Photo by Nataliya Vaitkevich from Pexels
Photo by Nataliya Vaitkevich from Pexels

The Beauty Of Spare Change Investing

Devesh Kumar

Devesh Kumar

Sun Nov 14 2021
8 Min Read

Would you care if your food order for 216 costs 220 instead? I know only my student self would. What do you do with the remaining 4 rupees? My mother would say put it in a piggy bank to a kid me. Let me tell you a piggy bank story.

As an elder child in a middle-class family, back in 2005, at 5 years old, I would only get around 30-40 rupees a month to spend on things like chocolates and ice cream, which I almost never did, more than half of that money was always saved at the end of the month. So you can tell I have a habit of saving money from a very young age. All that money went straight into a mini post-box savings box (Because I had no idea what inflation was at that time, I was happy to keep all my money in cash, today the money I have in cash amounts to almost nothing, because it doesn't earn me any interest)

It used to be amazing! Picture this now, like me, you've been saving those 3 rupees that you saved after buying a 7 rupee ice cream instead of a 10 rupee ice-cream, along with all the other money you didn't spend, put it in a piggy bank, repeat the process over and over again, and boom, a year later, your piggy bank is so full you can boast about it to your parents, to your friends and whoever comes by. At that point, you tell yourself, "I need a bigger box".

You have grown slightly in age, and seeing your habit of savings, your father brings a form home one day and tells you about a new way of saving, an account with a bank.

"Why would I give the bank my money when I can have it here?" You inquisitively ask.

"Because they will pay you interest." Your father replies.

"What's interest?" Your curiosity grows.

This is the point that most kids start to get a slight understanding of money.

"The bank will pay you a small amount for giving your money to them."

"How much?"

"For every 100 rupees you give them, they will give you 4 extra rupees. So if you have a 1000 right now, how much does that become?"

You do the math, at this point, multiplying by 10 isn't a big deal.

"40 rupees! Nice! That's a full month of pocket money, 4 more ice-creams!"

And that's when it started, you opened the piggy bank, counted the notes and coins tediously, you gave your father the money, he opened the bank account, and he gave you a small book where you see your account balance being a thousand rupees.

"Where are the 40 rupees papa?" You ask, worried, because not only do you no longer have the money, you also don't have the 40 rupees the bank promised you.

"Oh they'll add it to the account at the end of the year." Your father smiles, happy about your curiosity.

"At the end of the year? I thought I'll get it today."

Your father laughs, your thoughts of treating yourself to those ice creams after months of savings vanish in a moment, and now you have no cash either. You get over it in 2 days. Your father instructs you to give him the money to put into your new account as soon as it reaches 100 rupees, and you diligently do it because more money in the bank means a higher return as pocket money.

Now there were a lot of things I was unaware of at that time, inflation being one and that my pocket money should have been 50 instead of 40 at that time, but even more notable, compound interest, the concept of compound interest was inconceivable to me as a kid, interest on interest? How?

But that 1000 rupees you deposited 15 years ago as a kid and kept adding small spare change amount every now and then, would have ballooned to well over double the amount you started with. Just by keeping the money there and collecting interest on the interest the bank paid you.

I've earned thousands of times that amount of money in my life, but that initial 1000 rupees plus the interest is the most special money I have and probably will ever have!

As you grow older

As you grow older, you get to know a lot of other avenues where you can put your savings, the bank that paid you 4% interest on your savings, the bank now also offers you a feature called a fixed deposit that pays you 6.5%, the post office next to the bank pays 7.5% on your deposits. Nice deal, right?

"How can they pay 7.5% when their building's all tattered and people who deliver the mail aren't even paid well?" But that's a question that quickly skips as the bank also tells you about things called Mutual Funds that generate returns above 10% but don't guarantee and you could lose money with them, you don't want to get into that, because a 12-year-old only understands fixed-interest instruments and not instruments that have volatility in them, because to explain the concept of volatility, someone will have to explain a lot of other things to you as well.

So you decide to tell your father to open a fixed deposit with the money already in the bank account, and you start earning a higher interest rate, meanwhile putting spare change each month into that bank account waiting for it to accumulate to put into fixed deposits as well. This continues for a while, until the habit inevitably breaks a little, and then breaks off completely. Your money is there, waiting for more to come in, collecting interest, but you don't go back to look at it and forget it's there.

Fast Forward

Fast forward to today, your college got over, you understand the complex instruments that the bank was talking about, and realize that those were fairly simple instruments and that there are many more complicated instruments which people operating with them don't even understand (Cough Futures & Options Cough). At this point, you're probably even earning a little money and putting it aside in those instruments.

You're watching a YouTube video, an annoying ad comes in, two in-fact, both un-skippable. Before life goes out of you realizing that you're watching two ads right now only to watch a video that will for sure have another sponsored ad inside it too, you notice something about the ad, it's about an app that takes your transaction history, rounds up the amounts to the nearest ten, and adds the change to a cart that can be invested into a portfolio of whatever you want, gold, equity, debt, doesn't matter, just invest it.

"Isn't that exactly what I have been doing for a long time?" You think and memories of piggy banks flash through your mind, and by some miracle, you tap on the ad to install the app, intrigued by what it offers and how it's able to do it.

Once installed, before your short attention span takes you to another app and leaves the app installed without use for years only to be suggested as an app to be uninstalled because you rarely use it, you decode from the app that it accumulates your spare change from your SMS of transactions, to a certain amount and then sends it over to a mutual fund house to invest on your behalf. Pretty clever, they just replace the bank account in our case with a mutual fund house.

"How do they make money in case they're not charging me anything for it?" You wonder, just the way you wonder every time you see an app that gives you FREE XYZ where XYZ would actually cost them money, in this case, the app development must have taken people and people don't work for free, plus the company needs some money to operate.

After a little deep-diving, you realize the mutual fund's expense ratio, I.E: the amount they charge to invest your money is higher on the spare change app than on their actual portfolio website, so they must be paying the app some commission for facilitating the transaction and bringing in more money for them without any extra marketing.

The whole concept of investing your spare change isn't new, it's an age-old thing that follows the save-invest-spend methodology, just taken into a digital form by a plethora of apps like Acorns, Stash, Jar, Spenny, Roundups, Deciml today and guess what, it's actually not a bad idea, let's come back to the question I asked at the start of the post: Would you care if your food bill was 220 instead of 216? Most of you will say no, and that's the whole point of these apps and the age-old technique of putting aside your spare change to savings, they encourage you to build a nest egg with a little financial discipline because a little extra money never hurts.

Personally, I just assume my spare change amounts today to be a considerable amount, multiply that 4-5 times and then put it manually (I don't want any app to have debit access to my bank account, being a software engineer who's worked on such things, I am very paranoid) into a mutual fund every week and have been doing that for quite some time. Given that it's not going to be a significant life-changing or life-damaging amount you put in, you wouldn't notice it for a long time along with a lot of your other investments, but these add up over time, remember the 1000 rupees I talked about depositing initially, they would have grown 10 fold over 15 years invested in a regular index fund. Damn, I didn't understand about these schemes back then, but these apps are here to abstract that and ensure you don't have to know all that to start.

I'm not recommending anything here, I'm just pointing out the beauty of spare change investing and how beautiful compound interest can be when you pair it with a regular habit of savings. And that's my two cents, quite literally, pun totally intended. 😉