Understanding Micro-Investing: A Beginner’s Guide

If you’re new to investing and are looking for easy, automatic ways to invest, you may be curious about micro-investing. In short, micro-investing is when you regularly make small, automatic transfers into an investment account. Most often, it’s done using a platform that connects to your bank account.

Micro-investing may seem like a painless way to build wealth, but it isn’t without its downsides. Before you decide to start, here’s what you need to know about how micro-investing works and the pros and cons to consider.

What Is Micro-Investing?

In simple terms, micro-investing means making many very small investments. The idea behind micro-investing is that, while saving small bits of money can feel painless at the moment, those efforts can snowball over time to create a sizable store of funds. Investing that money can help you get more out of your savings efforts by exposing your money to market growth.

Micro-investing can be done using apps that let you enroll in automatic transfers from your checking account to your brokerage account. One approach is to use apps that round up your purchases to the dollar and invest that amount of change.

Pros and Cons of Micro-Investing

It’s easy to get started with micro-investing, and you may not miss the change. On the other hand, micro-investing may not be the best fit for all investors. And, it may not be enough to reach your goals.

Pros of Micro-Investing

It’s easy and automatic. A big benefit of micro-investing is that it’s easy to start and doesn’t require much time to keep going. Once you get started with micro-investing, the only upkeep required should be to occasionally check on your accounts and make sure you’re still happy with how your portfolio is balanced.

You don’t need much money to start. If you pick a micro-investing platform that offers round-up investing, you shouldn’t have to worry about coming up with a large starting investment.

It could be an entry point to financial learning. Paying yourself every time you spend can be an entry point to developing a lifelong saving habit. And if you’re new to saving and investing, experimenting with micro-investing apps could be a fun way to learn more. Taking the time to understand the different asset classes and cost structures you come across through micro-investing platforms can help you branch out and keep learning.

Cons of Micro-Investing

Investing is riskier than saving. When you invest your money in the market, you always take on more risk of loss than you do if you keep your money safely stashed away in a savings account. On the other hand, you also take on more potential for growth. But what’s key is to avoid tying up money you may need soon in risky assets like stocks.

Micro-investing probably won’t be enough. On its own, investing your spare change won’t be enough to check important financial boxes and reach saving and investing goals. Be sure you’re also saving for emergencies and directing a portion of your paycheck toward retirement through retirement accounts such as 401(k)s and individual retirement accounts (IRAs).

Micro-investing apps have fees. Different micro-investing platforms charge different fees, so it’s important to review the terms for investors in the app. The costs you pay to invest through an app impact your overall return from the investment.

It could result in overdrafts. If your account balance is low, rounding up your purchases and transferring the difference into a brokerage account could result in overdrawing your account. Be sure micro-investing works with your budget and to avoid the inconvenience and potential for fees from overdrafts. And, to the same effect, be sure you aren’t spending more than you can afford to in an effort to stash more through micro-investments.

How to Start Micro-Investing

If you decide you’re ready to micro-invest, here are some steps you can take to start micro-investing now.

Consider Your Overall Investment Strategy

Take some time to write out your objectives for investing. For example, are you investing for long-term goals, like retirement? Or short-term goals, like buying a home in a few years? Investing platforms often allow you to sign up for automatic portfolio balancing based on the time horizon of your investing goals and your risk tolerance.

Understand Different Asset Classes

Micro-investing apps offer you the ability to invest in different assets, such as partial shares of stocks, mutual funds and exchange-traded funds (ETFs). It’s a good idea to research these assets to know what you want to invest in first. Then, you can research apps with high rankings that allow you to micro-invest in the assets you want.

Research Micro-Investing Apps

There’s a whole host of micro-investing platforms out there. Each app has its own unique features and limitations, so it’s crucial to dig in and learn about how these apps work, plus the costs associated with using the app. Some of the most popular micro-investing apps include Acorns, Robinhood and Stash. Each of these apps allows you to sync your bank account to round up your purchases to the dollar and invest the change.

Check if the Brokerage is Registered

Before you consider any investing app, be sure the brokerage you’re considering is registered with FINRA or the Securities and Exchange Commission (SEC). You can also use FINRA’s BrokerCheck search tool for information on a brokerage’s certifications, plus to check for any history of regulatory reports (which can give you an overview of any issues the brokerage has had in the past, such as bad customer service).

Sign Up

Once you select the app that’s best for you, getting started with micro-investing should be as easy as signing up for an account, filling out questionnaires on your investing goals, linking your bank account and enrolling in automatic round-up investments.

Is Micro-Investing Right for Me?

Micro-investing may be a useful hack to increase how much you’re investing, but it likely won’t be enough to hit goals like saving for a down payment on a house or reaching financial freedom in retirement. Think of micro-investing as a fun way to supplement those other tried-and-true methods for building wealth, including stashing a portion of each paycheck into a 401(k) or IRA.

Also, when you’re considering investing, be sure to take a look at your full financial picture to come up with a holistic plan for managing your money. If you have high-interest debt, such as credit card debt, it’s a good idea that you tackle paying that off before you start investing extra funds (beyond investing in retirement accounts, which many experts recommend you do at the same time as tackling debt). To get a bird’s eye view of your debts, check your credit report for free through Experian.

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