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What Is Micro-Investing? – How It Works & What You Need to Know

Investing is one of the most critical steps you can take to reach your financial goals. While money in a savings account might earn a small amount of interest, investments offer much higher potential returns.

One of the biggest problems most people face when it comes to investing is getting started. Knowing how to invest and what to invest in can be difficult. For many people, it can be even harder to come up with the money to invest. Some brokerages or mutual funds require initial deposits of $1,000 or more.

Micro-investing means making very small investments over a long period of time. Micro-investing platforms make it easy to get started and get your money into the market.

What Is Micro-Investing?

Micro-investing is an investing strategy where you invest very small amounts of money as your budget allows for it. Instead of setting up regular purchases of stock, such as $500 every month, micro-investing revolves around adding a few dollars here and a handful of cents there. With micro-investing, you add small amounts of money to your portfolio as often as every day.

Many micro-investing strategies rely on an app or other program that connects with your debit card. A popular way to fund your investments is rounding up purchases you make. For example, if you spend $2.57 on your morning coffee, the app automatically rounds the purchase up to $3 and transfers $0.43 to your portfolio. Of course, the apps also let you make additional contributions when you have space in your budget.

Most micro-investing platforms don’t let you pick and choose individual stocks to invest in. Instead, they use mutual funds and ETFs to create a diversified portfolio of stocks and bonds. Depending on the service you use, you can select the funds you want to invest in or let the app choose funds based on your answers to questions regarding your risk tolerance.


Pros of Micro-Investing

Micro-investing has a number of benefits that make it popular for many investors.

1. It’s Easy to Get Started

One of the prime reasons micro-investing is growing in popularity is how easy it is to get started. If you want to open a traditional brokerage account, you need to choose a company to work with, fill out the required forms, and fund your account with whatever minimum amount that brokerage requires. If you want to invest in mutual funds, the minimum can often be $1,000 or more.

To start micro-investing, all you need to do is download an app and set up an account. You can get started on your phone in minutes. Once you link your card or bank account, you can make your first investment in a matter of a few days. Plus, you don’t have to worry about building up a balance before you can even start.

2. You Can Automate It

Another reason micro-investing is useful for many people is that it’s easy to automate. Almost every micro-investing platform lets you add to your investments without having to manually place orders.

One way many micro-investing apps automate your savings is by rounding up the purchases you make with your debit card. That means every time you make a purchase, you’re adding money to your portfolio. You can also set up automatic contributions, such as $10 every week.

3. You Can Save Small Amounts at a Time

One of the hardest parts about investing is building up enough to get started. If you decide to avoid mutual funds and their high minimum investments by buying shares in ETFs, you still need to have enough money to buy a full share in that ETF.

Micro-investing lets you invest as little as you want at a time, even if you only have a penny to add to your portfolio. If you can get into the habit of saving small amounts, it gets easier to build a habit of saving more when you have more money to set aside.


Cons of Micro-Investing

Although there are many noteworthy benefits to micro-investing, it’s important to be aware of its drawbacks.

1. You Won’t Make Huge Amounts of Money

Investing is a great way to build wealth over the long term, but it doesn’t give you money for free. The amount you invest in the market is a major factor in the returns you earn. If you choose a great investment and earn 15% in one year, you’ll only get $15 if you had $100 in the market. If you could have committed a larger amount, you’d have earned even more.

Because micro-investing relies on investing small sums, your returns can also be small. It’s not a bad way to get started, but if you want to see significant income from your portfolio, you’ll need to start making larger investments.

2. You May Incur Additional Fees

Everything costs money, and that includes investing. Most mutual funds and ETFs charge an expense ratio, which is a percentage of the money you’ve invested in the fund that you pay as a fee each year. For example, if you put $100 in a mutual fund with a 0.5% expense ratio, you pay $0.50 in fees over the course of the year to hold that fund.

Most micro-investing services use low-cost mutual funds and ETFs to build your portfolio, so you won’t have to worry about those fees too much. However, the micro-investing platforms need a way to earn revenue, so most of them charge additional fees. These fees can range from $1 a month to a percentage of your balance each year.

Fees have a direct impact on your portfolio’s long-term performance. Even a 0.25% annual fee can make a difference of thousands of dollars over the long term, so keeping fees low is essential to success.

3. Investment Options Are Limited

If you open a standard brokerage account, you can choose almost any stock, bond, ETF, or mutual fund you want to invest in. There are very few limits to your options. Some brokerages even let you invest in more complicated securities and derivatives.

Most micro-investing apps won’t let you choose individual stocks or bonds to invest in. Instead, they provide a list of mutual funds and ETFs you can buy. You can’t go outside their lists, so if you have a specific strategy you want to implement, it’ll be hard to do with a micro-investing service.


