Microsavings: Small Contributions Can Lead to Big Savings
January 11, 2017 | Your Finances
When you’re young and starting out, dedicating a portion of your paycheck to regular savings can be difficult. After all, between student loans, rent, food and maybe even a car payment, you have a lot of demands for your money.
But the sooner you start saving, the better. So if you’re not quite ready to commit to stashing away a substantial chunk of money each month, microsavings might be a good way to get started saving now.
Microsavings is being fueled by financial technology startups that aim to help people frequently save small amounts of money. “Microsavings programs and applications can help anyone commit to putting small amounts away today that will build up over time and eventually help them accomplish financial goals that at the beginning may have seemed impossible,” said Emily Holbrook, Northwestern Mutual director of personal markets.
How Do Microsavings Work?
There are a number of different platforms, many of which help you save in a variety of different ways. For instance, some platforms like Acorns, Qapital or Clink help you save money when you make purchases by rounding up or dedicating an additional percentage of your purchase to savings. Other platforms like Simple, Smartypig or Rize help you automate savings, either by dedicating a regular small amount to savings or by learning about your spending habits and automatically deducting small amounts of money as the platform determines you can afford it.
The platforms also differ in what they do with the money you have saved. Some help you invest the money for growth. Others act more like bank accounts but offer tools to help you set goals and see your progress toward achieving them.
What to Look For
Now that you know what microsavings are and are ready to get started, Holbrook recommends thinking of your financial goals first and then finding the platform that will best help you achieve them.
“Are you interested in saving for general purposes and to start a habit, or is it important to tie your savings to multiple financial goals?” she asked. “Consider how you want to be able to access and interact with your money, and know what motivates you.”
For example, some platforms have dashboards and budgeting features that may appeal to analytical savers. Others have gamification features, where you can compare your savings to others or earn rewards by completing various activities.
Each platform has its own structure and guidelines, so make sure you understand the fees, minimum balance and other policies. When you set up automatic transfers from your checking account, you want to make sure your microsavings platform is not going to pull out money that you don’t have! Digit, for example, offers a no-overdraft-fee guarantee, which means that if its withdrawal results in an overdraft fee from your checking account, Digit will pay the fee for you.
Lastly, when choosing a platform, understand how it’s protected. Some are associated with banks insured by the Federal Deposit Insurance Corporation (FDIC), and some are covered by the Securities Investor Protection Corporation (SIPC). While the FDIC protects your deposits in full (up to $250,000), the SIPC protects you in the event of an investment firm failure, not in the event of a poor investment. So you’re taking more of a risk by putting your savings into SIPC-insured funds; however, you could also get a greater return. You have to decide what makes the most sense for you and your financial goals.
While microsavings is a great way to get into the habit of saving, remember, it’s often just a start. Holbrook says that eventually you’ll want to work toward the 20/60/20 rule—saving 20 percent; putting 60 percent toward fixed expenses like housing, food and a car payment; and using 20 percent for discretionary spending on things like going out to eat.
“It’s okay if you don’t start at 20 or even 10 percent right away. That can be your longer-term goal,” she said. “If in the first year you’re able to simply increase how much you’re saving, that’s a win!”
With microsavings, you can start right away with small amounts that you increase over time so you feel less of an impact. “Getting started on a path toward financial security should not feel scary or intimidating,” Holbrook said. “Savings strategies, along with risk management protection and debt management, are a critical piece of the financial picture. For many people who may feel intimidated to get started, microsavings may be the perfect entry point.”