Stealth Saving, Can it be Done?

Two ideas are colliding in this post.

One. I love the idea of stealth saving. If there is new technology to help squeeze some funds from my spending accounts and increase my saving rate, I would love to use it.

Two. My goal for my children is to get them on the path to investing early. As I’ve looked into this, there are a lot of different technologies available. They weren’t around when I was their age and could potentially help.

Gadgets, Could Gadgets Work?

I love gadgets and technology, but I’m skeptical of these programs. I’m fine with using a tool that gives us advantages with investing and saving but it has to make sense financially. If there are high fees or it doesn’t really do the job I want, there is no point to use it.

Another problem I have with teaching my kids to invest is they really shouldn’t invest the same way I do. They aren’t going to be able to use the same brokerage accounts and get the same financial benefits. They simply don’t have enough money. They’re unable to throw tens of thousands of dollars in an account to get preferred fees or other extra benefits. So the tools that we use need to be tailored to their situation. As parents, we need to learn a strategy that could work for lower income earners.

As I look into my own strategy, there has been a great deal of maturity to get to the point I am today. One habit that has helped me and still does to this day is automation. I know it is cliché, but if I can give every dollar a job, especially before I really have the feeling that it is mine, I tend to invest more of it.

Automate It

Two examples that highlight this are taxes and my 401k account. As far as I’m concerned, that money is never really mine to use besides for those two tasks. It comes out of my gross pay before I ever see the direct deposit hit my bank account. I think automation will always be a tool that will help us maximize our investment allocation. Once we make something automatic, it’s ingrained in our behavior. The trick is getting to this point.

I want an actionable plan that a majority of us could follow to get our kids saving and investing. I’ve heard that it takes 21 days to form a new habit. Well, it turns out that is wrong too. It took some people 256 days in this small study, so we need to help our kids make the right decisions toward saving and investing to make it a lifelong habit. I don’t know about you but if I don’t see the benefit outweigh the cost, no matter how long I do something, I’m probably not going to keep doing it.

If you are anything like me, you’ve probably looked at your bank account and asked,

Where did all the money go?

Even the best budgeters have probably spent a little too much on entertainment or other discretionary purchases from time to time.

When I look at all these automated investing apps and accounts, I hope that they can accomplish an increased savings rate. They claim to take out money without you even noticing it is gone.

Count me skeptical.

I have a feeling that I might notice. But I’m willing to give these apps the benefit of the doubt. Maybe they can really pull it off.

I’ve seen plenty of article before about the best way to teach our kid investing and those are fine. I want to get behind the scenes though. Let’s look at how the sausage is really made.

 

Penny’s vs Real Investment

Anther aspect of these apps is they take a few cents here and there and before long they add up to some real investment capital. Now as high income parents, I can’t see this making a big difference in our own portfolios.

For example, say you use an app that rounds up your purchase to the nearest dollar. Let’s say you make three purchases a day, every day of the year. That is about 1,100 transactions a year. Let’s say the average round-up amount is 50 cents. That seems reasonable to me since that’s right in the middle. That comes out to an extra $550 a year we would contribute to our retirement accounts. That is an extra $8,000 we would have in our retirement account after 10 years at a 7% return.

Hey, that’s better than nothing, but it isn’t going to make a real difference to us.

What About the Children?

Now for our kids, on the other hand, I could see this become a great jumpstart for them to their investing careers. There could be problems with this though.

What if the fees on these investing apps are so high that our kids don’t really make any headway when the account value is low? Also, what if the investments themselves are not ideal for retirement-minded individuals?

 

What should the priorities of investment be for our kids?

I think the first priority for our kids is to invest in a Roth IRA. If we are talking about a high school student or a college student making close to minimum wage, she will be paying almost no taxes. Setting aside that money in a Roth and not paying taxes anyway makes that the ultimate investing vehicle. So how can we help our kids get some extra money they won’t even miss to a Roth IRA.

 

Let’s look at some Apps:

Acorns

This app has a $1 a month fee on the first $5000 dollars invested. It’s then 0.25% on the amount in the account above $5000.

Stealth Saving

Umm, not those acorns.

If you have an email ending in .edu you get four years use of the app free. The investments still go into one of five automated portfolios. Even the most aggressive portfolio has a 10% REIT allocation so it isn’t the most tax efficient when investing in a taxable account.

Of course, as long as our kids stay under the 15% tax bracket, they probably aren’t going to pay much in the way of taxes anyway.

A very cool feature with Acorns is you can link a checking account or credit card, and they analyze the spending. They round up the purchases to the neared whole dollar and then remove that from your checking account and deposit in an Acorns account.

