Micro-investing is the method of saving small amounts of money, such as spare change, and consistently investing it in the markets through ETFs or fractional shares. Even a small amount can grow into tens of thousands of dollars if invested wisely.
Definition of Micro-Investing
Micro-investing is investing small sums of money in the stock market, often on autopilot through automatic deductions via an app or other technological tool.
Micro-investing enables people who otherwise could not participate in the stock market to build an investment portfolio. People who don’t have a lot of cash to buy stocks, mutual funds, or other securities may postpone investing due to high minimum investments. Many people associate investing and the stock market with wealth. The old saying, “It takes money to make money,” reaffirms this notion, but micro-investing allows you to begin investing with as little as a few dollars per week.
How Micro-investing Works
One option for micro-investing is to use an app that allows you to invest small amounts on a daily, weekly, or monthly basis based on what you can afford, a process known as dollar cost averaging. After connecting the app to your bank account, you tell the app how much and how frequently you want to invest. That amount is deducted from your bank account on the specified schedule and then invested for you.
The second strategy rounds up each day’s bank account transactions and invests the spare change whenever it reaches a fixed amount, like $5. The software checks your transaction history when you link your bank account to discover the money to invest. These round-ups are often placed into an exchange-traded fund portfolio that is already diversified and includes equities and bonds.
Advantages of Micro-investing
Minimum investments: Micro-investing allows you to begin investing even if you don’t have much money. You can begin investing in ETFs and fractional shares of stock with just a few dollars, which is not possible with more traditional investments such as mutual funds, which typically require a minimum investment of a few thousand dollars.
Diversification: By investing in low-cost ETFs linked to broad market indexes such as the S&P 500, you can build a diversified portfolio for as little as a few dollars per month.
Small amounts add up: Contributing even small amounts of money to an investment account consistently can add up over time, potentially turning your spare change each week into tens of thousands of dollars over decades.
Automated investing process: Micro-investing helps to make automated investments. It makes it easier for you to stick to your plans through good and bad times. Moreover, it helps to establish a habit of saving early in your investing career, even if you can only save a small amount of money.
Disadvantages of Micro-investing
Won’t get you to your retirement goals: While micro-investing is a great way to start investing, especially if you’re young, it’s unlikely to result in savings that will allow you to retire comfortably. You’ll also need to save more money through your employer’s retirement plans and by contributing to tax-advantaged accounts such as traditional and Roth IRAs.
You need more than spare change: Most experts recommend saving between 10 and 20% of your income for retirement planning and an emergency fund, so if you can only save a few dollars per month, you may need to reconsider your budget.
Monthly fees: Fees can reduce investment returns, so it’s critical to understand what you’ll pay before downloading a micro-investing app.
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