The Easiest Way to Save Money on a Tight Budget
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“Save dat money” was a popular song by rapper Lil Dicky in which he ironically raps about saving money, a style of music that does nothing but talk about spending money on drugs, fast cars, and hos. While Mr. Dicky dispenses some decent advice, he didn’t talk much about the easiest way to save money on a tight budget. How can you possibly save money when you barely can put food on the table? Well, the concept goes something like this. You know how you wake up in the morning after a night out and always discover that you’ve spent almost exactly the amount of money you had in your wallet before you went out? The fact is that you’re always going to spend money, so why not save money while you’re spending money? No, it’s not some sort of multi-level marketing scheme but rather a new app that has managed to get 3.5 million Americans, the biggest consumers on the planet, to save money.
The Easiest Way to Save Money – Micro-investing
Founded in 2012, Los Angeles startup Acorns has taken in $152 million in funding from a slew of investors that include corporate names like Blackrock (BLK)and PayPal to develop their “micro-investing” app. The concept behind micro-investing is all about saving small amounts of money in frequent intervals over longer periods of time. One way to accomplish this is by “rounding up” your purchase for charity in the same way some stores in the United States put you on the spot during checkout by asking if you want to “round up for charity.” (No, we don’t, but thanks for making everyone involved in the transaction feel uncomfortable.) Acorn does much the same thing.
Update 01/29/2019: Acorns has raised $105 million in Series E funding. Part of the funds will facilitate a strategic partnership with CNBC aimed at creating content to help improve financial literacy and allow Acorns to reach a greater audience. This brings the company’s total funding to $207 million to date.
If you spend $4.70 on an overpriced coffee at Starbucks and you’re using the Acorns app, it will automatically round up the amount to $5.00 and put 30 cents in your savings account. It’s hardly likely that you’ll even notice it but over time you will actually be saving money. The world’s largest asset manager, Blackrock, led the last funding round of $50 million into Acorns in May of this year, and it’s no surprise to see that Blackrock investment products are where your savings will be placed. Users can choose from 5 core portfolios which Acorns describes as follows:
- Acorns portfolios are developed with help from Nobel Prize-winning economist, Dr. Harry Markowitz.
All of our MBAs had to sit through those boring-ass finance classes where they learned about the “efficient frontier“, and we see lots of companies say that they use “Nobel Prize-winning methods” when all that simply means is that they put together a stock portfolio which uses Markowitz’s “modern portfolio theory” – which is largely just using common sense. However, in this case, Acorns actually managed to get the Dr. Harry Markowitz onboard as an advisor. He may not be doing too much theory development at 91 years of age, but props to Acorns for landing one of the most notable individuals in the world of finance as an advisor. (For those of you who place celebrities at the top of the social hierarchy instead of Nobel Prize winners, then you’ll be happy to see that Kevin Durant and Ashton Kutcher are investors in Acorns as well.)
How Much Money Can You Make with Acorns?
The first question we had was whether the app is going to produce meaningful amounts of savings simply by rounding up. Immediately basic math tells us that if you have 100 transactions a month at an average of 50 cents, that’s only $50 which is about the cost of a dinner out for two these days. While something is better than nothing, you also need money to make money. According to an article by Tech Crunch, the CEO of Acorns was quoted as saying “most of Acorns’ more than 3.5 million customers are investing roughly $50 to $60 per month into their core accounts.” Back-of-the-napkin math shows us that investing $60 a month for 10 years with no growth would give you $7,200. That’s not going to move the needle much for your average Joe. In order to solve that problem, Acorns lets you “boost” the roundups by a factor.
At a factor of ten, things become more meaningful at $500 a month. Another way to save more money with Acorns is to setup fixed amounts to be deducted from your checking account each month.
Finally, you can also save money by spending money with a select number of large retailers who partnered with Acorns and will contribute a small percentage of your spend to Acorns. It’s called “found money” and it incents you to spend your money with merchants that Acorns has partnered with like Nike (Or you can just choose not to buy those new Nikes and put the entire amount into your savings.) Walmart is even on their list so now you can get paid to go grocery shopping. It’s the ideal solution for people who love spending money and hate saving money. As for the cost of the app, it starts at $1 a month but if you’re a student it’s free. This is a good segue into talking about how Acorns makes money.
How Much Money Can Acorns Make?
Let’s start with the 3.5 million people investing $60 a month, something that translates into more than $2.5 billion a year flowing into Acorns’ coffers and into Blackrock’s investment products. Acorns could certainly start getting kickbacks on these funds from Blackrock, but that’s just one way to make money on this business model. Another way is to charge the users, and Acorns has a fee structure that ranges from $1 to $3 a month. If we take the bottom end of that range, 3.5 million users = $42 million a year in fees that Acorns is collecting. They’ve also expanded their offering so that you can open a bank account with Acorns and then use their own debit card to make purchases.
Knowing exactly how you spend money and what you spend it on is invaluable in helping people better manage their finances. It’s also exactly what marketers need to know – everything about your spending habits. It’s a business model we’ve seen replicated multiple times before with free apps that are dying to get a visual into your checking account transactions.
Conclusion
If you’re an average Acorns user, you have a median income of $50,000 to $60,000 which doesn’t give you a lot of flexibility in terms of how much you can save. Simply allocating 10% of your income to a 401K will result in $416 to $500 being saved a month (just make sure to use Blooom and optimize that 401K.) Then, you can use the Acorns app to round up your daily transactions which will give you a more liquid investment fund which you can draw down in case of an emergency. Whether you take your investment advice from some millennial who raps about saving dat money in broken English or from a Nobel Prize winning laureate like Dr. Markowitz, Acorns is an app that will help you save money while spending money.
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