Microsavings apps provide a perfect example of how leveraging technology can make a task — in this case, saving — easier and more efficient.
Microsavings apps identify small savings opportunities within your existing budget and then automatically sweep money into a savings account. They amounts are small — sometimes cents at a time — but they add up. Some apps use algorithms to analyze your monthly spending, while others allow you to create rules to trigger savings based on another event. (For example, save $1 every time you make a purchase at Starbucks.)
Microsavings Apps At-a-Glance: Digit vs. Qapital
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How it works
An algorithm identifies "safe" amounts to save
Where your money goes
The bottom line
Digit is beautiful in its simplicity and works best for those who struggle to save on their own.
How it works
Set savings goals and triggers to transfer funds
Where your money goes
Savings account or investment portfolio
The bottom line
Qapital is an innovative choice for savers who want to define their own saving rules or allocate money toward investments.
Does saving a large amount of money seem impossible to you?
Are you more of a natural spender than saver?
Do you find it difficult to stick with a savings goal when you have irregular income, or little income to begin with?
If you answered ‘yes’ to any of these questions, then the concept of microsavings could help you.
Let’s take a look at how microsavings works so you can see if it’s right for you.
What is Microsavings?
Microsavings, as the name implies, emphasizes saving on a very small scale. When you're microsvaing, you're setting aside seemingly insignificant amounts of money—a few cents here and there—but doing so frequently and automatically. That jar on your bureau where you throw your spare change? That's microsaving. Only now, you can use various apps to create a “change jar” that works with digital payments.
The concept of microsavings originates from developing countries, where saving just fifty cents per day can be challenging.
In the last few years, a few banks and fintech startups have taken this concept and modernized it with the introduction of smartphone apps that help you save. Digit is a well-established example, and Qapital is an exciting new service. We'll look at these services more below.
How do microsavings apps work?
Microsavings apps connect to your bank and credit card accounts and analyze your spending. With some data, the services can then implement automated deposits to either a savings account or a broad investment portfolio in a few different ways.
How do microsavings companies determine how much to save?
There are several ways that microsavings apps painlessly squirrel away money for you behind the scenes:
- The most basic apps automatically transfer money into savings every payday. Not innovative, but it works. Some large banks offer this to customers with both debit cards and savings accounts.
- Some services, like Acorns, round up credit or debit card purchases to the nearest dollar and save the difference.
- At least one app, Qapital, lets you create rules or triggers. When you take a specific action, a certain amount gets deposited into your account. For example: Buy a beer, save a buck! This one is rather ingenious because it's based upon a psychology trick called temptation bundling, in which you couple a desired but difficult behavior, like exercise, with a reward, like watching a favorite show. Now, you can bundle a good habit (saving) with spending indulgences.
- Lastly, the microsavings app Digit analyzes your spending habits and use an algorithm to figure out how much is safe to withdraw from your checking and deposit into savings. (If you’re worried about this, these services typically come with a guarantee that they won’t overdraft your checking account.)
Each of these microsavings strategies assures that savings happen automatically, in the background, at a small but consistent rate. The key point is that it’s automatic, so there’s no action needed by you. Instead, you just live your “normal” life with normal spending and you start saving money at the same time.
It’s a win-win, especially for those who don’t (or can’t) stick to a rigid budget.
How much does microsavings cost?
It depends. Some are completely free, while others may have a monthly fee. In the case of a fee, we highly recommend running the numbers to make sure you’ll save enough money to make that fee worthwhile.
What Are The Downsides To Microsavings?
Not all microsavings services are equal. The devil is in the details, so read the fine print.
The most important thing to know is that some microsavings services do not pay interest on your savings. At first, that might seem frustrating. After all, a large incentive to save is your money's ability to earn interest and compound. The upside, however, is that many of the no-interest microsavings apps don’t have fees or minimum requirements, so signing up for them can be easier than signing up with a traditional or online bank.
The important thing is to weigh the tradeoffs: would you rather work with a bank that charges no fees but pays no interest? Or a bank with fees and minimums where you can earn interest? The more you save, the more valuable the interest will be, but lower savings balances make the no-fee alternative far more valuable. It just depends on your personal situation. Plus, you can always transfer money out of the microsavings account into an interest-bearing account once you've accumulated a meaningful balance making the interest component less relevant.