The $1 a month fee could have huge implications in the long run for small investors. Even if you put $100 a month in there, that is a 1% fee. Most likely, the spare change entering that account isn’t going to come close to $100 a month and the fee will eat away the investment.

Now you could transfer more money to Acorns to minimize the fee impact. If we have the discipline to do that, there are better investment accounts that will set our kids up for long-term success. We could help them get an account with a broker that will serve them once they graduate to higher tax brackets as adults.

 

digit

This looks like an interesting program that analyses our spending and strategically takes out the extra cash and places it in our digit.co account. Then we can transfer that money where ever we like. The problem here is they charge $3 a month for this service. That’s a deal breaker for me when we are talking about a small account for our kids.

Again, our kids probably aren’t going to be saving huge amounts and this $3 fee will eat up a large percentage of the savings over time. Then we still need to transfer the money to an investment account.

 

Qapital

Qapital is an automated savings app that allows you to set up different parameters to induce savings. It’s an “if this, then that” (IFTTT) platform. For example, you could set it up to save every time you go out to eat or go grab a cup of coffee, the app would take a fraction and deposit it in the Qapital account.

It is free. They make money on the interest they accumulate while holding the saved funds.

You still have to set up the savings parameters. If you are as lazy as I am, I could see myself forgetting to set up any new savings goals after the shiny newness of this app wore off. It seems just as easy to set up an automatic transfer from my checking account for a certain amount to my investment account.

Plus I could see this app preventing savings if you use the app to curb a bad spending habit. If you were trying to not eat out as much or buy less clothing, then setting up savings every time you commit the habit could result in less saving and spending more in other categories. I’m sure it could work for some people but it isn’t what I’m looking for.

 

Robinhood

This allows you to invest in individual stock free of charge. There aren’t any stealth savings associated with this app but at least it is totally free. If you are wondering how they make money it’s with their Robinhood Gold accounts. It’s basically a margin account, so they charge you a flat monthly fee to use their money to buy more stocks. You do get access to very inexpensive Vanguard ETF’s on their platform, so that is a plus.

It’s also a taxable account and doesn’t have an IRA option.

 

Dobot

Dobot is a savings app. It’s totally free as well. You give Dobot a goal amount to save, a time frame and then it helps by automatically withdrawing funds. They also send texts to encourage your saving. There is also a social media component to saving. It goes into a FDIC insured savings account, again no retirement accounts are available.

 

Is it useful?

From the perspective of a parent, I don’t really see much value in any of theses apps. I’m sure they help a lot of people and I don’t think there is anything inherently wrong with them. Using these apps to save is a heck of a lot better than doing nothing. Initially, the savings rate is going to be a lot more important than anything an app does or the investment return. If these apps get your kids excited about investing and saving more then that is a huge bonus.

The only app I saw that lets you pair a credit card to enable round-up automatic savings was Acorns. I would encourage everyone to use a credit card that provides some sort of reward structure that makes sense for your particular situation. You’re leaving money on the table if you aren’t getting some rebate on your spending.

We can always put the limit to about one month’s average expenses. Then we have to pay it off monthly or it’s unusable the next month. If you’re the type of person that can’t handle that responsibility, then saving is probably the least of your worries at this point. Getting a hold on the monthly budget and not overspending should be priority one.

I do 80% of my spending on a credit card. The other spending is a mortgage, and electricity so I would only get two transactions a month worth of rounding up if the app only used checking or debit account spending. If you do all your spending on a debit card then these apps are more useful.

None of these apps had IRA accounts available. I think we should encourage our kids to first put money in a Roth IRA. Using any of these apps to create some stealth savings would necessitate transfer into a Roth IRA. If we used an investing platform, I would image we could transfer the investments in kind to a Roth IRA account. If not, that could result in some capital gain taxes. Although, at our children’s low tax rate it shouldn’t amount to much. Don’t forget the kiddie tax rules on investment income.

There are a few checking accounts with automated savings like the Bank of American Keep the Change program or Wells Fargo Way2Save. They round up a purchase, but again you have to use a debit card and I don’t think that is ideal.

The Fidelity Rewards card does give you back 2% on all purchases and you can deposit that cash back in the Fidelity account of your choice, The Roth IRA would be a good one.

 

So what’s the answer?

It doesn’t look like there is a magic bullet to get my stealth savings strategy in hyperdrive but I think a couple of these accounts or apps could be used to boost your children’s savings rate.

I don’t think it’s going to make a difference to a high income earner but if we can instill the habit of saving and get our kids started early, they might get on the fast track to financial independence, even earlier than us.

The earlier our children start, the faster they will see the investments turning into some big numbers. That could inspire them to save even more.

