6:00 AM
El DiPablo
According to Dave Ramsey's famous baby steps, baby step one says to have $1,000 in your emergency fund to start. When I told my smoking hot girlfriend that I had reached my first $1,000 in my Acorns account, she told me I had completed baby step one! Woot!
Well, when I was reading his Total Money Makeover book, and it got to the section on baby step one, he said that the $1,000 had to be in a traditional savings account, and had to be liquid so you could get to it quickly in an emergency. He went on to say that stocks, or mutual funds didn't count.
Well, shit... Acorns invests the money I save into stocks. Did my $1,000 somehow not count?
From there I decided to check out what Mr. Ramsey thought about Acorns, or similar apps. Here is what his website says about "micro investing" apps:
As Dave says, “You can round up your Starbuck’s purchase by a nickel for the rest of your life, and then you’ll have a handful of nickels. If you want to do that, that’s okay. But if that’s your only plan, you should prepare to be hungry at retirement.”
Micro investing produces micro results.
That’s why Dave doesn’t recommend it as part of your investing strategy.After reading that, I thought to myself that Mr. Ramsey may not quite understand what these apps can actually do...
Now, if you decide to sign up with Acorns and think your will get rich just with their round-ups feature, you are absolutely wrong, and Mr. Ramsey is 100% right. Saving pennies here and there will not build up your savings at all. Or at least, not in a significant way. I also don't think you should use Acorns for your retirement.
When it comes to emergency savings though, I think Acorns could totally be used in conjunction with your Total Money Makeover. In fact, I think it is better than Mr. Ramsey's plan of putting that in a savings account and letting it gain 2% interest in the bank. I think so for the following reasons:
- Acorns takes your money out of your bank account so it's less easy to access. This means you are less likely to dip into it for impulse purchases.
- Round-ups does make saving pennies and cents easier (Like a piggy bank) but you can also elect to have a certain amount auto deposited monthly to save more. You can also do one-time investments when you have some spare cash you want to save.
- Acorns also has a neat feature called "Found Money" where if you make normal purchases with certain companies, they invest a certain amount in your account. Walmart is one of these companies, and I shop with them all the time for necessity items. Every purchase goes to help my savings in my Acorns account.
- The rate of growth is way more than with a traditional savings account, and is certainly going to grow your money faster than a savings account would. Ramsey mentions a rate of 4% inflation in his book frequently, and a 2% rate of return on a savings account doesn't sound like the best idea with a 4% rate of inflation to me. Since I've been using it, I've seen almost an 8% gain on my savings.
- You can withdraw your Acorns money whenever you want without penalty, however this does take a couple of days. This makes it a little less easy to dip into for impulse purchases, and also allows for the cooling off period Dave talks about in his book when needing to use the emergency fund.
- For me, since Acorns is out of the bank, it's sort of out of site and out of mind. I am way less likely to want to spend that money.
With all of this being said, I want to re-iterate that I think Dave's plan is great. I've actually seen it work with some friends of mine. I do think that some of his antiquated ideas can be slightly modified though, especially if one uses some critical thinking in conjunction with what he is trying to teach.
What do you think about this? Are you using Acorns or some other micro-investing app along with Dave Ramsey's program? Why or why not? Let us know in the comments!
