Everyone should invest, and investing apps have made that possible. Nearly everyone has a smartphone and some spare change in their pocket. This is largely a good thing. Investing isn't something only rich people do, and investing apps have democratized investing, allowing everyone to participate.
But investing apps can have their downsides as well.
Spare Change Apps: What's the Story?
Spare change apps are investing platforms that were designed to appeal primarily to Millenials. This is a lucrative market to target because of their sheer size. This year, 2019, Millenials are expected to be a bigger demographic than the Baby Boomers, 73 million to 72 million.
And because Millenials are the first generation of "digital natives," those who have never known a world without technology like smartphones and the internet, apps are the perfect way to target them, but Millenials are also well known for their money woes, particularly the amount of student loan debt they have.
These two traits make spare change apps ideal for their target audience. They often have a very sexy interface, are easy to use, and a painless way to invest. After all, who is going to miss their spare change?
Most of the spare change apps work in a similar way. They're robo advisors, which use computer algorithms rather than expensive fund managers to create investment portfolios. Investors own a broad range of investments across different asset classes. This provides diversification, which insulates our investments from risk. Robo advisors are a great way to invest.
These apps mine your spare change by rounding up purchases you make on linked credit or debit cards, and when you hit a certain, small amount like $5, the money is invested. You can also transfer money directly into your account to invest or set up recurring deposits to invest.
Pros of Investing with Apps
These spare change apps are really appealing. They require almost no investing knowledge. Users will be asked a few basic questions that will help determine the best portfolio for their goals. They often have no minimum deposit to open an account, so if you have $1, you can invest.
The importance of these two things can not be overstated. What holds a lot of people back from investing is the fear they don't know enough to do it and need a lot of money to get started. This is what we really love about investing apps.
And because there are no overpaid Wharton grads choosing the investments in the portfolios (who don't beat the market anyway) and because they don't have brick and mortar locations like old school brokerage firms do, the fees these investing apps charge are really low, often well under 1% (and 1% may sound low but it's not!). Over time, fees can eat up a significant portion of your investments, so very low fees are a must.
Cons of Investing with Apps
There is no better way to grow your wealth than to invest. It's one of the most important aspects of personal finance. Well, great, you think. I'm going to use an investing app and get started right now!
Not so fast. There are a few other important aspects of personal finance you have to have right before you should start investing. The first is to have no debt on your credit cards. There is no investment you can make through an app that is going to give you returns as high as you're paying in credit card interest.
The second is to have an emergency fund. Could you pull money out of your investments to cover an emergency? You could, but it's a bad idea. You should not invest money that you will need in five years or less. To be a successful investor, you have to stay invested long term, and you don't know when an emergency will happen.
These apps can also give you an overinflated sense of what you're doing. If all you're investing is your spare change, it's better than nothing, but it's not nearly enough.
How to Use Spare Change Apps the Right Way
If you have credit card debt or no emergency fund, it's okay to invest your spare change. A few dollars a month isn't going to kill your debt or see you through an emergency, but it does get you on the path to investing, which is a very good thing. You have to prioritize those two things over investing any additional money.
Once those things are squared away, you have to invest a portion of your income on a regular basis. The rule of thumb is that we should be investing 20% of our take-home pay each month. Doing that will have a real impact on your savings, a few dollars a month is not going to be enough to retire on.
Understand that you are investing long-term. The money you have invested is not your emergency fund, and it is not the money you use to pay for a vacation you don't have the cash for.
Pause Means Just That
This is definitely not meant to put you off using investing apps. They are a great way not only to get started investing but to continue to invest. They aren't the "training wheels" of real investing. You can use them to grow your wealth for decades (Although they can't do everything. If you want to buy individual stocks, like Nike stock or Apple stock you'll need a brokerage account).
We just want to make sure you have all of your other financial ducks in a row before you start investing and to make sure you know that you need to invest more than your spare change to really see some impact. If you understand those two things, we love investing apps. They make investing easy and accessible to everyone.