Rounding Apps…good idea?

I hear a lot about apps on your phone that can round up purchases and take that money and invest it. I have some thoughts on the effectiveness of these apps that I’d like to share…and then you can make up your mind from there as far as the usefulness of them in your own lives…

Pros:

-Obviously, you have to start somewhere when making savings goals. If you buy lunch at work on a random Tuesday and it’s $7.29…that’s a quick $0.71 that will be invested in some type of basic investment vehicle (typically some type of predetermined portfolio from a big investment house like Vanguard/Fidelity/etc., you’re not going to be buying Apple stock). Quick caveat, most investments require you to make a minimum purchase, so typically the app will keep track of the rounded-up amount and withdraw it from your account once it hits a certain threshold, like $5.00.

-If you are someone who uses their debit card a lot, these small round-ups can add up to a non-inconsequential amount of money saved. Most of the apps have forecasting information as well that will show an estimate of how much your money can grow over certain periods of time if you keep it invested (obviously not guaranteed).

-You’re gaining investment knowledge. If you’re someone who is starting at square one from an investment perspective, this can expose you to buying and selling real investments without a huge amount of risk. Also, it gives you a good reason to be reasonably familiar with the conditions of the market.

-It’s kind a “set it and forget it” type of thing. Due to the relatively small amounts, you probably won’t notice the money coming out of your bank account. Most of the apps do allow you to setup additional auto transfers (i.e., $5.00/week) to beef up your brokerage account.

Cons:

-If you’re only rounding up, it’s really going to take you a long time to generate any type of actual accumulation of money. When I used one of the popular apps for awhile, it would end up depositing, on average, about $5.00 per week. At that rate, even with a good market environment, you’re looking at multiple years before you even get to $1,000.00.

-Tax implications. You’ll need to be aware that if you are buying and selling securities, you’re going to start to have to wade into the world of tax reporting. You’ll want to speak to a tax professional to see how this would impact you. Having to deal with extra tax forms may not be worth the relatively small earnings an account like this will generate.

I think these can be good tools for experiencing the world of investments without having to really put yourself out there risk-wise, or if there is something you are saving up for that you find yourself having a hard time setting aside money for. If you’re thinking this will pay for your kids college fund, I’d probably look elsewhere. Your employer’s 401(k) Plan or a high yield savings account could produce much of the same fruit.