Breaking down the new wave of saving apps.
It took a while, but banking and other financial apps are now becoming more popular than ever.
Okay, the definition of FinTech Apps: Financial technology, also known as FinTech, is an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.
YUCK! What a lousy explanation for such cool apps. READ ON
The past few years have seen an explosion in startups aimed at helping you save, invest and spend in a cheaper and wiser way.
For too long, the financial industry hasn’t had much competition from the technology industry—and it’s made it all too easy to take advantage of consumers as a result. But that’s not the case anymore.
The financial technology (or: “fin-tech”) industry is slowly stripping away the ways banks make money, leading to a growing group of startups offering services to help you manage your money
But with an explosion in choices, there comes some confusion along with it. For example, one of the most popular kinds of these apps are focused on personal savings—Digit, Acorns and Stash all promise to help you sock away money, and in some cases, even invest it, in an attempt to grow it.
But what’s the difference between them? And which one’s the best for you, and your digital piggy bank? Take a look below, and find out how you can start to build that nest egg you’ve always wanted, with the help of only your smartphone, our guide, and your own spare change.
What it does
Digit’s a savings app that moves small amounts of money from your checking account to your Digit account. The idea here is for you to hit predetermined savings goals that you set up with Digit.
When you download the app, you’ll link it to your personal checking account. Digit then analyzes your spending habits by looking at your checking account balance, paychecks or predictable income, incoming unpaid bills, and recent spending. You then set up a specific savings goal like “bachelorette party weekend,” an amount you’d like to save, say $600, and how long until you’ll need the money.
So what’s the difference between Digit and using a basic checking account to save up the $600? If you’re bad at budgeting for an upcoming expense, that’s basically what Digit does for you. Digit takes money from your checking account and puts it in your Digit account in small amounts so you can hit the goal you’ve set up, without doing any work.
Look out for this
Here comes the tricky part: Money sitting in a savings account at your bank earns interest. Keep in mind that this is different than your checking account at your bank.
Cash that you have sitting in your Digit account doesn’t pay interest. They give you a “savings bonus” of .05% on every $100 every three months. The interest you earn on your Digit savings is pretty small, at least compared to the interest you’d earn with a high-interest online savings account with a bank.
Digit’s great for short-term savings goals and little things you need to stash money away for. The savings feels like free money. However, your Digit account isn’t necessarily the best for your long-term saving strategy, nor do they claim to be. In fact, they cap your annual savings bonus (their version of quasi-interest) at $600, to discourage you from putting too much money in your Digit savings account. If it’s long-term savings you’re after with a safe and dependable interest bonus, you’re better off putting that money in a high-interest online savings account.
What it does
Acorns rounds up your purchases (from your debit or credit card) to the closest dollar amount and puts the difference in your Acorns account. Acorns then invests that spare change or “found money” for you.
Acorns is more of a savings/investing hybrid app. After you download the app you will link your checking debit account or a credit card to your Acorns account. Then come the “round ups.”
Let’s say you spend $8.60 on a sandwich. Acorns takes the “round up” of 40 cents—the amount to round up to the nearest dollar—and drops that $0.40 cents in your Acorns account. Once you reach $5 in your Acorns account, they invest your round money for you in six exchange traded investment funds.
The fee? $1 per month, and that includes rebalancing. You can also set up monthly deposits into Acorns if you’d like.
Look out for this
With the round up strategy, you’re spending more money to invest, right? This could be called a savings app, as long as the money you’re spending to invest makes money instead of loses money. How would you lose money? If the investment funds that Acorns puts you in lose money!
Yes, it’s possible. Based on the comments I read, some Acorns users don’t seem to get that their money is subject to the performance of the funds Acorns puts your “round ups” in.
Acorns feels like a less sophisticated robo-advisor. Robo-advisors ask you a bunch of questions online and then invest your money for you in these same low cost ETFs. The difference is robo-advisors ask you tons of questions about your risk tolerance and make it very clear that these funds will lose money under various market conditions.
Acorns doesn’t. They just asked me my birthday, I assume, to determine my age and then made a cursory judgment call on my asset allocation. Asset allocation is how they split my money between the six stock and bond funds with my “round up” money.
If you’re serious about a long-term savings and investing plan or strategy, this isn’t your app. Serious, meaning, you want to save larger chunks of money to invest in low cost funds. Robo-advisors are better for that.
