Few investors understand what micro-investing is, especially in the context of when the strategy does and doesn’t make sense.
This in-depth guide to micro-investing will cover:
- What exactly micro-investing is.
- The dangers and risks associated with micro-investing.
- What to know before you get started.
In the simplest terms, micro-investing allows you to invest small amounts of money in the stock market, including in fractional shares of stocks and exchange-traded funds (ETFs).
In other words, it allows you to buy based on dollar amounts. For example, you can invest $5 in Amazon, even though that amount of money represents just a small portion of a single share in the company.
Where it gets confusing is that micro-investing can be done in a number of ways.
One of the most popular micro-investing apps is Acorns, which rounds up your purchases to the nearest quarter, half-dollar or dollar (based on your preferences), and then automatically invests that “spare change” in the market.
Then there’s Betterment, which is best known as a robo-advisor but which also allows you to start investing with just $1. As such, it fits our definition of micro-investing.
And these are just two of the many examples that exist.
What’s the same across all micro-investing platforms is that they allow you to get started with small amounts of money, and they’re often designed to help to begin investing consistently over time (even if that’s only pennies per day).
Brand new to investing? We highly recommend reading our guide on how to start investing for beginners, which shows you the step-by-step process for creating a sound investment strategy.
Micro-Investing vs. Micro-Saving
Although the terms micro-investing and micro-saving are often used interchangeably, they’re different concepts.
Micro-saving is the act of saving small amounts of money, but instead of buying long-term investments like stocks, you’re saving it in short-term investments like a high-yield savings account. Many apps allow for both micro-saving and micro-investing.
We’ll cover both strategies in this article. However, what’s important to know up-front is that micro-saving is the right approach when saving for short-term goals, like an emergency fund or vacation, while micro-investing is a good way to start building for long-term financial goals.
Why Micro-Investing “Sometimes” Works
While it’s easy to talk about the features and benefits of all the different micro-investing apps, the more important questions are:
- Can micro-investing help you reach your financial goals?
- Is micro-investing the best way to accomplish your financial goals?
Here are three reasons why micro-investing can work.
#1. It Helps You Take Advantage of Forced Savings
When people have to actively think about investing, they often don’t do it. From a psychological perspective, it’s difficult to consciously move money out of your checking account and set it aside — especially if you’re on a tight budget.
You have to think about how much to transfer, consider how it will affect your budget, and then actually press the button. And you have to do it over and over. That’s where a forced savings feature (which not every micro-investing app has) can be extremely beneficial.
The most well-known example of forced savings is a 401(k), through which you automatically invest a portion of your paycheck. After the account is set up, the agreed percentage gets pulled out of your pay and set aside for retirement.
With a 401(k) you’re often investing a decent percentage of your income. With micro-investing apps, you’re investing much less — for example, by setting up an automatic weekly transfer of $5 from your checking account to an investment account.
#2. It Helps You Gain Experience Investing
For those who have never invested, there’s often a psychological barrier to getting started. There are many complex decisions that have to be made. First-time investors also have to be comfortable setting aside money for long-term goals, prioritizing their future needs over their short-term wants. This is a lot easier said than done for someone who has lived most of their life paycheck to paycheck.
Micro-investment apps come without many of the mental hurdles often associated with investing, such as asset allocation or even deciding how much to save. After all, what sounds easier: saving $50 a month or automatically saving your spare change?
In many ways, micro-investing apps are like kicking off a weight loss goal with a walking habit. Long-term, you’ll probably have to leverage forms of exercise that are more intense than walking, but the walking habit gives you a place to begin.
So instead of spending months looking for the perfect plan, you’re making progress today.
#3. It Lets You Invest Small Sums In Individual Stocks
Some micro-investing apps offer the ability to trade stocks and ETFs for free. In addition, you can invest in fractional shares of companies.
This is helpful for beginner investors for a couple of reasons:
- They can learn to invest in stocks without fees.
- They can invest in some of their favorite companies with high share prices, such as Amazon and Tesla.
Keep in mind, investing in a few random individual stocks from companies you like isn’t a financial plan or a way to invest for retirement. It’s more of a fun way to test and learn the market, while (hopefully) making a few dollars in the process.
Pro tip: A rule of thumb we talk about a lot around here is investing no more than 10% of your investable assets in individual stocks. The rest should be put in index funds. For more on individual stock investing, see our guide on how to make money investing in stocks for beginners.
Disadvantages of Micro-Investing
While micro-investing apps can work well for some people, they’re not the right fit for everyone. Here are the main disadvantages of micro-investing.
#1. Micro Means Small
By its very definition, micro-investing is investing done on a small scale. It’s designed to help you get started with saving or investing when you’re not accustomed to the practice.
In other words, you’re investing tiny amounts of money — certainly not enough to prepare yourself for retirement.
The best long-term solution is to still take a large portion of your paycheck (preferably at least 15%) and invest it in an employer-sponsored 401(k) or an IRA.
That being said, you need to start with where you are today. If you don’t have a lot of money to invest, and you can only envision yourself investing spare change in your current financial situation, that’s how you should begin.
#2. It’s Often An Additional Cost
Some micro-investing platforms are “third parties,” meaning that they are not financial institutions themselves. Rather, they’re software companies that connect you to financial institutions while providing extra features, like an easy-to-navigate platform, spare change round-ups, and automated investments.
