How Does Micro and Robo-Investing Turn Change into Savings?
Pretty much everybody wants to know how to make money. If they can easily make money, even better. You can turn your change into savings, then grow that savings quickly by using a combination of micro-saving and micro and robo-investing.
The Ultimate Guide to Micro and Robo-Investing
First, let’s discuss what each of those terms means - micro-saving, micro-investing, and robo-investing. Next, we’ll look at the financial management tools you’ll need to start making money. The rest is up to you.
Micro-Saving
Micro-saving services have existed for decades in developing countries where residents rarely own bank accounts. While they just became all the rage in the US, in developing countries, they have long provided a method for individuals to build savings based on tiny deposits – typically, change. The frequency of the deposits provides the key to building up large savings in a manner that results in no disruption to the saver’s budget. Services such as this include Acorns and Stash, both of which also include a micro-investment option you can use to grow the money.
How It Works
Here’s how the micro-savings component of micro and robo-Investing typically works in the US. The account owner links a credit or debit card to the micro-savings account. Many allow you to link more than one. You also enable what is called ‘round ups’. This refers to the service or app rounding each purchase made on the credit or debit card to the next full dollar amount. So, a purchase of $2.50 becomes $3 and the 50 cents goes into the savings account.
That tiny amount seems innocuous but quickly adds up. You are able to make deposits of your “loose change” automatically without actually paying in cash. This makes it easier to save because it requires no real sacrifice. You can generally open these micro and robo-investing accounts with no deposit or a very small one, such as $5. The account fees usually do not exist or are very low-cost.
For example, let’s say you make a monthly average of two purchases per day. The two round ups result in a savings of 90 cents per day. Using a monthly average of 30 days, in one month you save $27. In one year, you save $324. While that may not sound like a fortune, over time, it can become one if you do not touch it.
Assume you begin saving at age 25. You use the same micro-saving service until you reach the age of 65. Every year, you save $324 for 40 years. Without interest added, you have saved $12,960. You would have enough for a really nice retirement vacation.
If you do not have a savings account, but would like to make one and save up money, so that later on you can start investing, below you can find some of our favorite ones:
Now, let’s look at what happens though if you combine micro-savings with micro-investing.
Micro-Saving by Itself
It is pretty rare that an app only helps you micro-save, but they do exist. Most function as savings plus micro and robo-investing apps. Recently, Paypal integrated a feature for this to help its users set monetary goals and meet them. Another, Qapital, uses only the micro-saving aspect. You can partner it with other apps like Motif to invest.
About Qapital
You incur no cost to use Qapital and it requires no minimum deposit. It helps you save the money to start investing. It uses a round up feature like the one in Acorns. This makes saving money less painful. You can link a credit or debit card to your Qapital account. You can also link your PayPal account. You choose the round up amount, from $1 to $5.
You can also add money through a feature called Guilty Pleasures (GP). When you make a purchase that triggers the GP, you also trigger an instant transfer into your savings account. GP lets you help yourself avoid the purchase you want to avoid. You can set it to help you diet. If McDonald’s is your diet downfall, set a trigger that when you make a purchase at Mickey D’s, you also transfer $10 into your savings. You just paid yourself a fee for eating junk food.
About Paypal
Yes, Paypal now hits the micro-saving list. It recently introduced a goal-setting feature that lets you save on your own schedule. There are no round ups. You simply decide on a schedule and set up an automatic transfer. Paypal moves the money from your main account area to a separate account within your Paypal. Once it accumulates to the desired amount, you can move it into the main account area for spending.
Micro-Investing
Sure, $12,960 is a lot of money that you do not currently have, but if you only save in a manner that does not earn interest, you cheat yourself. Most micro-saving services also offer a micro-investing aspect. The round ups work similarly to the way 401(k) payroll deductions do. The micro and robo-investing option works like the 401(k) investment options. You can choose your desired level of investment risk beginning at no risk with a money market or choose a high-risk option that provides a potential of double-digit percentages of return on investment (ROI).
