Why is Micro Investing the New Spare Change in a Jar?
Last updated on 2021/5/8
Many people think that investing is only for the wealthy and feel like they don’t have enough money to invest. One of the main things when you are learning how to handle money is investing, but it can seem very overwhelming.
However, the truth is you don’t need a lot of money to begin investing and you should be starting as soon as you can. Investing can be a key money move that helps you achieve your financial goals. With micro investing, you can get started even if you only have a few dollars.
What Is Micro Investing?
As its name implies, micro investing is using small increments and using the money to buy fractions of shares. It’s gaining popularity in recent times with the invention of micro-investing apps that allow you to begin investing with just as little as $5. The way the platform will work will vary. Some just require a deposit from you, while others link to your bank account so you are able to invest with just the change of your everyday purchases.
Micro investing is not about purchasing penny stocks, since this is a practice that will likely make you lose money instead of make money. Instead, you do get a diversified portfolio. Micro investing can be done by anyone but it will usually benefit younger investors the most, especially millennials.
How Is Micro Investing Different Than Regular Investing?
Micro investing isn’t all that different from regular investing. It still gives you the benefit of allowing you to maximize your money’s growth potential and allow your savings to beat inflation. With this type of investing, investing becomes more accessible to everyone. Traditional platforms for investing usually come with high minimum investment requirements, along with some hefty fees, which can be a barrier for those who want to start to invest.
For example, for many mutual funds, you need at least $1,000 for the first investment. Many brokerage firms begin charging fees of $5 for a transaction, which doesn’t usually make a small investment worthwhile. Usually, a single stock purchase won’t allow you to have a well-diversified portfolio.
Should You Wait to Invest Bigger Funds?
While it is possible to wait so you can invest with bigger sums, every second you are waiting means more time that your money is not growing on the market. You can see this with a simple real world example. If you save $10 a week and after two years you have $1,040 you feel comfortable investing then your investment can grow to $58,769, assuming a 7% return and adding an additional $10 a week for the next 30 years.
This may not seem bad until you look at what micro investing can do for you. If you instead took that $10 a week and started investing then you could have $59,423 over the same period of time with the same return. This is extra money that didn’t require any additional money or time from you just because you started investing earlier with micro investing.
While you may think this is not a lot of money, especially for major long-term goals like retiring, it still adds up to a decent amount. This extra money could still be for a down payment on a car or a new home. It could still just mean you have more money than you would have without a lot of extra effort.
Benefits of Micro Investing
There are several benefits of micro-investing.
Low Entry Point = High Motivation for Investing
One of the main benefits is to nudge you to start investing in the market, even if you lack a lump sum in order to reach your big financial goals. With an entry point just as low as $5, you can overcome the idea that you can’t afford to invest and begin as soon as possible. Once you have started then you get firsthand experience and it shows you how simple investing can be. This encourages you more and more and then, before you even realize it, you have worked up to saving and investing.
No Stock Market-Related Stress
A routine investing strategy can also help you overcome the anxiety you can have when it comes to market volatility. Historically, stocks do head up significantly over the long term but it can be normal for them to make downward movements along the way. If you keep your investments steady and small, you can help ease the shock for the natural falls. It also allows you to minimize the risk that you will run out of fear and lock in losses. If you are able to make automatic contributions then you may just skip paying attention to daily market happenings and then just check in a few times a year.
No Minimum Investments
This makes it a big draw. Even if you don’t have money, as an investor you would just need to switch to a small or medium coffee from a large one if you want to start using micro investing apps. In addition to the low amounts to begin, there are also low asset management fees. Many apps just charge a flat fee for lower investment apps. As you start to invest more then you will have to pay more.
Even though there are affordable investment management fees and a lower entry barrier, the apps don’t compromise on investment options. You are able to invest in purchase stocks or ETFs with these applications.
Automatic Rebalance Of Portfolios
With micro-investing, you also have the ability to automatically rebalance portfolios. Traditional financial planning requires an understanding of how the different investments work, the risk profile, lock period, and more. For regular investing, allotting the right portions to different assets can be tricky and it’s even harder when you are trying to rebalance your portfolios in order to meet your long-term goals. With micro-investing apps, there is an easier solution. Instead of you having to pick individual investments, you just need to pick a risk level, such as conservative, moderate, or aggressive, and then the apps will adjust your portfolio to match your financial goals.
Simplicity of the Apps
Another benefit is the simple to use interface of many of the apps. You can track your investments right on your smartphone and see daily contributions, growth patterns, and net investment amounts. Many of the apps also feature knowledge centers to help you learn more about the different parts of investing.
What Are the Limitations of Micro Investing?
Even though micro investing has a lot of benefits, there are still some limitations.
Reaching Long-Term Goals Is Harder
It’s possible that you may fall short on longer term investing goals. While the apps can play an important role in savings and investing habits, you can be in danger of not getting enough money throughout the year or even longer. The sense of saving money you are getting from micro investing can also lead to procrastinating in making some other investments.
Limited Account Options
Even though there are a lot of options, there are still limited account choices. For example, in these apps there are no options to open Roth IRA, retirement accounts, or other kinds of savings accounts.
However, if you do want to open a savings account, considering all the benefits that it offers, but you still aren’t sure which one, here are some of our favorite options that you can choose from:
Some micro investing apps do use automatic portfolio allocations that are best designed for your investor risk level. This means there is limited diversification and it takes away your discretion. It will just invest in funds that it considers appropriate for the investor. Some micro investing apps also limit investments to ETFs only. These are great for the long term but then you don’t necessarily have the option to choose a specific asset or stock.
