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Updated on Friday, November 30, 2018
If you’re new to the world of investing, it can be intimidating and kind of scary. The word “investing” may conjure up images of wealthy people in suits managing millions (or billions) of dollars. When you have just a few dollars (or less!), joining that world might seem impossible.Micro-investing can help level the playing field. Rather than needing to come up with a fortune, you can get started by investing with just your spare change. Sound too good to be true? Learn how micro-investing works and determine whether or not it’s a smart bet for you.
What is micro-investing?
Many banks and financial institutions offer a number of ways to invest. However, their accounts often have high minimums to get started. For example, if you want to open an IRA with Vanguard, you’ll need at least $1,000 in cash. A number of Vanguard mutual funds actually require a minimum initial investment of $3,000. For many, coming up with that kind of money in one lump sum isn’t realistic.
For people with a small income or who don’t have much money in savings, micro-investing is a gateway to the stock market. Micro-investing is when you invest tiny sums of money on a regular basis, rather than investing hundreds — or even thousands — of dollars at once.
Micro-investing apps typically work by investing your extra money, often in the form of spare change. Your app account is synced with your debit or credit cards. Every time you make a purchase, such as groceries or your morning coffee, the app rounds the purchase price up to the next full dollar and invests the difference.
For example, if you bought $36.15 worth of groceries, micro-investing apps would round your purchase up to $37 and invest the extra 85 cents for you. While the invested amounts are negligible — you may not even notice the difference — these small amounts can add up over time, helping you build a nest egg.
Why micro-investing is so popular
It’s easy to see the appeal of micro-investing. According to Karl Kaufman, founder and CEO of American Dream Investing, micro-investing is an easy way for young investors to get started.
“A lot of self-starting millennials know they need to get started investing somehow,” he said. “Micro-investing apps are very easy, the apps are right on your phone, and you can check on your account at any time.”
And for beginning investors who are overwhelmed by the stock market, micro-investing apps can make it simple and effective.
“[Most apps use] good exchange-traded funds (ETFs) that are set up by professionals,” says Kaufman. “There are different portfolios available based on risk assessments that are helpful for first-time investors.”
Micro-investing apps often allow you to buy a fractional (or partial) share, rather than needing to save enough to buy a whole share on your own. That allows you to start investing — and start earning — sooner. Plus, you can set it and forget it. Once you sign up for an account and sync it with your bank or credit cards, the app will automatically invest your money for you.
5 popular micro-investing apps
If you’re interested in getting started with micro-investing, there are several options available to you. Here are five of the most popular micro-investing apps and services.
With Acorns, the app links to your debit or credit card. Whenever you complete a transaction, the app rounds up the amount and deposits your change into a portfolio (of ETFs).
Depending on your risk tolerance, there are different portfolios available, from conservative to aggressive. If you don’t know which portfolio is right for you, Acorns will provide recommendations based on your age, target retirement date, and risk tolerance.
There are no minimum account balances or commission fees, and you can start investing with as little as $5. However, there is a monthly $1 fee and a management fee of 0.5%.
Robin Hood is an app that offers zero-commission stock trading. It has a simple and easy to use design that allows you to sync it with your bank account and make recurring deposits.
You can shop for stocks and sell shares directly through the app. Each day, the app will show you how much your investments have grown or decreased. When you’re ready to withdraw money from your investment account, you can easily transfer the funds to your bank.
Like Acorns, Stash allows you to start investing with just $5. You can set up regular transfers, and the app will even track your spending habits, helping you find extra money to invest.
Stash guides you through a series of questions about your financial goals and risk tolerance to determine what ETFs might make sense for you.
However, you should know that Stash charges a $1 monthly fee for regular investment accounts and $2 per month for retirement accounts with balances under $5,000.
If your account has over $5,000 on it, you’ll be charged a fee that is 0.25% of your monthly average balance.
Stockpile allows you to choose from more than 1,000 stocks and ETFs. There’s no minimum contributions or monthly fees, and each trade is just $0.99. Stockpile allows you to buy fractional shares, so you can get high-priced stocks like Amazon without having to save enough to buy a whole share. That perk allows you to own pieces of valuable stocks with only a small cost.
With Clink, the app sets aside a fixed percentage of your recreational expenses by tracking your credit card transactions. The extra money it identifies is invested in low-risk portfolios. You can also decide to contribute a certain amount of money each month to boost your investments.
If your balance is under $5,000, it costs $1 a month to use Clink. Balances over $5,000 cost 0.25% a month, so make sure you account for those fees before you sign up.
Is micro-investing worth it?
Micro-investing can be a good way for beginners to enter the stock market.
“It’s better than nothing,” said Kaufman. “If you’re going to leave cash in a savings account getting 0.01% interest or if you haven’t invested at all, micro-investing is a good place to start. It’s a good way to teach people and get them excited about investing money.”
However, Kaufman doesn’t think micro-investing should make up your long-term investing plans. Once you’re comfortable with the basics of investing and the ebbs and flows of the stock market, Kaufman recommends working with a brokerage account or other investment vehicle.
“Investing just your spare change in ETFs, you’re not going to get the returns you want,” he said. “Save your money in a more traditional fashion and then buy shares as appropriate.”
By switching to a brokerage account, you can get more control over your investments, and get higher returns. Plus, most micro-investing apps are individual investment accounts, rather than retirement plans. That means you miss out on the benefits that many tax-advantaged plans, like a 401(k), offer.
Investing for your future
If you’re overwhelmed by investing or crave convenience, micro-investing can be a smart way to learn about the process and start building up your investments. Over time, as you become more knowledgeable and comfortable with the stock market, you can graduate to the next step and open a separate investing account with a brokerage firm, many of which offer the same user-friendly features of micro-investing apps.
If you’re not sure how to get started with investing, check out these 10 ways to invest outside of your 401(k).
Any fee information mentioned is accurate as of the date of publishing. Be sure to visit the company’s website for up-to-date fee information.