Micro-Investing Defined & How to Get Started

Myth: You need lots of money to start investing.

Micro-investing apps are giving everyday people access to the stock market for as little as $5.

Micro-investing allows you to start small — really small. Apps like Acorns and Stash work by transferring small sums of money from your bank account to a diversified investment portfolio.

Research shows that these tiny money moves can really add up.

According to a recent consumer study by Cornerstone Advisors, saving and investing apps like Acorns, Digit, and Qapital helped consumers save an average of $600 a year above their standard level of savings — and one in five users saved more than $1,000.

Is a micro-investing app right for you? The answer depends on your financial goals and income.

What is Micro-Investing?

Micro-investing allows you to automatically allocate small amounts of money into a portfolio of stocks and bonds — even if you know nothing about investing.

This fintech term applies to a handful of mobile-based platforms that make investing easy and painless.

Here are a few common features these apps share:

• The ability to set up recurring transfers from your bank account to your investment account.
• The option to round up purchases and sweep the spare change into your investment account.
• Robo-advisors that select a portfolio of diversified investments tailored to your goals and risk tolerance.
• Fractional shares of stocks, which allows you to start investing with $5 or less.
• A flat monthly fee for services, or a fee equal to a percentage of your account balance.
• Educational resources that teach you about personal finance.

Micro-investing can be a good option if you’re tight on extra cash or you’re new to investing and not sure where to start.

You can customize how much money you invest and how often — putting you in the driver’s seat. These apps also remove some of the barriers of traditional brokerage accounts, such as account minimums and trading fees.

“Micro-investing apps lower the cost of entry, which opens up investment opportunities to a wider audience,” said Summer Red, a financial advisor and education manager at the Association for Financial Counseling & Planning Education. “Investing is complex, and the best way to learn about it is to actually invest.”

You can use a micro-investing app like training wheels to support you as you begin your investing journey.

Or you can use it as a second emergency fund or as an auxiliary account to save for a mid-term goal, like buying a home.

Still, most financial advisors agree these apps should be just one small (some might even say micro) piece of your long-term financial picture. You’re going to need to do more than round-up your Uber Eats orders to save enough money for retirement.

How Micro-Investing Platforms Work

Here’s what to expect once you dive in.

Where Is My Money Invested?

After you download a micro-investing app and create an account, you’ll need to link a debit card or bank account.

You’ll also be prompted to complete a survey designed to determine your risk tolerance and financial goals.

From there, many apps select a pre-made portfolio where your money gets invested. You can usually choose a different portfolio if you disagree with the algorithm but you may not be able to select individual stocks or other assets.

In this way, micro-investing apps also work like robo-advisors, or online brokers that use advanced software to invest money and manage your investments.

Portfolios are most often comprised of exchange-traded funds, or ETFs. ETFs bundle many different investments into one fund, giving you exposure to hundreds of stocks (and/or bonds) with a single purchase.

Exchange traded funds provide instant diversification, and are considered less risky than investing in individual stocks.

From there, you can customize how much money you want to invest and how often.

How Do Round-Ups Work?

Several micro-investing apps work by rounding your purchases to the nearest dollar before tucking the difference into your investment account.

So, if you spend $10.35 on Amazon, you’ll actually get charged $11 and the app will set aside 65 cents.

Once your round-ups total a certain amount (usually $5 or more), the app transfers the spare change to your personal investment account.

Round-ups are an attractive option for new investors because they’re simple, easy and automatic.

According to Acorns, users invest about $30 a month, or $360 a year, with the app’s Round-Up feature. If you’re new to investing, $360 in the stock market is a step in the right direction. .

Recurring Transfers, Retirement Accounts and Other Features

Every app also lets you set up recurring transfers from your checking or savings account on a daily, weekly or monthly basis. You can enable this feature in addition to spare change round-ups so your money grows even faster.

For example, you can set your account to automatically withdraw $20 a week from your bank.

Investing a fixed amount of money each week or month plays into a key investing strategy known as dollar cost averaging.

By making regular, fixed-amount investments, you average out the roller coaster highs and lows of the stock market. You end up buying more when the price is low and less when the price is high.

Some investment apps also give users the option to put money into sustainable portfolios that align with your social or environmental views. You can make some green while supporting green companies, a nice plus for many Millennial and Gen Z investors.

Finally, these apps offer other services, such as access to a financial advisor or a tax-advantaged retirement account — but you’ll pay more for these features.

Most apps automatically invest you in a taxable brokerage account, but for a couple bucks more a month, you can opt for a Roth or traditional individual retirement account (IRA).

Retirement accounts come with special perks from the federal government, like a deduction on your yearly tax bill. But it’s important to learn about IRS early withdrawal penalties and other restrictions before opening an IRA.

Pros and Cons of Micro-Investing

If you’re not investing already, the first step is always the hardest. Micro-investing apps make the process less intimidating and stressful for beginners.

“They’ve changed the format and experience so it’s much easier to get started than it was with old-fashioned investment companies,” said Justin Chidester, a certified financial planner and owner of the fee-only firm Wealth Mode Financial Planning in Logan, Utah.

