The new millennial investing strategy

Source: Acorns

Setting aside spare change can be a sound strategy for building up a rainy day fund, but how about an investment portfolio?

Some new start-ups are angling to turn contributions of a few cents here and there into big business. App investment platform Acorns tracks purchases on users' banking and credit card accounts, sweeping cash in from a linked checking account once the round-ups total at least $5. Then there's Wherewithal, an online loyalty mall. Users shop at favorite retailers through the site, earning cash-back rewards that can be redeemed or slotted into an investment account. Regular users can become eligible for bigger cash-back bonuses over time.

Both of the new programs, which launched this fall, take a leaf from Bank of America's (BAC) long-running Keep the Change program, which rounds purchases to the nearest dollar, transferring the difference into a savings account.

Small contributions have the power to add up fast, especially during the holiday shopping season. Acorns estimates its average user generates $1.40 in round-ups each day from purchases. Over the course of a year, that adds up to $511-before factoring in elective contributions or the investments' performance. "We wanted to offer a program that could provide meaningful returns over the long term," said Jeff Cruttenden, co-founder and chief operating officer of Acorns.

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The target audience: millennials. That generation, according to Moody's Analytics, has a savings rate of negative 2 percent. "We're trying to make it easier for people to start building their savings," said Sam Das, founder and chief executive of Wherewithal. "Having some kind of financial cushion is a necessity in this day and age."

Necessary, but not easy. "People are completely paralyzed," said Cruttenden. He co-founded the company with his father, Walter, after noticing that many of his college classmates wanted to invest but couldn't accumulate enough to meet minimum balance requirements, let alone navigate commissions or create a balanced portfolio. "The goal is to offer them a product that enables them to invest a little bit every day," he said.

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The spare-change angle could be an attractive hook, said Kit Yarrow, a professor of marketing and psychology at Golden Gate University. It's a small enough amount of money that investing is less intimidating and more like a game, and an easier savings commitment to keep when money is tight. "A lot of time, it's those low-risk starts that get people fascinated," she said.

Just don't rely on them. "Your retirement is not going to be made or broken on the investment growth of your spare change," said Michael Kitces, a certified financial planner based in Reston, Virginia. At some point, you need to actively make larger contributions toward future goals.

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That's something Acorns and Wherewithal do allow for; but, even then, consider whether putting money in the stock market is the right choice. Both sites invest your cash in low-cost exchange-traded funds. "If saving is that much trouble, I'm going to guess that the bigger problem is that you don't have emergency savings," said Kitces. Consumers in that situation, he said, should focus first on stashing cash in a savings account where there's no risk of losing money.

Users should also assess fees. When contributions are small, fees eat up a bigger percentage of your balance, said Kitces. Wherewithal users start with a free cash-back account; upgrading to the investment option entails a monthly fee of $10 and an annual fee of 0.25 percent of the balance. (Das said that price could change. "That's part of the beta, just to see what the right price is and get people's feedback," he said.) Acorns charges $1 per month, as well as an annual fee of 0.25 to 0.5 percent of your portfolio.