Each of these micro and robo-investing services starts investing your money once it reaches a certain level. Sometimes the service invests your money as soon as you begin saving, while others require you to save $5 first. Some offer only a few choices of investment funds while others may feature more than 20. You can choose whether you want to invest in stocks, bonds or real estate. Each of these micro and robo-Investing services charges a management fee which typically ranges from $1 a month or 0.25 percent of the total balance.
Micro-investing works great until you reach a certain level of savings and account size. At that point, when you reach between $5,000 to $10,000, you need to move your funds to a larger portfolio management service. You might not be ready for traditional portfolio management, so think about a robo-advisor.
What Services Offer Micro-investing?
Micro-saving and micro-investing typically appear as services in the same app. The most common of these micro-saving/micro and robo-investing apps include:
Acorn,
Stash,
Motif.
About Acorns
I mention Acorns since every article does, but of the micro and robo-investing apps I have tested, this one failed when it came to withdrawals. It lets you use round ups to build your savings account. You can invest using its handful of risk-level options from the day you begin the account. You link your bank account and credit or debit card. The hitch is that you can only choose from certain banks.
Acorns provides a pre-populated list of banks you can add. It offers an option for adding others that do not work. You can link your Paypal. Many of the users of this service have experienced the same problem with withdrawing money. You can only withdraw to the Paypal or bank account that you established the Acorns account using, so if you change banks or alter your Paypal, such as switching to a business account, you lose your money when you try to withdraw it. My withdrawal to test the service went to a defunct Paypal account and I was never able to add my bank account to this micro and robo-investing app. Ever.
About Stash
Stash goes one step further and uses a questionnaire similar to the robo-investor apps that helps you determine your risk tolerance and set investment goals. The app also provides you with investment recommendations of both individual stocks and exchange-traded funds (ETFs). It places the final decision with you. You fund Stash by linking your bank account and setting up a transfer.
About Motif
Use Motif after you have built your savings using Qapital or Paypal. You can create custom investment portfolios using any theme you want or a traditional mixed portfolio. It can include up to 30 ETFs or stocks. Each portfolio costs $9.95. You pay no maintenance fees and the account requires no minimum balance. You manage it yourself with no micro and robo-investing assistant.
Robo-advisors
I know how it sounds, but a robo-advisor in no way resembles Terminator. This refers to a computer robot that uses computer algorithms to determine the best possible investments for you. You get a largely hands-off way to invest. These automated investing services provide automatic rebalancing, tax optimization, and basically let you “set it and forget it,” as they say in the cooking commercials. While robo-accounts do not require much human interaction, you can make changes on your own and most of the services also offer human advisors so you can ask questions and learn the basics of investing.
They cost little. You can start with a free service like Sofi Automated Investing. Companies that do charge a fee, typically charge between 0.25 to 0.50 percent annually. An account balance of $10,000 might cost you about $25 a year to manage, typically charged monthly or quarterly. Usually, there are no transaction fees.
You will get about the same number of investment selections as with a micro-investing app. Most of these consist of exchange-traded funds (ETFs) and index funds. The funds contain stocks and other investment types designed to mirror an index’s behavior. This means you will also pay a small fee called an expense ratio in addition to the service’s management fee.
What Services Offer Robo-investing?
As discussed, robo-investing is something you move up to after accumulating enough funds to use a traditional service. These are not app-based. They are a service offered by a traditional investment firm. As mentioned, you will obtain a financial advisor to ask questions as well as the robo activity. These include:
Vanguard,
Charles Schwab,
Facet Wealth,
Personal Capital.
About Vanguard Personal Advisor Services
Vanguard calls its robo-investing service Personal Advisor Services. You do get access to a team of financial advisors, but you can also set it up to automatically manage everything for you. You work up to this one since you need to save up $50,000 as account minimum to use it. You will pay an annual fee of 0.30 percent.
About Charles Schwab Intelligent Portfolios Premium
Another major investment firm, Charles Schwab, offers its Intelligent Portfolios Premium package for one-time charge of $300 and a $30 monthly fee. You get a custom financial plan and a team of advisors to query when you need advice. You also get automated investing. You can set it and forget it. You need $25,000 to start your account.
