If you’ve ever collected change–maybe in a piggy bank as a kid, or in a cup by the front door as an adult–you likely already know the benefits of spare change savings.
You generally don’t miss the coins you drop into your collection each day. But, once you get around to putting the whole pile in the bank (or a coin machine), you could end up with a few hundred bucks.
These days spare change saving or “round-up” apps make the process even simpler. They automatically calculate the difference between the amount you charge on your debit or credit card and the next dollar amount. They then divert that virtual change into a savings account.
Spare change savings (also known as “micro-saving”) can be a great way to kick start your savings and also help you start automating your finances. However, not all spare change apps are created equal.
Some of these apps charge fees, which can quickly erode your savings. And some actually invest your savings, which may not be ideal if you’re saving for a short-term goal, such as building an emergency fund or buying a car.
Here are some key things you may want to keep in mind when choosing a spare change savings app.
Recommended: What Are Round-Up Savings?
How Does Spare Change Saving Work?
The philosophy behind spare change savings is “little and often.” Every time you spend money, whether it’s on gas, groceries or dining out, an app rounds up that purchase and saves the change for you.
Spare change savings apps typically connect to your credit and/or debit card, take the virtual change from your linked checking account, and put the money into a separate account. For instance, if you buy a sandwich for $5.80, the app will automatically transfer 20 cents from your checking account into a savings account.
Some spare change apps put your money into a traditional savings account or a cash management account. Others invest your money in small portfolios, based on your risk tolerance and financial situation. There are also spare change apps that use saved funds to pay off debts that you designate, such as credit cards or student loans.
The Benefits of Spare Change Savings
There are a number of potential benefits to spare change savings. Below are some of the reasons you may want to try using one of these apps.
They can make saving easy and automatic
One of the biggest advantages of spare change savings is that it’s automatic. You don’t have to remember to bring your change to the bank or transfer money from checking to savings after you get paid in order to save money from your salary. And, unlike the change jar, the money saved is out of sight and out of mind.
If you’re struggling to save money, setting up a spare change savings app can help jump start the process and make it relatively pain-free.
Your savings can earn interest
Unlike the piggy bank method, a spare change app can put your savings into an account that can earn interest and help your money grow over time.
Some spare change savings apps, known as “micro-investing” apps, will offer users the opportunity to invest their money into stocks, bonds, and/or exchange-traded funds (ETFs). This involves risk, but if these investments do well, your savings could grow considerably.
They can make investing less intimidating
Micro-investing apps can make it easy to get started with investing, even if you currently don’t know anything about it. Generally, they’ll recommend a portfolio based on your goals and time horizon, turning your spare change into an investment on a small scale–a good way to experiment.
There may be extra ways to save
Some spare change savings apps partner up with other brands that will kick in a percentage of every purchase you make to your savings account. For example, if an app partners with Macy’s or Apple, every time you make a purchase from one of those retailers, a small percent of the total you spend would get added to your savings account (in addition to the round-up amount taken from your checking account).
Disadvantages of Spare Change Savings
There are some potential downsides to spare change savings apps. Here are a few you may want to consider before signing up for one of these apps.
They may charge fees
Some spare change apps charge monthly (and other) fees for using their services. Before signing up for an app, it can be a good idea to read the fine print and look into what, if any, fees you may be charged and how often.
Even if the fees are small, they could quickly eat into your savings, especially since the dollar amounts you’re putting away are small.
It’s possible to lose money through investments
If you choose to put your spare change savings into investments, there is some risk involved. Depending on market fluctuations, your money could grow. On the other hand, you could potentially lose some or all of your savings.
Micro-investing may not be ideal for emergency funds
If you go with an app that invests your savings, you may not be able to access the money immediately, which could be an issue if you’re faced with a financial emergency.
Another issue is that if your account is down in value at the time you need to withdraw the money, you would have to take a loss instead of waiting for market conditions to improve.
You might get hit with an overdraft fee
If your checking account is close to zero after you make a transaction, and then the spare change app rounds-up the transaction and withdraws additional funds, you could end up overdrafting your account. This could result in getting hit with a hefty overdraft fee.
While each spare change app functions slightly differently, they all revolve around the same basic concept. You save small increments of cash that you likely won’t miss. The money gets put into a digital piggy bank, so it’s separated from the funds in your primary checking account. You can then use the money to work toward your savings goals.
Spare change apps aren’t for everyone, however. If you’re living paycheck to paycheck and at risk of overdrafting your account, these apps may not be ideal for you. And if you don’t yet have an emergency fund, you may not want to choose an app that invests your savings.
On the other hand, if you’re looking for creative ways to jumpstart your financial goals, a spare change app (with low or no fees) may be just the tool you’re looking for.
SoFi Money® makes spare change saving easy–and also free. When you open a SoFi Money cash management account, you can set up “Roundups,” which allows you to save automatically every time you use your SoFi debit card.
Photo credit: iStock/Nattakorn Maneerat
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