good to hear about different ways of saving money so I was intrigued by this recent Forbes post about how one of my colleagues uses an app called Acorns to save more by making it a game. The app rounds up your linked debit and credit card purchases to the nearest dollar and then invests the difference in a mix of ETFs. Partners can also contribute cash rewards from purchases to your accounts.

The main advantage of Acorns is that it makes saving and investing really easy. Beyond setting up your account and linking your cards, there really isn’t anything else to do. However, there are a few drawbacks to be aware of:

1. Complacency. My biggest fear is that people would use this as a substitute rather than a supplement to making sure they’re saving enough to hit their goals. The reality is that rounding up your purchases is unlikely to be enough. You’ll still want to calculate how much to save for both long term goals like retirement and shorter term goals like an emergency fund, buying a home, or going on vacation.
2. Taxes. Once you know how much to save, the next question is where to put it. For goals like retirement, there are significant tax benefits for contributing to your employer’s retirement plan (plus possibly free money in the form of a match), an HSA, and an IRA. Acorns only allows you to contribute to regular taxable accounts.
3. Risk. Of course, regular taxable accounts are fine for short term goals where you don’t want to be subject to an early withdrawal penalty. The problem here is that any money you might use in the next few years should be someplace safe like a savings account or money market fund. The type of investments that Acorns uses are just too risky for such a short time frame. You could see a good portion of your savings wiped out if you need the money while the market is down.
4. Fees. While the fees are pretty low for small accounts, their .25% fee on balances over $25k will start adding up as your account balance grows over time. After all, this is how they intend to make money. The problem is that you can purchase essentially those same investments in a brokerage firm without that additional cost.

Fortunately, you can get a lot of the same benefit of using Acorns by simply automating your saving and investing. After calculating how much to save, have that amount deducted from your paycheck or automatically transferred from your bank account to a separate account.

You can then have your savings money automatically invested in a low cost diversified portfolio that matches your time frame and risk tolerance. It may not be as fun as using the app, but it’s definitely more fun to hit your goals than to find out that you haven’t saved enough, paid too much in taxes, or saw your savings decimated by the market in the short run or by fees in the long run.

Does this mean there’s no place for apps like Acorns? Not necessarily. It can be a great way to start a good habit or supplement your other savings, especially if you shop a lot at one of their partners and can collect a lot of “found money.” Just don’t expect it to replace a real financial plan.

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