what is micro investing?

What is Micro Investing?

This is a guest post by Tom at Zero Effort Cash, a blog dedicated to educating others on how to make and save money.

 

Most of us had a piggy bank when we we’re kids, and whether you were saving up for something or just for a rainy day, it felt good saving your money in there.

Now you’re an adult and thinking about how you can stash some money away, but you don’t have enough saved up to start a typical investment account.

Luckily, you don’t have to wait until you’ve built up a savings, you can get started today with micro investing.

Welcome to the grown ups piggy bank. Micro Investing is an alternative way to invest in which your spare change could be making you money without you even realizing it.

The best part? Anyone can do it.

No matter how much investing experience you have, you could be getting great returns every year on your money.

What is micro investing and is it right for you? Lets find out.

What Is Micro Investing?

Micro Investing is a new method of investing that is accessible to anybody who has at least $5. Your money is invested through either an app or website, such as Robinhood or Acorns, into a large fund called an exchange traded fund (ETF).

The ETF will already have thousands of other people invested in it and is managed by professionals. The only thing you need to do is decide how much money you want to invest in the fund.

Another of the benefits of micro investing is that you don’t have to pay traditional investment fees. If you wanted to make a trade on the stock market, you would typically have to pay a fee for each transaction. With micro investing, you can invest your money for very little cost. Acorns, for example, charges a small monthly fee ($1 to $3). No trade fees means you can put away little amounts every week while only being charged the small monthly amount or a percentage on your earnings, no matter how many transactions you make.

Why Does It Work So Well?

We’ve already mentioned several of the benefits of micro investing, but the reason it works so well is because of economies of scale.

Economies of scale describes how the more you buy of something the cheaper the cost per unit. For example, McDonalds would get their meat cheaper than a standalone takeaway store because they are buying huge amounts of meat and it benefits the supplier to sell more units.

Translating that to our situation, micro investing companies can purchase shares at lower than market price because they’re buying a high quantity. Then when it’s time to sell them off, there’s no harm in doing it incrementally, to make sure a profit is turned.

On top of that, the people handling your money are professionals. Remember, the micro investing companies want to make money too and the best advertising they can do is through their results. Whether they make their money through monthly fees or by taking a cut of the gains, it’s always within their best interests to be doing everything they can to give you the best returns possible.

How is Your Money Invested?

The goal of micro investing is to allow you to invest small chunks of money in a relatively safe way that also provides decent returns.

The way micro investing companies achieve this balance of risk and reward is through diversity. The ETF will have shares in many different companies across different industries, as well as government bonds, corporate bonds, and cash.

While the goal is to provide a balance of risk and reward, there is some flexibility depending on the type of investor you are.

Most platforms offer you the choice of how aggressive you want your investment to be. This will ultimately determine where your money will go. For example, a highly aggressive portfolio will be heavily invested in an industry currently doing well, like the tech industry, and will give more of a focus to up and coming companies. The opportunity for short-term growth with an aggressive portfolio is high, however so is the risk.

If you want more of a long-term solution with less risk those options are available as well. A less aggressive portfolio will be invested more towards companies with a long and stable history and have more of a focus on government bonds. With this type of investment there’s a high degree of certainty that the investments will do well and not fail, while still creating growth higher than inflation.

Where Do You Find the Money to Invest?

We already know that there are no trade fees and you can have as many transactions or withdrawals as you like without penalty. But how does the money actually get into the investment?

The idea behind micro investing is you put away small amounts of money regularly so that you eventually end up with a nest egg. As it turns out, the best way to do that is through spending money.

It sounds crazy, believe me I was scratching my head too at first, but this method works remarkably well so that people are investing without even realizing it.

It works like this. You link your credit or debit card with the platform you’re a member of, then for every purchase you make, it will round up to the next dollar, and invest the change. For example, if I buy a coffee for $3.20, $0.80 will be invested at the same time.

I know it seems silly, but I’ve been using it for over a year and it honestly works. By taking incremental amounts out of my account every day, it doesn’t feel like I’m losing anything from it.

This feature isn’t available on all the micro investing platforms, so I’d recommend checking if this is available before signing up.

Some platforms also have their own debit cards you can use, which essentially does the same thing for you. Some of these micro investing debit cards come with an added bonus because a lot of the platforms are teaming up with businesses to give you cashback on your purchases. The cashback is then invested into your account.

The Downsides

While there are many positives to micro investing, there are also a few downsides that we’ll discuss here.

Fees

While micro investing companies don’t charge traditional transaction fees, they still do charge something in order to make money.

As mentioned earlier, most of the platforms will require a small monthly fee for your membership. However, these fees are typically less than $5 a month.

But keep in mind, some platforms that may seem completely free will typically take a slice of the profits from your investments to cover their costs. Micro investing companies that take a percentage of earnings include Robinhood, Public.com or Spaceship Voyager.

Delays

Another drawback to micro investing comes in the form of delays. When you wish to invest or withdraw, unfortunately, it just can’t happen instantly.

This is true with all investments, however, when you’re dealing with an ETF the wait time is often longer. That’s because they need to make incremental changes in order to fulfill your requests.

For example, they can’t give you cash for a withdrawal if all the money is invested, nor can they promise you shares if none have been bought.

Although not instantaneous, most platforms are able to process your transaction within 5 days for both investments and withdrawals. Just make sure you plan ahead if you want to cash out some of your investments.

Should You Be Micro Investing?

Absolutely!

Micro investing is an excellent way to begin investing that isn’t overwhelming or confusing.

While you won’t get rich overnight through micro investing, is is certainly a step in the right direction. Having your spare money sitting in a savings account is essentially useless, so why not make your money work for you?

Making incremental investments, even $5 a week, will turn into a nice nest egg before you know it.

With that being said, micro investing is a great option for those just getting their feet wet or who don’t have a lot of money to invest.

Investing doesn’t have to be scary, or for the rich. With micro investing anyone can do it.

So, what are you waiting for? Start micro investing today!

 

 

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