Micro-investing is becoming more and more popular as people become increasingly interested in finding new and innovative ways to save for their future. But what is micro-investing, exactly? How does it work? Is it worth it?
In this article, we will answer all of your questions about micro-investing and help you decide if it's the right choice for you.
What is micro-investing?
The term micro-investing can be broken down into two smaller pieces. Micro and investing. Micro means small and investing means growing money. Micro-investing is a new way of investing that allows people to start with small amounts of money and grow their accounts over time through compound interest.
How micro-investing works
Micro investing works by allowing people to invest small amounts of money into a portfolio of stocks, bonds, or other securities. Whether it be an app that rounds up and invests the spare change from your everyday purchases or a set-it-and-forget-it investment plan, micro-investing makes it easy and affordable for anyone to start growing their money.
For example, if a stock is trading at $200 per share and an investor only has $20 to invest, they can purchase a fractional share of the stock. In this case, the investor would own 0.1 shares.
While this may not seem like a lot, with micro-investing, eventually that fraction can turn into a full share (or even more). And as the value of the stock goes up, so does the value of the fractional share.
Essentially, micro-investing works by allowing people to start small and grow their investment over time.
Is micro-investing worth it?
The short answer is yes! Micro-investing has numerous benefits that make it worth considering as part of your overall financial strategy. Even a little bit counts and over time, the compounding effects of micro-investing can really add up!
The spare change you have left over after purchases is usually left to degrade in purchasing power as it sits idle in your checking or savings account. By investing this spare change, you can grow your money while also combating inflation. If you are someone that utilizes the spare change in a more effective manner, such as investing in your community through a tip jar, you might not think it's as worth it.
Although indeed, the wealth in networks and your social circle should not be neglected, consistent contributions to a micro-investment account can provide exponential growth.
If philanthropy is your main goal, you might be able to do more good for your community over the long term by first investing in yourself. Micro-investing also allows you to start building good financial habits early on.
The sooner you start investing, the more time your money has to grow. And since you're starting small, it's easy to make micro-investing a part of your routine without feeling like you're sacrificing too much. It's worth it if you know you want to start investing but aren't ready to make a large commitment yet.
Benefits of micro-investing
We identified a few benefits of micro-investing and why it's worth it already. But here are a few more reasons to consider micro-investing.
You don't need a lot of money to get started with micro-investing. You can start small and invest as little or as much as you want. It's a common investing myth that you need to have hundreds of dollars to begin investing.
The affordability of micro-investing combined with the power of compounding will grow your accounts to a few hundred dollars before you know it. The small amounts also won't take much away from your other financial goals.
For example, if you're trying to save for a down payment on a house, you can still put money towards that goal while also contributing to your micro-investment account.
Micro-investing apps make it easy to get started. Simply download the app and connect your bank account. Then, set up a plan and start growing your money. Investing does not come naturally for some people.
The learning curve can be daunting and the idea of putting money into something you don't understand can be scary. But with micro-investing, you can start small and learn as you go.
With micro-investing, you have the flexibility to change your investment plan at any time. If you need to, you can withdraw your money at any time without penalty (depending on the account). You can also increase or decrease your contributions as your financial situation changes.
Once you set up your micro-investment account, the investments are made automatically. This makes it easy to stick to your investing plan and take the emotion out of investing.
Investing regularly can seem like a chore for many people. The task of moving money into different accounts and then buying security over and over again can be daunting. But with micro-investing, the process is automated so you don't have to think about it.
It can help you reach your financial goals faster
With the power of compounding, your money can grow much faster than it would in a traditional savings account.
It can help you start investing sooner
If you're looking to save for a specific goal, like retirement or a down payment on a house, micro-investing can help you get there sooner. The power of compound interest means that the earlier you start saving, the more money you'll have in the long run.
If DCA (Dollar-Cost Averaging) is your investing strategy of choice, micro-investing can help make it more consistent. Since you're investing small amounts regularly, you won't have to worry about trying to time the market or coming up with a lump sum of cash all at once.
Disadvantages of micro-investing
There are many advantages of micro-investing, but it's fair to have an objective point of view and understand the disadvantages before making a decision.
It's easy to overspend
When you have money in your account and the ability to make small investments with just a few clicks, it can be easy to overspend. You may be tempted to invest more money than you originally intended or to make more risky investments than you would with a larger sum of money.
This is because small sums of money can quickly be seen as lottery money and not "real" money. Overspending can also make it more difficult to pay for essential expenses. This can cause stress and lead to financial problems down the road.
For example, if someone were to over-contribute to their micro-investing, they might realize that they don't have enough money left over to pay their credit card bill. This would then hurt their credit score and make it more difficult to get approved for loans in the future.
You may not reach your financial goals as quickly as you'd hope
While micro-investing can help you reach your financial goals faster than traditional savings methods, there's no guarantee that you'll reach your goals as quickly as you'd like. It's important to remember that micro-investing is a long-term strategy and it may take years to see the results you're hoping for.
This can be discouraging for some people, especially if they're expecting to see immediate results. Have realistic expectations and be patient when micro-investing. The sooner you start, the better off you'll be in the long run.
You could lose money
As with any investment, there's always a risk that you could lose money. This is especially true with micro-investing, as you're generally investing in individual stocks or other securities. If the stock market crashes or a company goes bankrupt, you could lose all of your investment.
It's important to understand the risks before investing any money, no matter how much or how little it is. Micro-investing can help lower the risks as you are dollar cost averaging with small sums of money, but there's still a chance you could lose money.
Panic selling at the wrong time could also lead to losses. Sound investing psychology still applies, even though this form of investing can support risk-averse individuals.
Potential for high fees if using the wrong brokerage account
If your brokerage firms charge per-trade fees or high account maintenance fees, micro-investing can eat into your returns. This is because, with micro-investing, you are investing multiple times (each time that you have a transaction). Be sure to shop around and compare different brokerages before signing up.
You may not have enough money to invest in a diversified portfolio
If you're only able to invest small amounts of money at a time, you may not be able to build a diversified portfolio. This could lead to greater losses if one sector or company crashes, as your entire portfolio would be impacted.
Although it's true that if the entire micro-investing strategy is centered around an index fund like the S&P 500, it will already be diversified. But the allure of diverging from the original investment plan to pick a few stocks "that will make you rich quick" is high. New investors should beware of this and not put all their eggs in one basket.
It can be difficult to stick to a plan
Micro-investing requires discipline and it can be difficult to stick to a plan. The boredom of this investment strategy can wear on some people, especially those who are used to more exciting forms of investing.
It can be argued that this is an advantage but micro-investing that does not include gamified features to make it more engaging could lead to people falling off the wagon.
It's not for everyone
Micro-investing isn't the right choice for everyone. If you're looking for immediate results or don't have the patience to wait for long-term gains, it may not be right for you. If your income also vastly outweighs your expenses, you might also want to invest more than micro amounts. This is because the access capital can help grow your accounts even faster.
Now that you know all about micro-investing, it's time to decide if it's right for you. If you're looking for an affordable, easy way to start investing, it might be a good option. Just be sure to do your research and choose the right brokerage firm to avoid high fees. Micro-investing is like taking baby steps or dipping your toes in the water.
Rather than diving head first or running into a brick wall, micro-investing encourages you to ease into the world of personal finance and investing. And like anything else in life, the sooner you start, the better off you'll be in the long run.
What are your thoughts on micro-investing? Have you tried it before? Let us know in the comments below.