The secret of successful investing is realizing that saving even small amounts adds up over time. Although initiatives from a number of fronts have helped those with modest savings find ways to invest better, a new platform aims to take amounts of less than a dollar and turn them into long-term wealth.
Last week, a company called Acorns Grow announced it would come out with a new mobile app to help users boost the amount they save and invest. The app, called Acorns, has a very simple strategy: Every time you buy something, it looks at the amount you spend and rounds it up to the nearest dollar. As a result, Acorns will take an additional amount between a penny and $0.99 from every purchase and earmark it for investment.
Doing the legwork
Acorns isn't the first company to take this tack with card purchases. For years, Bank of America (NYSE:BAC) has allowed customers to round up their purchases to the nearest dollar and transfer the difference to a savings account. Not only did the B of A initiative help deliver a useful service for debit-card customers, but it also helped cross-sell savings products that helped Bank of America get its customers involved in a wider array of bank services. Similarly, Wells Fargo's (NYSE:WFC) Save As You Go plan uses a transaction-based automatic-transfer strategy, although it transfers a full $1 from each transaction, rather than rounding purchases up.
The difference between Acorns and the banks' offerings, though, is that the Acorns program saves the extra step of transferring money from a savings account into a higher-return investment. Rather, Acorns automatically takes the money and invests it in a portfolio of index funds from money-managers Vanguard, BlackRock (NYSE:BLK), and PIMCO. Those investments are commission-free, avoiding the fees that so often make investing impractical for those who can save only small amounts.
Following the trend
Acorns is one more attempt to get people to save more. For years, the government's Savings Bond program has been aimed at small savers, allowing people to buy bonds with face values as small as $25. Similarly, the newly proposed MyRA program from the Obama administration would allow workers to start Roth-IRA-like accounts with as little as $25 to start and $5 in additional contributions.
Yet MyRAs and savings bonds don't offer diversified exposure to the stock market, which is a key element of Acorns. As the company's advisory-board member Harry Markowitz notes, "Investing in a broadly diversified portfolio for the long term is the right choice for most people. Acorns enables this to happen automatically in tiny increments with minimal cost."
When it comes to cost, Acorns' fees are fairly reasonable for a small-saver-oriented product. A service fee of $1 per month to facilitate the transfer of what co-founder Jeff Cruttenden estimates could be 50 to 100 small-change amounts every month isn't out of line. Although charging a 1% management fee for index funds would be excessive for larger accounts, it's not unreasonable when you consider that it amounts to $0.50 per year for the $50 that Acorns estimates those who make frequent purchases could save using the service.
Invest early and often
Especially for younger investors, who are most likely to feel comfortable with an app-based program, Acorns could have the positive impact of encouraging those who have traditionally shied away from investing. If Acorns succeeds as an incubator for savers just getting started, it will have fulfilled a valuable educational service to its customers as they learn more about investing and find other ways to build wealth in the future.
Dan Caplinger owns warrants on Wells Fargo and Bank of America. The Motley Fool recommends Bank of America, BlackRock, and Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.