How Micro Investing Platforms Work
Micro investing allows you to have investing sums as low as a few pennies possible since you are investing in fractional shares. The fractional shares are in exchanged traded funds and your investment is diversified across many different bonds or stocks to help protect you against market swings. By making these small investments in a diverse set of bonds and stocks, you get a portfolio created with just a tiny amount of money.
The platforms can be considered the digital equivalent of taking the spare change you get from your purchases and saving it in a jar until it’s full before taking it to the bank. Each time you make a purchase, the platform will round up the purchase total to the nearest dollar and then deposit the difference into your investment account. You aren’t likely to notice that extra change missing from your account but over time, there will be a growing sum for your brokerage account.
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For those who do save regularly then micro investing platform can actually help improve the situation. If you save money in a savings account with a low interest rate, you wouldn’t get as much as if you were to invest, and even savings accounts with interest rates can pay lower rate than inflation.
Automatic investments are a benefit of using the platforms but not a required feature. Some investing platforms do have this feature in order to make it even easier to get involved. There is also educational information so that you can learn more about the investments you are making and how to choose an ETF based on risk tolerance, interest, beliefs, and goals.
Using Micro-Investing as Part of Your Overall Financial Strategy
Micro-investing is not meant as a long-term solution but it can be used as part of your overall financial strategy.
Set Up an Emergency Fund
You want to start with a firm foundation. Before you use your extra dollars for micro-investing, make sure that you have a paying off debt and have an emergency fund. You likely aren’t ready to invest until you can get these steps down.
Paying off debt will free up your biggest wealth-building tool, which is your income. Having a healthy emergency fund will allow you to take care of surprise expenses, such as a broken water heater or car repair, without having to go into more debt or dip into investments.
Make an Investing Plan
At first, you need a simple investing plan that is going to work. This is where you can begin micro investing but you also want to consider your workplace investing options.
For example, if you are going to get a company match on your 401k then you absolutely want to take advantage of it and invest up to the match. If you don’t have workplace retirement options then a Roth 401k option or traditional 401k option may be your best bet.
A Roth IRA can be a good addition to a 401k because there are more mutual fund options and then you don’t have to worry about paying taxes on the money you are withdrawing to fund your retirement.
Don’t Forget a Long-Term Strategy!
Remember that you still need a long-term strategy. The earlier you can get started, the better since there is more time for your money to work and have compound growth. If you don’t have enough money to start with your investing now for a long term strategy then this is where micro investing can be used.
Be sure you are involved in your investment plan, even if you are doing micro investing. Micro investing may be fine at first but if you want to make it to retirement then you also need a plan. It can be normal if you are feeling overwhelmed with planning and saving for the future. This is why micro investing is a good start and then you can move on to partnering with a professional for some extra guidance.
Different Apps to Use for Micro-Investing
When it comes to micro investing and how to make money, there are different options you can use. Any micro investing platform will need to register with the Securities and Exchange Commission and as a broker dealer. There are a lot of similarities between the apps but they some subtle differences so with some research, you are sure to find one that works for your financial and investment strategy.
Acorns
With this app, you can link your debit or credit card and it rounds up your purchase to the nearest dollar and then uses the change to invest. It chooses an ETF based on savings and risk tolerance. You can also schedule a transfer in order to increase your portfolio quicker. There is a monthly management fee of only $1, $3, or $5 but if your balance is larger than $5,000 then it will switch to a percentage amount. College students can qualify for four years of management for free.
Stash
Stash is similar to Acorns when it comes to the account minimum but there are ETFs thematically so you as the user can pick your investments that line up with your environmental or social values. The first month is free and then you pay the same as Acorns. You can choose between Stash Beginner ($1/month), Stash Growth ($3/month), and Stash+ ($9/month).
Robinhood
If you want to dive in to purchase some individual stocks or then pick from all available ETFs, this will be the cheapest platform you can buy. You won’t pay any transaction fees if you are buying shares in publically traded companies. The disadvantage is that you will need to have enough to purchase a single share of stock, which can be a challenge, especially if you want some high dollar stocks such as Amazon or Google. The investing platform doesn’t have a lot of extra features and other platforms do offer more investing tools and research.
Betterment
Betterment is a robo-advisor but doesn’t have a minimum deposit requirement. When you just take a quick glance, this app is similar to a lot of the ones that will allow you to build an ETF portfolio. However, there are some differences. It also supports both tax-favored or table retirement savings accounts so you are able to open and fund your IRA with this app. There are also a lot of tools and advice and the annual fee of .25% includes access to in-app messaging with a financial advisor, which can come in handy as you start to want to expand your investments.
When it comes to using apps, you want to make sure that every penny is counting. Saving early and consistently can make it possible to save without a lot of work and trying that hard but you do need to be aware of any shortcomings that come along with smaller portfolios. Investing and account fees can have a large impact on accounts that don’t have a lot of money.
If you are just paying $1 a month then it may seem cheap until you put it up against the amount as a percentage of your assets. If you only have a $200 balance then you paying that $1 a month or $12 a year means you are paying about 6% of your money. When your smaller amounts are more substantial within the $1,000 range then you may want to start using a more robust investment service in order to have different investment account options and lower management fees.
Finally,
Micro-investing has a lot of benefits, especially to get you started on your investment journey. While it may not be a long-term strategy and there are some limitations, there are different platforms that make it easy so you can learn how to make money without even really trying. Make micro investing part of your overall financial strategy so you can have both a short-term and long-term financial plan for your future.