That being said, this is a great place to start for people who are too afraid to invest any larger sums of money, such as what you would need to do when picking funds for your retirement funds. If you want to start following the stock and bond market and want to dip your toe in the water to start learning, Acorns is a good app for that. Acorns would actually be a great starting point to get people in the door investing, with the goal of eventually converting them to robo-advisor services where you can set up a long-term savings/investment strategy with larger chunks of money.
What it does
Stash allows you to open an account for as little as $5 and then choose from a curated list of funds or individual stocks to invest in. Once you link your checking account to your Stash account, you set up auto payments, with your dollar amount of choice, to your Stash account.
The biggest difference between Stash and Acorns is that while Acorns invests your round ups for you, Stash offers a recommendation, but then, you have to pull the trigger yourself, and actually pick the investments. How would you know how to do that?
Stash asks you your investing style (conservative, moderate, aggressive) and a few other questions. They then tell you what bucket of investments they recommend and you can either take their recommendation or let your auto payments sit in your Stash account.
How’d the underlying recommendations look?
I picked the “moderate mix” and the underlying fund they recommend for that is the iShares Core Moderate ETF. This is a fund that invests in other funds. This means that there’s a fee to invest in the main fund (in this case the iShares Core Moderate ETF), but then there’s an additional layer of fees on your underlying funds that’s taken out of your investments’ performance. So that’s less money for you in investment returns. Not great.
They do recommend a decent amount of these types of funds—they’re called “fund of funds.” For an individual investor with little money, fund of funds aren’t the best option for the reason we mentioned above: fees.
We spoke to Stash’s founder, Ed Robinson, and asked him why they wouldn’t just recommend a handful of low-cost funds and scrap the “fund” extra layer. His answer was pretty straightforward. “When we get more assets, we will build our own investment team,” he said. In other words, it’s easier to have iShares (Blackrock’s funds) determine the fund allocations for the funds until Stash can beef up their investment staff.
That being said, they already recommend portfolios of stocks, so it’s hard to see how recommending individual funds (instead of a fund of funds) is any different. Your first three months on Stash are free, then fees are $1 per month. When you hit $5,000 in your Stash account, the annual fee drops to .25% per year on the balance in your Stash account.
Look out for this
Stash gets slammed for fees. For example, if you have $600 in your Stash account at $1 per month fee, that’s a 2.0% annual fee. Robo–advisors (that do all the work for you including rebalancing, which Stash doesn’t do) have much lower fees at less 1% per year.
Stash is very focused on education. Stash is a good educational tool (better than Acorns) but missing some key features that would make it a great educational tool. Educating investors on the fee structure of fund of funds would be a good place to start. Also, some basics on interest rate risk would be good. The “moderate mix” recommendation, which I assume is pretty popular, has a lot of bond fund exposure for a young person, so they should understand interest rate risk before investing.
The big takeaway? If you have problems saving yourself, these apps are here to help you, and they do. That being said, it’s good to make sure you understand the role these apps should play in your life. They’re not gonna replace a long-term savings or investing plan, but they’re a good place to start learning.
Digit is my the best of these apps for savings. Stash is definitely onto something, too, with its emphasis on education.
So, to recap, here are the key differences between Digit, Acorns, and Stash:
great for saving for a specific, small event or purchase, but not for long-term savings planning, so use it accordingly. Check out high-interest online savings accounts for your savings that is sitting in cash in your bank account. You’ll earn a much higher interest rate than your savings account at your bank or any money that’s in your Digit savings account.
These apps aren’t gonna replace a long-term savings or investing plan, but they’re a good place to start learning.
Great for dipping your toe in the water if you wanna follow how a slice of money is doing, relative to market performance. But avoid using it for a long-term investment strategy. Don’t kid yourself into thinking of Acorns as a replacement for setting aside larger chunks of money in, say, a tax-advantaged retirement account—it’s not.
Stash would be much more appealing if they took their education one step further—say, in-app explainers for good old boring finance terms, almost like an encyclopedia, would be hugely helpful. But it’s a good place to get your feet wet understanding what goes into investing.
Ultimately, if you’re trying to save, and need help, these apps are absolutely great places to begin that process. That being said, it’s good to make sure you understand the role these apps should play in your life. They’re not gonna replace a long-term savings or investing plan, but they’re a good place to start learning. Digit is my the best of them for savings, and Stash is on to something with their emphasis on education. Check them out wherever you download apps, and maybe, you can even start to put yourself on the road to a healthy stash of cash outside of your checking account.
Read more at Mashable