Is Micro-Investing Right for You?

If you’re considering micro-investing, you need to ask yourself a few questions to make sure it’s a good fit.

  • Do You Already Have an Emergency Fund? Investing is an important step on the path toward building wealth, but it isn’t the first step you should take. Everyone should have an emergency fund they can use to cover an unexpected bill without having to borrow money or sell investments. Make sure you have a month or two’s expenses saved before you start investing your money.
  • Is There a Micro-Investing Service That Matches Your Investment Strategy? For many people, micro-investing is their first encounter with investing, so you might not have an overall strategy yet. If you like the idea of index investing and using mutual funds, micro-investing should be fine for you. If you aspire to more complicated strategies that rely on picking stocks or using derivatives such as options, micro-investing might be too basic for you.
  • Can You Invest Enough to Make the Fees Worth Paying? Depending on the micro-investing service you use, the fees can range from a flat amount each month to a percentage of your invested assets. If you’re paying a flat monthly fee, you want to make sure you put enough into the account so you have the chance to earn more than you pay.
  • Do You Have a Plan for Moving Beyond Micro-Investing? Micro-investing is a great way to get started, but for the most part, it’s just a start. In the long term, you should have a plan to move to another investment service that offers more features, and hopefully, a better fee structure. That can mean anything from an account with a major brokerage company like Vanguard, where you invest in mutual funds and ETFs, or an account with a robo-advisor like  SoFi Invest for those who want to stay hands-off.

How to Get Started With Micro-Investing

If you’ve decided micro-investing the right choice for you, the next step is choosing a micro-investing service. There are a number of options out there, each with its own pros and cons.

Stash

Stash is a micro-investing service that offers multiple tiers of account, letting your account and its capabilities grow as your account balance grows.

The basic service costs $1 per month, and you can get started with as little as $5. You can invest your funds in ETFs, bonds, and individual stocks. Stash lets you buy fractional shares of businesses, meaning you don’t need to save up enough to purchase a whole share.

Stash lets you invest with automatic deposits, round-ups from your linked debit card, or Smart Stash. Smart Stash is an algorithm that tracks your bank account and typical spending, then makes automatic transfers based on what you can afford.

Stash is good for people who want the flexibility to invest in individual stocks and who plan to add funds to their accounts quickly. If you can’t invest a significant amount, the $1 per month fee gets expensive very quickly.

Acorns

Acorns was one of the first micro-investing services that hit the market. Its basic service costs $1 per month and focuses on investing your spare change by rounding up purchases you make with a linked debit card. The service automatically puts your money into a portfolio of ETFs based on your risk tolerance and investing goals.

Acorns also offers a service called Found Money. When you use your linked card to make a purchase from one of Acorn’s partners, Acorns automatically deposits a percentage of your purchase to your account. That makes it easier to grow your balance. Acorns partners with more than 350 businesses to offer Found Money, including Airbnb, Barnes and Noble, Expedia, and Lyft.

Betterment

Betterment isn’t a traditional micro-investing app. Instead, it’s a full-service robo-advisory company that happens to have a $0 minimum balance. That low threshold makes it easy for anyone to get started with the company.

Betterment charges a fee of 0.25% of your invested assets each year. In exchange, Betterment’s software manages your money, placing it in a diversified portfolio of ETFs that track the stock and bond markets. As your balance grows, you’ll unlock additional services like tax-loss harvesting and personalized advice from Betterment’s advisors. The company also has other services, such as a cash management account, that you can use if you like its service.

Betterment doesn’t link with your debit card or offer round-up investing, which means the onus is on you to add money to your account. You can make one-time transfers, or you can set up automatic deposits to fund your account.

Robinhood

Robinhood is a mobile-focused brokerage company with no account minimums and no transaction fees. Unlike other micro-investing services, Robinhood is all about self-directed investing in individual stocks and ETFs. You can also trade options if your account balance meets the minimum requirements.

Robinhood won’t let you make investments by rounding up your purchases, so you’ll need to be diligent about regular transfers if you want to build your savings over time.

Robinhood typically isn’t the best choice for beginning investors, but if you want to jump in at the deep end or buy a few shares in your favorite companies, it can be a good, cheap way to do so.


Final Word

Investing is an important part of saving toward goals like retirement, but it can be difficult to get started. Learning how to invest, what to invest in, and the best way to structure your portfolio is only one part of the process. For many people, saving enough cash to make meaningful contributions is the hardest part.

Micro-investing services can help you set aside small amounts of money and build your portfolio over time. As the saying goes, “a journey of a thousand miles begins with a single step.” Micro-investing can be that single step on the path toward building wealth.

Why does micro-investing appeal to you?

TJ Porter
TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he's not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.

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