How you can save £20,000 without feeling a thing?

I read some alarming news this week. Apparently over 50% of Americans have less than $1000 worth of savings. The data is equally disturbing in my home country the UK where a third of adults have less than £100 saved.
 
There are multiple reasons why saving money is a good idea despite what some economists may tell you. Saving is a core pillar to achieving your financial security and without security there is no freedom.
 

The old piggy bank

My parents are strong savers who would save big and small. When I was a kid, we had a massive piggy bank like the one below. It was truly enormous and very pig-like! My family had a zero-change rule where every time we came home, we had to deposit all of our coin changes in the piggy bank without exception. The bank was only allowed to be opened once a year when my mother took it to a proper bank and deposit all the coins into our savings account (trust me, the teller hated that day every year). It often led to embarrassing situations when I couldn’t find any changes to catch busses and had to run to the nearest ATM (thank goodness for modern card technology).
My family’s piggy bank lookalike
 
What surprised me was that every year we could at least get £2,000 out of that piggy bank on the deposit day. We even had years where the bank was full by September and we had to empty the piggy early. The funny thing was that we never noticed a slight change in our lifestyle.
 
My parents would put the fund into whichever account that paid the highest interest and never touched it. Last time I checked, they were still saving strongly, albeit the piggy bank had shrunk enormously in size as they had both discovered debit cards recently (the day when that poor bank teller finally rejoiced).
 
What’s the moral of the story?
Saving the daily spare change really makes a difference to your financial health without making a difference to your lifestyle.
 

The new piggy bank

I recently encountered an app called Moneybox which tries to become the modern day piggy bank.
 
It securely connects to your current and credit card accounts and receives the financial transactions details. It then works out the difference between the amount per transaction and the nearest integer and recommends you to save that difference (e.g. if you spent £8.45 on Uber then it recommends you to save £0.55 to round up the transaction to £9). Should you accept its suggestion, it makes a note and then move onto the next transaction, before taking a weekly direct debit from your designated account.
 
You can do cool things like automatically doubling the deduction per transaction, making a one-off extra contribution and my favourite feature, the Payday Boost, where they deduct and save a chuck right after your payday, even more you’ve had the chance to go out for the first drink!
3 simple investment choices for your savings
 
Once they have received the fund, they will invest them in plain vanilla assets like index mutual funds. You get the choice of 3 simple portfolios based on your risk appetite (Cautious, Balanced and Adventurous). Since I don’t need the fund for a while I went for the Adventurous option where equity (aka stock) weighs heavily in the portfolio in order to maximise returns.
One feature I particularly enjoy is something called Time Machine, which gives the projected value of your savings if you continued at your current rate. At £10 per week, I’m expected to get almost £20,000 in 10 years’ time, not bad for the price of a 2 daily coffees.

 

Withdrawal

The app offers a flexible investment service where you can withdraw your fund at any given point. It does take around 7-10 days from the request to fund being deposited into your account, so in case you want to dip into your Moneybox for that Friday night out, you really gotta plan and time it well as otherwise you will be sipping tap water all evening.

What are the down sides?

All in all, I found the registration, usability, service offering and flexibility excellent on Moneybox. The only downside is the cost.
 
They are a business so they have to make money after all! There are 3 cost components:
  1. Monthly platform fee: fixed at £1 per month as long as you have any balance on your account
  2. Monthly management fee: currently accrued daily but charged monthly at 0.45% per year, based your closing balance at each day
  3. Fund fees: currently charged at around 0.25% of your invested amount
As you can see, trying to work out the Total Expense Ratio (TER) of your portfolio on Moneybox is a living nightmare, given that your balance is likely to be dynamic and fluctuating weekly.
 
I managed to save £350 with Moneybox in 2017. If I were to make a £350 deposit today, my fees (annualised) would have been:
  • Platform fee: £12
  • Management fee: £1.58
  • Fund fee: £0.88
  • Total: £13.46
This makes a 3.84% TER (£13.45 over £350).
 
To put it into perspective, below is a list of common fund types and their annual TERs:
As you can see, Moneybox is definitely a very expensive way of saving and managing your spare change, at least initially, as the higher your savings, the less % the platform fee occupies.
Furthermore, trying to accurate calculate your TER is very convoluted as it involves a moving base and thus I dislike like products with complex fee structures.
 

What are the alternatives?

Well quite simply, set up a standing order between your current and saving account. With some banks you can even choose a weekly frequency, which mimics the effects of Moneybox, plus it’s free.
 
Another tactics I use is that I withdraw the fund from Moneyboox on an annual basis and invest it directly into my Self Invested Pension Plan (SIPP), thus limiting my fee exposure to 1 year only whilst achieving 45% tax relief (offered by SIPPs). I still consider it an expensive way to save £350 however the ease, autonomy, beautiful aesthetics and the fun nature of swiping ad saving provided by Moneybox still justifies the price for me currently.
 

Wrap up

Moneybox is great if:
  • You want an automatic way of saving your spare change
  • You want your savings to work hard for you and be invested in world-leading companies like Apple
  • You want to simple and effortless way of growing your wealth
However be aware that you can achieve the same goal with a standing order to your saving / investment account and Moneybox has very expensive management fees which can erode your return in the long run.
 
DISCLAIMER
I am not connected in anyway to Moneybox App or its associates, nor do I receive any remuneration from them. Contents expressed in this blog are purely drawn from my personal experiences. I am generally a fan of their product however I am also aware of the pitfalls.