You can use our compound interest savings calculator to get an idea of how much money you might earn with an interest-bearing savings account (or give up by foregoing the interest). At the time of writing this, the best savings accounts pay 2% annual interest, give or take. Check our list of the best high-yield savings accounts for the most up-to-date rates.
What if I want to invest the savings?
Well, you're in luck. Many microsavings apps, including Acorns, Stash, and Qapital, are geared toward investing the money you save rather than simply diverting it to a savings account. Microinvesting is great if you will leave your money invested for many years and are comfortable with the risk of losing money in the short-term. As always, you'll want to do thorough due diligence on any investment service to see where your money is going, how it will be invested, and what fees will be incurred. All investment services come with fees, so read the fine print before opening one of these accounts. Fees are extremely important to your long-term wealth growth (as fully explained in this video lesson). So don't make the high-fee mistake, even if you don’t have a ton of money to start with.
On the upside, these services make investing easy with prefab portfolios, so you don't need to be an investment expert to get started.
Why is Saving Money Important in the First Place?
For most people, saving money means you don’t get to spend it on something you want right now, which doesn’t seem very fun. It’s your hard-earned money – you deserve to enjoy it, right?
Sure, but let’s take a minute to reframe this thought…
All money always gets spent, no matter what. It's just a question of what you spend it on. Do you choose consumption today, bigger long-term goals for tomorrow, or long-term financial security? Are you prioritizing the experience of life, or just stuff?
The goal is to “spend” your money in a way that best reflects your values and serves you.
Is spending everything until you have none left ‘serving’ you? Or is it creating anxiety and stress because you’re unsure if you can make rent or pay the bills? What kind of life experience does that create?
Spending everything on consumption can feel good in the moment, but that happiness is often short-lived because you know the bigger truth. Your finances must be balanced between short-term satisfaction and long-term planning or someday you'll have a big financial problem to deal with. That's where microsavings can help.
Saving money opens up doors and brings freedom and flexibility to your life – options that otherwise wouldn't be available to you.
For example, if you lost your job today – with little savings in the bank – what would happen? You would immediately search for another job to replace your lost income, and quite possibly take the first position offered out of desperation to pay your bills.
But what if you lost your job with six months of living expenses saved in your bank account? You would be able to take your time searching for a job that suits you; a job you’d be happy working. This flexibility could turn short-term misfortune into a blessing by improving your work situation, and possibly your income. Or, maybe you’d take that time to start an entrepreneurial venture, or learn about real estate investing.
Do you see how the second option – having six months of living expenses saved – affords you more options? As a bonus, you’ll feel less pressure to accept whatever offer comes your way. You could even choose a totally different career path.
Here’s another example with a more immediate payoff. If you find yourself saying “I can’t afford it” to things like travel, shows, or dining out with friends, then saving money will give you the option to do these things.
So yes, there is a trade off involved here because you’re saving money for future needs, which may seem silly when you have things you’d like immediately, but your future self will thank you for it.
Delayed gratification is the hallmark of financially successful people, and microsavings is a painless way to get started.
Get Grounded on Why You’re Saving in the First Place
The number one thing you can do to keep yourself from spending money while also making saving fun is to create a “why” for saving in the first place. After all, without a strong reason to save money, you’ll only find reasons to spend it.
To figure out your “why”, go back to what we said before about saving money giving you options.
What options would you like to have? Do you want to use money to travel the world, go back to school, fund your children’s education, or have a secure retirement? There’s no right or wrong answer here. The key is to find what's most motivating for you.
When you have your “why” then write it down and stick it somewhere noticeable. Place it on your refrigerator, wrap a note around your credit or debit card, place it on your phone’s lock screen, or stick it on your computer monitor.
These constant reminders will ensure you remember your “why” at all times and reinforce the importance of saving.
I Want to Start Saving, but I Don’t Have Any Money…What Can I Do?
If your earnings fall on the lower side, or if your income is irregular, it’s understandable that saving money might feel overwhelming.
Here are some ideas you can use to increase your income and decrease your spending, so you have more money available to save.
- Create a list of things you’re good at, and see if there’s any way to monetize your skills by offering products or services for sale.
- Educate yourself on various passive income opportunities.
- Ask for extra shifts at your job, or take on a second job.
- Sell digital or physical goods.
- Go through your last three months of spending and see what you spent the most money on. Is there any way you can lower this expense at all?
