When you first graduate from college, you might not feel comfortable dumping lots of money into unknown stocks or ETFs. Even if you're not a new college graduate, you may want to consider a different approach when you don't have a lot of extra cash lying around. Why not try micro investing?
Micro investing takes the daunting feeling away from investing, and therein lies its true magic. Let's take a look at what it can do for you and how it can find a place in your portfolio.
What is Micro Investing?
Put simply, when you micro invest, you invest using small amounts of money. In other words, you pony up money to buy fractional shares of stocks or ETFs instead of full shares.
As of today, a single share of Amazon NASDAQ: AMZN costs $3,383.87. You may know you can't even afford one share of Amazon, much less two shares!
Enter micro investing apps. You can buy Amazon for a much smaller amount — even really small amounts, like $10. You can also buy multiple securities to aim for diversification (always a great thing!) and lower your risk in the long run.
Why Micro Invest?
Small amounts, compounded over time, can make an impact. Compound interest makes your money grow faster. You can calculate interest on accumulated interest as well as on your original principal. Compounding can create a snowball effect: The original investments plus the income earned from those investments both grow.
Let's say you save $1 per day. Your $1 per day adds up to $365 a year. Instead of spending that $365, you could stick it into a micro investing app at 5% interest per year. Your small amount would grow to almost $466 by the end of five years. At the end of 30 years, the amount you originally invested would grow to $1,578.
If you micro invested even more, your investment could grow even faster.
How Does Micro Investing Work?
Have you ever heard of the app, Acorns, which invests small change for you? That's micro investing. A micro investing app rounds up your purchases to the dollar or makes automatic transfers for you. Think of micro investing as "spare change investing" — many apps round up your transactions from a linked bank account and invest the difference.
In other words, let's say you go to Chipotle and order a mega burrito with those delicious limey chips. You spend $10.34. The app would take your remaining $0.66 and invest it.
You don't have to invest a lot to get started, either. Stash allows you to get started with just a penny.
Interested in micro investing for your favorite college grad or yourself? Take a look at the following steps to get started with micro investing.
Step 1: Choose a micro investing app.
What's often the hardest part? Choosing the right investment app. Often the most important question comes down to this: Do you want to get your hands directly on your investments or do you want an app to pilot and direct your money for you?
Quick overview: Acorns and Betterment put a portfolio together for you based on your preferences. Stash and Robinhood allow you to choose the direction you want your money to take by allowing you to choose your own investments.
You may want to choose an app that lets you steer the ship yourself, particularly if you want to take a DIY approach to your investments at some point.
Step 2: Input your information.
Once you've chosen a micro investing app, it's time to let the robo-advisor do its job. You input information to your micro investing app that helps it "understand" how to put together the best portfolio for you. You input your age, income, goals and risk tolerance and it'll allocate your investment dollars accordingly.
Your money will go into a portfolio of exchange-traded funds (ETFs) based on the level of risk you choose. Based on the information you supply, you could end up thoroughly diversified with shares in many (sometimes hundreds) of different companies.
Step 3: Set up recurring investments.
You can set up investments to go into your investment account on a recurring basis for just a few dollars per month. You can also choose to make one-time deposits. Your robo-advisor will automatically rebalance your account if you have too much invested in a particular asset class.
Setting up recurring investing means that you'll invest without thinking about it. (You'll never miss pennies!)
Step 4: Don't quit there.
You can easily track your earnings when you micro invest because those apps are seriously slick. You can even project your earnings through the app's earnings calculator so you don't have to wonder how much you'll have later on.
However, this is important: Remember that micro investing may not make you rich (if, in fact that is your goal). You probably can't save enough for retirement through micro-investing, either. You probably also won't net enough to save for larger goals, such as a down payment on a home. You may generate a few hundred dollars a year, which might allow you to save enough to fund an emergency fund, but that’s about it.
The real win involves building the confidence needed to invest.
Consider other ways you can invest, such as investing money in a 401(k) or a Roth IRA after you get comfortable with micro investing.
Micro Investing Could Work Wonders
Micro investing can work wonders by breaking down barriers to investing. One of the biggest complaints from young students just starting out is that it's too expensive to invest.
Micro investing can give you or a new grad the confidence to try bigger things, starting with baby steps. If micro investing is what it takes for a new grad to get more comfortable with smaller investments (then grow investments later), then it's a great option for young investors just getting started.
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