One common misconception about investing is that you need a big bankroll to get started. Some financial technology companies are challenging that notion by bringing the concept of micro investing to the masses. The idea is simple: Instead of investing large chunks of cash, you can do it in small increments. But can you really get rich by making micro investments?
Consider working with a financial advisor as you create or modify an investment plan.
Check out our investment calculator.
Calculating Long-Term Investment Returns
Micro investing involves investing small amounts of money at a time. Whether that pays off depends on three things: how much you’re investing, your investment returns and how much you’re paying in fees.
Let’s use Acorns as an example. The app automatically takes your debit card transactions and invests your spare change. If you spend $5.50 at your favorite coffee shop, the app rounds the transaction up to $6 and invests the remaining $0.50.
Before you invest in anything, it’s a good idea to take fees into account. With the Acorns app, there is no minimum balance to open an account. However, personal accounts charge $3 per month while family accounts charge $5 per month. Those amounts are small, but even small fees can take a significant bite out of your investment returns. For example, if you have a personal account with a $100 balance that $3 per month fee ($36 per year) translates into a very high 36% expense weighing on your investment results.
Try out our asset allocation calculator.
Making the Most of Micro Investments
If you’re interested in using micro investments to build a portfolio, there are a few things you’ll need to keep in mind. Micro investing can work well when you have time on your side. That’s why it can be an attractive option for millennials.
But it all depends on what you’re investing in. Both Acorns and another app called Stash let you invest in exchange-traded funds (ETFs). Stash features more than 93 ETF investments while Acorns offers five different portfolios with risk levels ranging from aggressive to conservative.
As you’re weighing your investment options, you’ll need to think about your risk tolerance and your overall asset allocation. You don’t want to choose investments that require you to take on more risk than you’re comfortable with. If you want to lower your investment risk, it also helps to build a diverse portfolio.
Finally, if you’re going to employ a micro investing strategy, it’s a good idea to explore different brokers. Besides Acorns and Stash, there are other apps that allow you to invest with $100 or less.
Bottom Line
Micro investing may not necessarily make you rich but it could make a difference in your overall bottom line. At the same time, it’s important to make the most of tax-advantaged accounts like your employer’s 401(k) or an IRA. Funding those kinds of accounts first is a good idea since they’ll give you a bigger tax benefit in the long run.
Tips on Investing
- A financial advisor can offer valuable insight and guidance on micro investing. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check out our no-cost investment calculator to get a quick estimate of how you investments will do over time.
Photo credit: ©iStock.com/LeManna, ©iStock.com/Ridofranz, ©iStock.com/feellife