Most micro-investing platforms charge a set monthly or annual fee for the use of their products. This can make investing small amounts of money costly. A $3 per month fee on a $1,000 investment account comes out to about 4% annually — far higher than the 0.10% to 0.50% percent you might pay if you went directly to a financial institution.
#3. Fees For Micro-Investing Apps Are Constantly Changing
Even if you’re new to investing, you’ve likely heard of Vanguard. Founded in 1975, Vanguard is a leader in low-cost investing with over $7 trillion in assets under management.
An important characteristic of Vanguard is that it’s a mutual company. It’s not publicly traded or privately held by VC firms. As such, Vanguard’s goal isn’t to maximize return for shareholders or venture capitalists (at the cost of its customers); as a mutual company, Vanguard’s profits are invested back into the business to benefit customers.
Because of this, we can reasonably predict that Vanguard’s fees will likely be the same (or less) 10 years from now.
On the other hand, many micro-investing apps are still in the startup phase. While there are many very good investment brokerages that are not mutual companies and are able to balance serving both shareholders and customers in the startup phase, what we’ve seen so far from a lot of these startup brokerages is a significant amount of change.
For example, in the past, some startups have launched with free or ultra-low-cost services, only to change their terms of service and/or raise their fees a couple of years down the road. Acorns itself has gone through a lot of fee and plan changes over the years.
If your money is held in cash or an IRA, this isn’t a big deal because the funds are easy to move. However, there are situations — such as investing in a taxable account — where you could have to deal with capital gains taxes in order to switch providers to avoid the newly-assessed fees.
How to Get Started With Micro-Investing
If you’ve determined that micro-investing is a good strategy to help you achieve your financial goals, here’s how to get started.
#1. Choose Between Micro-Saving and Micro-Investing
You don’t want to just jump into micro-investing without a goal in mind. That’s why the first step is understanding what you’re end game is, and then choosing between micro-saving or micro-investing.
Micro-investing is a good way to kickstart a long-term investing habit. Eventually, you’ll need to invest more to reach your goals; but if you’ve struggled to invest in the past, micro-investing can help overcome that hurdle.
#2. Open an Account
There’s no one best micro-investing app, because it all depends on your individual goals.
Here’s an overview of our favorites:
|Best for round-ups:||Acorns||$3 to $5 per month|
|Best for micro-saving:||Qapital||$1 to $3 per month|
|Best for buying individual stocks:||Public||None|
|Best for long-term investors:||Betterment||$4 per month or 0.25%|
|Best for socially-responsible investing:||Betterment||$4 per month or 0.25%|
It costs $4 per month to invest with Betterment. If you make recurring deposits of at least $250, or have a balance of $20,000 or more in your Betterment accounts (including Cash Reserve, checking and crypto), you’ll pay a yearly fee of 0.25% on your investment balance instead.
#3. Select Your Asset Allocation
Choosing your asset allocation is the process of understanding what your financial goal is and then deciding upon the optimal mix of assets (e.g., stocks, bonds and cash) to help you achieve that goal.
In many cases, the micro-savings and micro-investing apps will have a risk tolerance and goal questionnaire, which can help you choose what to actually invest in. Having taken many of these quizzes, the advice they provide is sound and most investors will be best off using the recommended allocation.
Here’s a good rule of thumb: for short-term goals (less than three years, for example), you’ll want to keep most of your investments in cash. Yes, you may even lose some of your investment to inflation, but stock prices vary widely over the short term.
Here’s an all-too-common scenario: say you’re using micro-investing to save for a vacation you want to take in 18 months. After saving diligently for 16 months, your stock portfolio declines by 30%, which wouldn’t be unheard of. Now, just two months before the vacation, you’re left far off from your goal.
This is why it’s only when you start to invest for the longer term that you’ll want to invest in stocks.
Micro-investing apps are an ideal way to get certain people started with investing. The big benefit of micro-investing is that through good times and bad, you continually invest because you hardly notice that the money is gone.
See our list of the best micro-investing apps to learn more about the specific options available.
Some micro-investing apps’ revenue is tied to an investment institution. That’s the case for Betterment, which charges either $4 per month or an annual fee of .25% of the assets in your portfolio (if you deposit at least $250 each month or have $20,000 or more in your Betterment account).
Other apps serve as middlemen or third parties rather than as investing institutions themselves. In these cases, the product they offer is the technological innovation or convenience they provide — the artificial intelligence that pulls money from your bank account into investment or savings accounts, the round-up feature that helps you stash away your spare change, or the tech that helps you stick to your investment strategy.
These apps generally charge a monthly or annual fee.
Micro-Investing Apps Summary
Anything that gets people investing and saving more money is arguably a good thing. But there are both smart and not-so-smart ways to use micro-saving and micro-investing apps to help you save and invest more.
To summarize, micro-saving can help:
- People who are saving for a short-term goal, like a vacation in a year’s time, without much effort.
Micro-investing can help:
- Those who’ve struggled to overcome the hurdles to investing.
However, if you decide to get into micro-investing, make sure to:
- Understand the fees you’re paying. Calculate what you’re paying annually in fees to use a specific service and compare that to how much you plan to invest.
- Have a plan for increasing the amount of money you’re investing. Because eventually, there will come a time when you’ll need to stop micro-investing and start investing.