Saving money is an essential part of building wealth yet finding extra money each month isn’t always easy.
Microsavings apps have exploded in popularity within the last few years. These are apps that help you save money “invisibly” by rounding up transactions, transferring small amounts from checking to savings, and even canceling some of your subscriptions (with your permission of course). They are becoming a popular way to save money effortlessly.
The big question is are they worth using? The answer may depend on how much you can increase your savings rate.
What is the United States Personal Savings Rate?
The U.S. Bureau of Economic Analysis reports that the personal savings rate was 12.9% in November 2020. This rate is a recent high, but the savings rate was only 7.9% in January 2020—the last full month before the pandemic.
The U.S. personal savings rate peaked in the 1970s when the annual savings rate was consistently above 10%.
The median savings balance, however, is only around $30,300 (in bank accounts) according to the Federal Reserve’s Survey of Consumer Finances.
A general financial recommendation is that you should save and invest at least 20% of your income. So, American households have room to improve to achieve financial stability.
The U.S. real median household income in 2019 was $68,703, according to the U.S. Census Bureau. Following the 20% savings recommendation, households should aim to save $13,740 per year.
Saving a few dollars each day won’t achieve the 20% savings target by itself. But microsavings can get people closer to reaching their savings goal.
How Microsavings Can Help Improve the Savings Rate
Getting a salary increase and saving the extra income isn’t the only way to increase the savings rate. Wisely managing disposable income is also important by saving instead of spending.
Many financial experts like to cite the “latte factor.” Instead of spending $5 a day on coffee or another treat, saving the money can add $1,825 to a savings account balance.
Microsavings apps can save the money and nudge people when they make small yet frequent purchases. Some apps can withdraw money each time someone makes a purchase, adopting a “save and spend” approach.
The microsavings concept has been around for several decades in the developing world where many can save pennies per day and build wealth—but not dollars. For instance, the Bill and Melinda Gates Foundation donated $500 million to international microsavings programs in 2010.
As recently as 2012, the U.S. Bureau of Economic Research recommended microsavings programs in the United States to boost personal savings rate.
How Microsavings Apps Work
Microsavings apps are a relatively new innovation in the United States as the first apps launched around 2015.
These apps usually withdraw between $1 and $5 every few days from a linked checking account and deposit the cash into an FDIC-insured savings account.
Two apps, Digit and Qapital, state their average user saves $2,200 and $1,500 annually with a basic plan, respectively. That’s not a bad result for effortlessly saving money.
There are several microsavings apps that Americans can use to save money. While each app has its unique features, the savings concept is similar.
Many apps analyze a customer’s spending habits and withdraw small amounts of money several days per week. The withdrawal amounts are intended to be small enough to avoid overdraft fees and still let the users afford their monthly bills.
It’s also possible to add custom savings rules, including:
- Rounding up card purchases
- Withdraw after each fitness app workout
- Schedule recurring fixed amount withdrawals
- Implementing a 52-week savings challenge
These custom savings rules can encourage households to increase their savings rate.
What About Microinvesting Apps?
Microinvesting apps are another growing trend and are similar to microsavings apps. The difference is that with microinvesting apps, your balance is being invested in the markets rather than placed in a savings account.
As investing has more growth potential than a savings account, microinvesting apps may provide more long-term value for the monthly fee if you have a higher risk tolerance.
An October 2020 survey of 2,000 Americans conducted by Pollfish and commissioned by The College Investor found that 78% of respondents are familiar with “investing-as-a-service” type companies.
The concept of microfinance apps is becoming common despite their relatively young age.
Pros of Microsavings Apps
Here are several advantages of using a micro-savings app.
Automated Savings
Saving money each month with a traditional bank account requires scheduling automated transfers or manually transferring funds.
It can be easy to forget to schedule or transfer. Or, skip a transfer during a pricey month.
Microsavings apps automatically analyze daily finances and transfer funds several times per month.
The primary goal of these savings apps is to increase the personal savings rate, after all.
Goals-Based Savings
Goals can be a handy motivation tool. Microsavings apps can deposit the cash savings into multiple goals-based accounts and calculate when you can reach your goal.
If your goal is to get out of debt, some apps can send your monthly savings as an extra payment directly to the credit card or loan account. Visually tracking your progress can motivate people to save more frequently.
Open to All Adults
There are no minimum income or balance requirements to use a microsavings app. Couples can create shared goals and link multiple accounts to reach their savings goals sooner.
Those who already save enough to meet their monthly savings goals can use microsavings apps to save even more.
Negatives of Microsavings Apps
Requires a Checking Account
Microsavings apps must link to a checking account to work. Those who may benefit the most from these apps may not have a banking account.
The 2019 FDIC Survey of Household Use of Banking and Financial Services
Not having enough money to meet the minimum balance requirements is the main reason why the survey respondents remain “unbanked.”
Thankfully, there are several free online checking account options without a minimum balance requirement.
Microsavings apps can also help unbanked households save for the future as there isn’t a minimum balance requirement. Users can also withdraw their savings at any time.
High Monthly Fee
We live in a time where there are many free bank accounts and free investing apps. There are some free microsavings apps but many charge a monthly fee between $1 and $5 per month.
The microsavings may deposit into an interest-bearing account but most likely won’t be a high-yield savings account. Also, the interest income will probably be less than the monthly fee.
Users must decide if the monthly fee is worth the potential savings increase.
Only Save Small Amounts
Microsavings apps can increase a monthly savings rate but don’t replace traditional savings and retirement accounts.
The small yet frequent withdrawals can save a small percentage of income. Workers will still need to save and invest a percentage of each paycheck for their short-term and long-term goals.
Depending on the savings rules, the apps may save more when monthly spending increases. This can be the case when using spending round-ups and shopping at retail partners that offer savings boosts.
Summary
Microsaving apps can be worth it if you’re looking for an easy way to save a few dollars at a time and avoid unnecessary spending. However, the ongoing fees and low savings rate means microsavings apps won’t replace the purpose of regular banking and investment accounts.
