Micro-investing involves saving small amounts of money – like pocket change – and investing consistently in the markets through ETFs or fractional shares. In the long run, even small amounts of money can turn into tens of thousands of dollars if invested wisely.
Many people view investing and the stock market as an activity for the wealthy. The old saying “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 if you don’t have a lot of savings. 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 let you automatically round up your purchases and invest the extra money in ETFs or fractional share shares.
Shares of well-known companies such as Amazon and Google parent Alphabet have traded for more than $2,000 per share in recent years, making it difficult for some investors to afford just one share. Many companies split their shares when prices reach this level to make them more affordable. But until then, you can invest with fractional shares no matter how much a single share costs.
This approach, which involves consistently investing savings in the stock market over time, has proven profitable in 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 you buy more shares when prices are low, and fewer shares when prices are high. With dollar cost averaging, you buy over time and average your purchase prices.
Benefits of micro-investments
- Low minimum investments: Micro investing allows you to get started investing even if you don’t have a lot of money to invest. With just a few dollars you can start investing in ETFs and fractional shares of stock, which is not 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 like the S&P 500, you can build a diversified portfolio for just a few dollars per month.
- Small amounts add up: Consistently depositing even small amounts of money into an investment account can add up over time, turning your spare change into tens of thousands of dollars every week over decades.
- Automatic investing: Micro-investing helps automate the investing process, making it easier for people to stick to their financial plan in both good and bad times.
- Make saving a habit: It also helps to get into the habit of saving early in your investing life, even if you can only save a little extra money.
Disadvantages of micro-investments
- Won’t Get You Towards Your Retirement Goals: While micro-investing can be a good way to get started investing, especially when you’re young, it likely won’t result in the kind of savings that will lead to an easy retirement. You’ll also need to save more to reach that goal through retirement plans offered by your employer and by contributing to tax-advantaged accounts such as traditional and Roth IRAs.
- You need to save more than change: Most experts recommend saving between 10 and 20 percent of your income for retirement planning and an emergency fund, so if you can only save a few dollars a month, you may need to rethink your budget.
- Costs: Micro-investing platforms like Acorns and Stash charge users monthly fees. Costs vary by plan, but Stash’s basic plan charges users $3 per month. This isn’t much, but if you can contribute just $5 or $10 to your account each month, $3 will eat up a big chunk of your returns.
In short
Micro investing can be a good way to start investing if you don’t have a lot of savings. If you consistently contribute small amounts, this can add up over time if you invest it correctly, but you will need to contribute significantly more to secure your future retirement.
To get started, check out Bankrate’s list of the best investing apps. Consider whether popular micro-investing platforms like Acorns and Stash are best for you or whether a more general investing app like Robinhood or the robo-advisor Betterment is a better fit for you.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