- Do a “no-spend” challenge, where you cut something out of your budget for a certain period of time.
- Practice delayed gratification, especially with discretionary purchases. Wait at least 24 hours before making a purchase.
- Ask yourself why you’re buying something in the first place. Is it truly a need, or is it a want that can wait?
- If you’re more likely to spend at a certain location that you pass by daily, take a different route so you don’t pass by it.
- Create a list of things truly valuable to you, and only spend according to those values.
The key point is to start somewhere – even if it’s with pennies. That's the beauty of microsavings. Sooner or later, those pennies will turn into dollars, which will turn into hundreds of dollars, and thousands of dollars. The worst thing you can do is put off saving. Every day that you delay literally costs you. Procrastination is wealth suicide on the installment plan.
If you want a guideline for how much to save, you can start by saving one percent of your income. If that’s too much, then set the goal low enough that even if you have an off-month, it’s easy to stick with your plan.
Alternatively, you can decide on a savings goal and work toward that. For example, if you want to take a vacation, determine how much it will cost and when you want to take it. Then divide the cost by the number of months that remain to figure out how much you need to save per month to reach that goal.
For example, let's assume your vacation will cost $3,000, and you want to take it in two years. $3,000 / 24 months = $125 per month to reach your goal.
Here’s a tip… once you figure out how much you want to save (and confirm that you can afford to save that amount each month): prioritize it! Always put your savings away first so that money doesn’t get spent elsewhere. Essentially, you want to treat your savings like a bill that needs to be paid at the beginning of every month, or right after you get paid.
The point is to pay yourself first because all money always gets spent. It's just a question of what you spend it on.
Who Should Use Microsavings Accounts?
Let’s look at the biggest benefits of microsavings accounts to see if it might be the right fit for you.
- Easy – if you haven’t come across any good savings accounts that you qualify for, it’s possible that signing up with a microsavings service will be easier. Most of them don’t have strict requirements, other than being over the age of eighteen and being a United States citizen. This is particularly important if you’re just starting out and have little to no money to open an account. Since microsavings services don’t typically have minimums, there’s no barrier to entry. You can get started right away!
- Convenient – if there are no brick and mortar banks nearby, microsavings accounts offer a convenient banking alternative because all of them are accessible on mobile devices, either via an app or mobile website.
- Automatic – microsavings services can be a great way to automate your savings. If you prefer a passive approach to money management, microsavings services have you covered. All the saving happens behind-the-scenes so you don’t need to think about it.
To summarize, microsavings are easy, convenient, and automatic. If you don’t have enough money to open a ‘regular’ bank account because of the high minimums, or you don’t want to worry about keeping a minimum amount in the account to avoid fees, then microsavings accounts can be a great solution for you.
Just remember that one tradeoff for the convenience is the lack of interest income on your savings. Again, you can check out our list of high-yield savings accounts here – some of them have very low (or no) requirements to open an account, and a majority are online banks.
Should I treat microsavings as a stepping stone?
Microsavings is a great way to make your savings grow automatically and reliably. It's an excellent solution to make savings happen for non-savers.
However, microsavings is not the best way to maximize your wealth growth from existing savings because of the low, or no, interest rates and potentially high fees on investment accounts.
What that means is you should use microsavings to easily create your savings in the first place, and look at high-yield savings accounts and other investment alternatives to improve your wealth growth on your accumulated savings.
I like the idea of microsavings, but I don’t want to open a digital account
If you're not a fan of signing up with a newer online service, or don’t have a smart phone, then you could consider the do-it-yourself solution. Just decide how much to set aside on a daily or weekly basis, and deposit that money into savings.
How much should I save?
A possible rule-of-thumb to follow for how much to save is one percent of your income, to start. That means if you earn $1,000 per month, you save $10 per month. You can divide this amount up over the month and make multiple deposits, or deposit the $10 right at the beginning of each month.
How do I make sure I actually save the money?
You can set up an automatic transfer from your checking to your savings account, depending on your existing bank. This is the best way to ensure that you’ll actually save the money, since automating the process makes it painless and simple. If you don't see it, then you won't spend it.
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The key to saving more money is to get started sooner rather than later.
Microsavings accounts are one of the easiest savings vehicles to sign up for and get started, which makes them a useful tool to help grow your savings.
If you’re looking to start small, either out of necessity or because you don’t want to make any drastic financial changes to your life, give a microsavings account a try today!