Digging Deeper: Saving and Investing – its Simple but not Easy
We all know we should save money, and we know that we should invest some of what we save, but that doesn’t mean everyone is disciplined enough to “pay themselves first” rather than waiting to see what’s left at the end of the month. Once we do invest, human nature and emotion often work against us in making good investment decisions. For example, if we have an investment that is doing well, our inclination is to stay in it, rather than (more rationally) to sell some of it to lock in the gain. Similarly, when an investment is not looking so good, selling at a loss hurts more. We may sell too quickly, or we may hold on to it longer than we should, hoping it rebounds a bit. When the market dropped during the great recession, some investors hung on until the market bottomed out, then got nervous and ended up selling. To compound the pain, they were too spooked to buy back in until the market already started to rebound. So much for “buy low, sell high.” Holding on would have been a better strategy.
William Bernstein’s “If You Can” offers a straightforward prescription for millennials to get rich slowly…in other words, save enough to retire comfortable. As other financial gurus have noted about investing, Bernstein states his method is simple, but it is far from easy to do.
We look to apps to make our lives easier. Developing apps to save and invest is the perfect avenue to get millennials and younger folks engaged. But every time I start to investigate financial apps, I get dizzy. There are so many financial apps out there. Some help you budget, some help you save your money, some help you save money when you buy stuff, and some help you invest. For this article, my search focussed on the apps that take behavioral economics/finance into account in their design. Rather than fighting human nature, which apps help us overcome it and make more effective saving and investing decisions.
Here is a review of a few of the popular apps out there. Qapital and Betterment get the “best use of behavioral economics” award. (Note: I have not personally used any of these apps.)
Qapital is really a bank. The app turns financial management into a game. You can set up a variety of savings rules, from rounding up your purchases (like Acorns) to rewarding yourself when you reach a fitness goal or if you get through a day without spending a certain amount of money. You can listen to Dan Ariely (we have mentioned him in past blogs), Qapital’s chief behavioral economist, explain the philosophy behind this company. (He explains opportunity cost really well.) While Qapital has no investment options, they do pay interest on their accounts, and there are no fees at all. Gamification has been a really successful way to engage millennials. The gamification and variety of savings goals give Qapital an edge (IMO) over a similar offering called Simple. Digit is another savings app that looks at your spending and (aggressively) moves excess funds into savings for you. You can set separate savings goals.
Betterment is a highly rated investment app that invests your money in a portfolio of ETFs matched to your goals and needs. They focus on tax-efficient investing. You need to set up the automatic transfers, but Betterment rebalances for you. Their website explains behavioral economics and how, by automating all of the aspects of investing that might otherwise trip you up, you will have a better outcome. (They also have a link to Dan Ariely’s Coursera course if you want to learn more about behavioral economics.) Betterment charges 0.25%, unless you have over $100,000 and want a higher level of service, in which case you pay 0.40%.
Acorns automates the savings part of the equation by rounding up up your purchases to the nearest dollar and investing those funds directly into a portfolio of funds based on your selected level of risk. Acorns enables you to invest limited funds and is an interesting introduction to investing. However, you need to do the math to see if Acorns makes sense for you. Unless you are a college student, Acorns charges $1 month to round up your purchases to the nearest dollar and invest that money in ETFs. How many purchases do you make in a month? 30, 40, 50? So how much are you really investing? $30, $40, $50? At $50/month, you are effectively paying 2% commission. If you use it to set up an automatic recurring investment and save more, the commission drops. If your balance reaches $5000 you pay 0.25%/year. Given that the average balance of Acorns accounts is just over $200, this isn’t a good deal for most people post-college. (IMO - Qapital would be a better way to put aside some cash.)
Robinhood is an investment platform that seems geared to the young and adventurous investor looking to dabble in markets and learn along the way. It is totally free – no commissions or fees – and offers edgier investments (options and cryptocurrency). The issue with Robinhood is that you need to have enough money to buy a whole share of stock or ETF.
Stash and Stockpile (see below) are investment app that offers fractional shares and so allows you to invest with as little as $5. Stash has more investment options than Acorns, you have to set up the transfers for yourself, and it guides you through creating your portfolio. It is priced the same as Acorns: $1 month ($2/month for retirement accounts) and .25%/year for balances over $5000, and so can be expensive if you aren’t investing much.
Just looking for a Robo-Advisor? Two names that come up are Wealthfront (free up to $10,000) [We had CEO of Wealthfront on the NGPF Podcast] and Wealthsimple. With any of these apps, you might want to consider their business model. Wired published an article with a word of warning.
Apps with a focus on teaching kids
FamZoo takes doling out weekly allowance to a whole new (digital) level! The basic tool is either a prepaid card or an IOU account. Parents have complete visibility to their kids’ activities and can establish a wide assortment of spending and savings mechanisms (like paying interest or matching savings), all of which teach the kids the value of money, the value of savings, and how to manage it all. There are costs (up to $6/month) attached, but the lifelong financial lessons are “priceless.” Check out FB customer reviews here.
Stockpile is an investment app that offers fractional shares ($5 minimum investment) in a small group of popular stocks and a large assortment of ETFs. It charges $0.99/trade or $2.99/month for unlimited trades. Investments can be made using a linked bank or even a credit or debit card. It is unique in that Stockpile is very oriented towards young people (13-18), offering them their own accounts (with adequate parental control mechanisms), it has educational content (look under blog), and you can buy/give stock gift certificates!
At this point, I am getting dizzy…..here are links to reviews for apps listed in the article if you want to read more:
Nerd Wallet Reviews of...
Investor Junkie Reviews of...
Robinhood Investopedia review
NGPF resources on this topic: