eclipse_images/Getty Images
Micro-investing involves saving small sums of money — such as spare change — and investing it consistently into the markets through ETFs or fractional shares of stock. Over the long-term, even small amounts of money can turn into tens of thousands of dollars if invested wisely.
Many people think of investing and the stock market as an activity for the wealthy. The old adage “It takes money to make money” reinforces this idea, but with micro-investing, you can start investing with just a few dollars a week.
How micro-investing works
In general, micro-investing allows you to invest your savings even when you don’t have much in savings to speak of. Skipping small purchases that have become a habit or rounding up to the nearest dollar when spending can help you get started. Personal finance apps like Acorns and Stash even offer debit cards that will automatically round up your purchases and invest the additional money in ETFs or fractional shares of stock.
Stocks of well-known companies such as Meta Platforms and Netflix have traded for more than $500 per share recently, making it difficult for some investors to afford just one share. Many companies split their stocks when the prices reach these levels to help make them more affordable. But until then, fractional shares allow you to get invested no matter how much a single share costs.
This approach of consistently investing savings into the stock market over time has proven to be profitable over the long-term. Investing a fixed amount each week or month is known as dollar-cost averaging, which takes the market-timing decision out of the equation. The consistent purchases mean that you’ll be buying more shares when prices are low and fewer shares when prices are high. With dollar-cost averaging, you’ll be buying over time and averaging your purchase prices.
Advantages of micro-investing
- Low minimum investments: Micro-investing allows you to get started with investing even when you don’t have much money to invest. With just a few dollars you can start making investments in ETFs and fractional shares of stock, which isn’t possible with more traditional investments such as mutual funds, which typically require a minimum investment of a few thousand dollars.
- Diversification: If you choose to invest in low-cost ETFs tied to broad market indexes such as the S&P 500, you’ll be able to build a portfolio that’s diversified for just a few dollars each month.
- Small amounts add up: Consistently making contributions of even small amounts of money to an investment account can add up over time, potentially turning your extra change each week into tens of thousands of dollars over decades.
- Automatic investing: Micro-investing helps to automate the investing process, which makes it easier for people to stick with their financial plan through good times and bad.
- Make saving a habit: It also helps create a habit of saving early on in your investing life, even if you’re only able to save a bit of extra cash.
Disadvantages of micro-investing
- Won’t lead you to retirement goals: While micro-investing can be a great way to get started investing, especially if you’re young, it isn’t likely going to result in the kind of savings that will lead to an easy retirement. You’ll also need to save more to achieve that goal through retirement plans offered by your employer and contributing to tax-advantaged accounts like traditional and Roth IRAs.
- Need to save more than spare change: Most experts recommend saving between 10 and 20 percent of your income for retirement planning and an emergency fund, so if you’re able to save only a few dollars each month, you might need to revisit your budget.
- Fees: Micro-investing platforms like Acorns and Stash do charge monthly fees to users. Fees vary across different plans, but the basic plan offered by Stash charges users $3 per month. This isn’t a lot, but if you’re only able to contribute $5 or $10 each month to your account, a $3 fee is going to eat up a hunk of your return.
Bottom line
Micro-investing can be a great way to get started with investing when you don’t have much in savings. Consistently contributing small amounts can add up over time when invested properly, but you’ll need to contribute substantially more to secure your future retirement.
If you’re looking to get started, check out Bankrate’s list of the best investment apps. Consider whether popular micro-investing platforms like Acorns and Stash are best for you or if a more general investment app such as Robinhood or the robo-advisor Betterment is a better fit.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
Read the full article here