Realistically, these apps can help you set aside a few hundred dollars a year — no small feat if you’ve been living paycheck to paycheck.

But over time, Chidester and other experts say you should adopt a more robust investing strategy by stepping up your 401(k) contributions at work and speaking with a financial advisor about retirement planning.

Pros of Micro-Investing

Easy to Use: You do everything else on your phone — why not start investing? Micro-investing apps feature easy-to-use interfaces that make it super simple to create and manage your account.

Safe: Apps like Acorns use multiple security features, including encryption, secure servers and alerts about unusual activity to keep your money safe. Stick with well-known apps from companies registered with the Financial Industry Regulatory Authority (FINRA) or the U.S. Securities and Exchange Commission.

Diversification: Buying individual stocks as a newbie can be risky. Diversification and asset allocation are the easiest ways to mitigate risk, and micro-investors do a great job at this by spreading your money across broad-based ETFs.

Low Minimum Deposits: ETFs can cost hundreds of dollars per share. But these apps get you started with an initial investment of $5 or less. How? By purchasing fractional shares of ETFs, which isn’t possible at many traditional brokerage firms. This gets you invested quickly — even if you can’t afford to purchase an entire share at first.

Educational Tools: These apps provide lots of educational resources and financial advice for beginning investors, from definitions of financial lingo to daily market commentary. They hammer home the importance of investing for the long haul. If you’re trying to boost your financial literacy know-how, definitely read up and take advantage of these free resources.

Micro-investing apps are a great place to start, but most financial experts agree that you shouldn’t stop there.

“Something that invests a few dollars a month for you isn’t going to make you rich,” Chidester told The Penny Hoarder. “You’re never going to be able to save for retirement unless you intentionally invest a higher and consistent amount of money.”

Cons of Micro-Investing Apps

Miss Out on Retirement Plan Tax Perks — Or Pay More: Since most micro-investing apps offer taxable investment accounts, you won’t get the sweet tax perks of retirement savings plans like 401(k)s. While apps like Acorns and Stash offer the choice to open an IRA, you’ll pay more, usually $3 a month. Paying $36 a year to access an IRA is a pretty lousy deal. More robust robo-advisors like Betterment offer IRA access for a yearly charge of 0.25%, or just $2.50 per every $1,000 invested.

Fees: Fees for these apps vary widely. Some charge a flat amount for basic service, like $1 a month, while others charge a small percentage of your portfolio balance. Some may feature free trades until your account reaches a certain amount, such as $5,000. Most will offer additional services, like access to a checking account, for a higher monthly fee of $3 or $5. This may not seem like much, but it adds up. For example, a monthly $1 charge equals 12 percent in fees each year if you only have $100 in your account.

Limited Investment Choices: As you learn more about investing, you might want to DIY your portfolio or add specific assets. Unfortunately, micro-apps don’t provide much wiggle room as your investment strategy evolves. You can’t invest in cryptocurrency, and you may not be able to pick individual stocks. Many apps also lack access to professional investment advisory services.

Not Enough to Reach Retirement Goals: Micro-investing often means micro results. Meanwhile, retirement is really expensive: According to Fidelity Investments, you should aim to retire with about 10 times your current income banked. So, if you make $50,000 a year, you’ll need at least $500,000 by the time you stop working. You can round up your Starbucks purchases for 30 years — and still fall miserably short of your retirement nest egg goal.

How to Start Micro-Investing

Thanks to technology, entering the investing world is as easy as doing some research and downloading an app.

4 Popular Micro-Investing Apps

Acorns

Acorns lets you invest your spare change through a linked debit card and/or make recurring deposits to your account. It works as a robo-advisor by creating a portfolio tailored to your goals and risk tolerance. Accounts cost $1 to $5 a month.

Stash

Stash offers many of the same perks as Acorns, including round-ups, recurring deposits and the option to open an IRA. However, Stash also allows users to tweak their portfolios, with more than 3,000 ETFs and individual stocks available. Monthly fees range from $1 to $9.

Rize

Rize is a combination savings and investing app that lets you earn an interest rate that’s about 1.43% higher than most major banks. You can create and track different goals and set up automatic transfers to your account. It’s free to use the savings feature but the automated investment portfolio costs $2 a month.

Public 

Public lets you buy fractional shares of companies, and offers “themes” of stocks, such as health care and tech companies. It also incorporates a social media-like feed, letting users keep track of other users’ stock portfolios. Public is a free app with no membership or commission fees.

Frequently Asked Questions

What is Micro-Investing?

Micro-investing works by saving small amounts of money and consistently investing it into a portfolio of ETFs or fractional shares of individual stocks.

Is Micro-Investing a Good Idea?

It depends. Micro-investing can be a fit for new investors who want an easy, relatively hands-off approach to growing their cash. It’s not a great option for more experienced investors seeking customization or crafting a long-term retirement strategy.

What is a Micro-Investing Platform?

Micro-investing platforms are apps that let users contribute small sums of money — as little as a few dollars — to a brokerage account. By connecting a debit card, a micro-investing platform can round up your purchases or make automatic transfers on your behalf.

Rachel Christian is a senior writer for The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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