Let’s talk about micro investing.
- Micro-investing is the process of investing small amounts to get your foot in the door or save your spare change in an account that with better growth potential than a traditional savings account – some brokers let you get started with as little as $1
- While micro-investing won’t make you rich, it can boost your retirement and savings strategy by rounding up your purchases and taking advantage of dollar-cost averaging
- Most traditional brokers don’t allow micro-investing thanks to their high investment minimums and trading fees; instead, investors often look toward lower-cost platforms such as Acorns, Stash, or Robinhood to get started
Too often, investing is considered a rich man’s game, something mysterious and alien that wealthy people do to increase their net worth while leaving the rest of us in the dust. But thanks to innovations in FinTech, brokerages, and modern philosophies on capital growth, anyone can get started in the stock market – even if you only have pennies to spare.
What is Micro Investing?
Micro-investing is a relatively new trend that involves buying fractional shares in companies or ETFs (exchange-traded funds) instead of shelling out potentially hundreds of dollars at a time. (A fractional share is just what it sounds like: a fraction, or piece, of a single share.)
Or, in layman’s terms, micro-investing is the process of saving and investing your spare change, rather than stuffing it into a piggy bank. By contributing manageable sums – sometimes as little as $1 – investors who are short on cash or unsure of their risk tolerance can dabble in the market without losing their life savings.
One of the primary purposes of micro-investing is to help retail investors get their foot in the door. But there’s another reason many have turned to this strategy: by putting a small portion of savings into the market, rather than a disappointingly low-APY savings account, investors have a chance to see their money grow faster.
How Does Micro Investing Work?
The particularities of micro-investing vary depending on the broker or strategy you choose. Since many large, traditional brokers don’t allow micro-investing practices, investors often turn to nontraditional platforms such as Acorns, Stash, or Robinhood to get started.
One popular micro-investing model is the round-up method employed by Acorns and Stash. The premise is simple: just link your bank account or use their offered debit cards. Then, every time you make a purchase – such as at your local coffee shop or the grocery store – the platform “rounds up” your purchase and deposits the change into your investment account. You also have the option of setting recurring investments to capitalize on your growth.
Essentially, the round-up model serves as a variation on the dollar-cost averaging strategy, where you invest a set dollar amount at regular intervals regardless of the current price. By circumventing the desire to “time the market,” investors often find it easier to stick to their plan, build healthy investment habits – and may even see a lower cost for their return in the long run.
Others nontraditional platforms, like Robinhood, require a more proactive approach. Investors on this free platform can select individual stocks and ETFs that they want to own. Then, they fund their account and purchase as little as $1 worth at a time. This method can provide more granular control over your investment strategy – at the added cost of doing additional research.
How Does Micro Investing Differ from Traditional Investing?
On its face, it may seem like the only difference between micro and traditional investing is the amount you contribute. And that’s largely true – until you factor in the broker.
You see, traditional brokers often charge a range of fees, including management, transaction, and expense ratio fees. Many also require investors to front a minimum balance to open an account (the “low” end usually starts at $500-$1,000), which proves prohibitive to hesitant or lower-income investors.
But micro-investing platforms aim to make investing accessible to the little guy – you. By removing excessive trading fees and minimum balance requirements, these brokers open up the world of compound returns to investors who otherwise may never have started.
Consider Micro Investing as Part of a Larger Plan
For newly initiated and lower-income individuals, micro-investing can be an excellent way to get invested with relatively low risk. But ultimately, your pocket change won’t be enough to fund large, long-term goals such as retiring or buying a house.
Instead, think of this strategy as a way to get your foot in the door, or even as a higher-interest savings account. Platforms that promote micro-investing can help individuals with little know-how invest responsibly, learn more about saving and the stock market, and start generating compound growth and long-term returns.
And while investing your pocket change won’t make you rich, those small amounts add up over time thanks to the effects of compound growth.
For instance, let’s say that you open an investment account with $100 of your birthday money and average $30 per month in round-up contributions. Over the span of 30 years at a modest 5% rate of return, your account would grow to over $25,500 – with just under $11,000 of that being your investment dollars.
However, micro-investing probably shouldn’t be your primary strategy if you don’t yet have a retirement account. Just take our quick example above – $25,500 is a decent lump sum of cash, but it’s not nearly enough to retire on. In fact, conservative estimates suggest you should have enough to spend 75-80% of your annual income after retirement, or around $1 million stashed away, by the time you hit 67.
Additionally, many micro-investment accounts don’t take advantage of the tax benefits offered to IRAs and 401(k)s. If you’re just stashing funds in a typical taxable account, that’s potentially thousands of dollars in savings you’re leaving on the table.
Getting Started in Micro-Investing
A variety of platforms offer micro- or fractional share investing opportunities for investors of all stripes. And while many of them provide flexibility and ease of use, it’s still important to know what you’re getting into.
For instance, just because a platform caters to micro-investors doesn’t mean that it’s fee-free. Brokers like Acorns and Stash both let you round up your purchases and invest the funds when you reach a sum of $5 – though you’ll pay $1 per month for the privilege for balances under $5,000, and a percentage of your funds above that.
Robinhood is best known for eliminating all trading fees (on its free version), which means that you can buy and sell as little as $1 worth of stocks, ETFs, and even cryptocurrencies with no commission or account maintenance costs. However, Robinhood offers no portfolio advice or research, which can leave new investors in the lurch.
Or you can opt for an app like Q.ai which lets you get started with as little as $100 with no monthly or trading fees and access to automated investment kits.
Many of these platforms also let you access premium services – for a premium fee, of course – to make the most of your micro-investing journey.
Is Micro Investing Worth It?
Micro-investing is more than a few pennies short of a get-rich-quick scheme. But if you incorporate this strategy as part of a larger investing plan, or even use it to kick off your investing habits one dollar at a time, you can start to break your paycheck-to-paycheck lifestyle and get ahead on your financial goals.
Even if you only set aside $100 per year, that’s $100 more than you had a year ago – and $100 that’s earning compound growth in your name.
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