About Facet Wealth
You pay an annual fee of $480 at Facet Wealth. That gets you a dedicated financial advisor, so you can ask questions when you need it. You get a custom financial plan and investment management.
About Personal Capital
Personal Capital requires a $100,000 deposit to start and charges a 0.89 percent fee annually. You will get a dedicated financial advisor for financial planning and investment management. Rather than using a digital robo-advisor alone, this lets the investor ask questions to a human employed by Personal Capital.
When It Is Time to Switch to a Robo-Advisor
Unless you are old hat at investing, you won’t start out with a robo-advisor. You will save up the amount it takes to switch to one. Most of these function as a stepping stone to using a traditional investment firm. When you meet all of the following criteria, you are ready to move from a micro-investing app to a robo-advisor.
What Does That Fancy Investing Term Mean?
Portfolio Rebalancing
A financial process in which the assets of a portfolio are sold or purchased to return to the portfolio to its original level of risk allocation. This typically occurs on a quarterly basis.
Retirement Calculator
An online spreadsheet or form that allows the individual to enter their savings, earnings and their spouse’s earnings to calculate their estimated retirement savings.
Tax-Loss Harvesting
A financial strategy used to reduce tax liability to offset capital gains taxes. Some investment assets get sold at a loss to reduce the tax liability resulting from selling securities.
Fintech
A term that refers to apps and software used by individuals and businesses to provide and/or automate financial services.
Online Financial Planning Service
A financial planning service provides qualified investment professionals to assist individuals and organizations set and meet long-term and short-term financial objectives. An online service does this via instant messaging, chat rooms and email.
You can expect the cost and minimum investment requirements of online financial advisors to increase with the level of human involvement and personalization. With a plethora of financial tech (or “fintech”) services coming online, it can be hard to tell exactly what each app or platform does. Two of the most popular new fintech categories are robo-advisors and micro-savings. They arrived on the scene at about the same time and seem to perform similar functions.
Tying It All Together
You can use micro-savings, micro-investing and robo-investing to build your savings and your investment portfolio. Using them in a step-wise fashion helps the individual who has never been a saver get started building a nice nest egg. These investment methods take the old saying, “A penny saved is a penny earned.” quite seriously.
You can actually turn your spare change into a massive savings and investing account. You could conceivably start with less than a dollar and in 40 years’ time, amass more than half a million dollars. That’s from saving 88 cents per day for 40 years at an interest rate of 12 percent, the average percent earned by the Standard & Poor`s 500.
Beginning with a micro-savings account, you can start out as a small saver and build your account. By using a service like Stash that also includes a micro-investing component, you can quickly increase the amount of money you have.
It may seem hard to imagine, but you can turn your loose change into a small fortune so long as you invest it. Earning interest on your savings proves key. You need to earn at the highest rate possible. This means using a medium-risk or high-risk investment option.
You can invest using a micro-investing option that uses ETFs. This lets you robo-invest based on a successful index. Once you amass a large enough account, you can switch to using a robo-investor from a traditional financial management company. While it could take you a few years to save to this point, you can do so painlessly. Once you switch to a robo-investor, you can earn even more quickly. Robo-investors typically offer more investment choices and they include a financial advisor so you can also request investment advice.
1. Type of Account
Most robo-advisors manage both individual retirement accounts and taxable accounts. Some also manage trusts, and a select few will help manage your 401(k).
2. Minimum Investment Requirements
Some robo-advisors require $10,000 or more; among most popular and recommended robo-advisors, a majority have account minimums of $500 or less.
3. Portfolio Recommendation
When signing up with a robo-advisor, your first interaction will almost always be a questionnaire, designed to assess your risk tolerance, goals and investing preferences. Robo-advisors generally offer between five and 10 portfolio choices, ranging from conservative to aggressive. The service’s algorithm will recommend a portfolio based on your answers to these questions, though you should be able to veto that recommendation if you’d prefer a different option.
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