If I was a high school or college student with a part-time job generating earned income, I would hope my parents help me sign up for a Roth IRA.

If I had a .edu email address, I would sign up for Acorns and let them help with the stealth saving. Otherwise, I might try some of the other apps without fees to see if they help. I bet it would be better to just analyze my budget and schedule a monthly deposit into my retirement account. Then I just treat it like another bill that has to be paid. Maybe getting my parents or other friends to keep me accountable would help make it a habit.

I might get the fidelity reward card and have that cash back go to boost a Fidelity Roth IRA.

I wouldn’t use the Acorns app if I had to pay any fees. The Dobot app could get some more stealth savings. Since I don’t use a debit card very often, it probably won’t help me save much. At least the Acorn’s app would allow me to pair my credit card. That gives more opportunity to get some additional stealth savings for the four years at college.

I know these apps are popular with financial bloggers. I don’t know if it is because of the affiliate income or if they really find them handy. There isn’t much value in them for me. Using traditional checking, savings, and retirement accounts still look the best to me. Analyzing a budget and then automating the transfer of income into savings isn’t sexy, but it works.

Making the decision to pay me first has been my best savings strategy.

 


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I’ve done a fair amount of research, but I’m sure there are some other financial apps out there that could help. If you have any suggestions, I’m all ears. Let’s here some other suggestions for improving our stealth saving options. What are your ideas for jumpstarting your children’s saving strategy? 

Tom
Tom is a doctor and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

7 Responses to “Stealth Saving, Can it be Done?

  • I absolutely love stealth saving. I call it microsaving myself, but definitely like the term stealth saving.

    In terms of it’s value, I just like how it’s a way to squeeze so more use out of surplus money. As much as I should, I can’t actually give every dollar a job because I just tend to automatically spend less than I make. As a result, it’s easy for me to end up with a buffer in my bank account. I feel that stealth saving with apps like Qapital and Dobot (the two apps that I use), helps me to basically sweep out excess money. Yeah, I won’t get rich doing it, but it ends up helping me to really give every dollar a job. My thought is, if your savings are already where you want it to be, it doesn’t hurt to try to squeeze out a little bit more by using these type of apps.

    • From reading your site, as efficient and sharp as you are I could see it giving you a few extra percent on the savings side and you getting excited about the tech aspect of it.
      I like the idea of these apps, especially for those starting out as long as the fees aren’t a big percentage of the savings.
      It always comes down to time versus money and for high earners I think it fits in the law of diminishing returns category.
      I don’t think these apps are bad, probably just more useful to a certain subset of the population.

      Tom @ HIP

  • Big fan and user of this strategy . . . automated deposits and automated buys help increase my savings rate without my brain getting in the way . . . the psychology of savings is a mysterious thing.

    My favorites — acorns, robinhood, dobot, and even coinbase (for some auto cryptocurrency investing).

    Great article!

    • Robinhood looks very interesting if you are interested in individual stock investing. I’m interested if you have been able to put the majority of your savings through these apps or does it supplement what you were already saving?

      • Good question and an important distinction I should’ve mentioned in my original comment . . . I’m definitely NOT including the majority of my savings in these apps . . . likely because they are still somewhat ‘experimental’ in my mind, and also because there are more investment options with other providers (i.e., IRA, 403b, even taxable account flexibility and choice).

        I recently did a review of Robinhood for Rockstar Finance . . . as part of that review, I talked a bit about how I use RH to ‘prospect’ stock ideas. If I’m playing around with a small amount of my portfolio on a turnaround company or swing trade, you simply can’t beat testing the waters when it’s free. Others like dobot and even acorns act like intermediaries for me . . . I’ll get them up to a reasonable amount, and then transfer the funds into a more long-term investment.

        Right now, these apps are fairly short on features (and expertise). It will be interesting if/how they evolve. If they stay the same, I’d say it’s a fad. If they start to branch out in other ways, they could last . . . Either way, there is a ‘edutainment’ value in using them . . . it keeps me entertained and savings, so I guess that is worth something!

  • When I started reading the article I was expecting something else, like not showing off how much cash you saved in time. You think about optimizing your costs, which may result in a big impact in a decade if we think about the compound interest that we could make over that period as well.

    You mentioned that REIT’s aren’t that well tax efficient, but did you think to look into other investment opportunities such as P2P to try to increase the ROI?

    • I’ve looked into P2P and even experimented with it a small amount. I must have been an outlier but my rate of return was terrible from the start. I withdrew my funds long ago. I know others have had better luck but I see a lot of people pulling funds from the P2P platforms and the ROI dropping.

      Tom @ HIP

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