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What is Micro Investing Apps

Jimmy Khan

Nov 28, 2022 17:00


You can use a smart investing program to round up your purchases to the next dollar and deposit the spare change into a savings account. Why not start your day with a cappuccino and an investment in your future?

You're saving money without even realizing it, and that feels good! But what kind of a long-term difference will that little modification make? And is it secure in entrusting your money to a user-friendly smartphone app?

Let's explore micro-investing in more detail, including what it is, why it has gained popularity, and whether or not you should include it in your overall investing plan.

What Exactly Are Micro Investment Apps?

Users of micro-investing apps can set aside and make small-scale investments, and the software typically makes saving simple. Some micro-investing programs can even round up your purchases to the nearest dollar when you attach a debit card, arrange automatic transfers, and invest your money for you.

You can invest that additional money in equities using micro-investing apps. Most of them either impose fees on trades or provide free trades up to a particular threshold, say $5,000, on your account.

Acorns, Stash, and Robinhood, are a few platforms that are examples of investment apps.

And a lot of people use these apps, especially millennials. Ramsey Solutions' study shows that 51% of millennial investors have used investing applications like Robinhood, compared to 32% of investors from Generation X and only 5% from the baby boomer generation.

What exactly is the process of micro-investing?

The concept is to round up purchases, frequently to the closest dollar, and utilize the spare change to gradually amass savings in an diverse exchange-traded fund portfolio. Acorns and Stash, two investment applications, have made this exceedingly simple by providing a debit card that handles your roundup investing and provides financial advice along the way. This differs from conventional brokerage accounts, which allow stock market investment but frequently lack a roundup option.

It is generally advised that investors follow their investment plan and refrain from trying to time the market by making consistent, long-term investments (often referred to as dollar-cost averaging). And any software that promotes sound investing and saving practices deserves to be praised.

The issue is that spending 27 cents here and 45 cents there might not be sufficient. Let's assume that Sarah, age 25, uses roundups on average, costing $1.50 daily. The dimes and quarters Sarah will very doubt hardly notice leaving her bank account and entering her investing account will nevertheless result in a monthly payment of roughly $45. By the time she is 45, the funds might amount to roughly $23,500 after 20 years at a return of 7%. Not bad for merely amassing money in an electronic piggy bank. (Learn more about the stock market returns you might anticipate.)

How much money should you save, though, for retirement?

The average 401(k) balance for investors aged 35 to 44 was $72,578, according to a 2020 Vanguard research.

Unfortunately, Sarah's savings are 68% below average due to her micro-investing technique.

Additionally, there are other problems with micro-investing to take into account. Sarah's retirement funds are currently based more on spending than saving. How much more money would Sarah have at age 45 if she had invested any of that money? Additionally, Sarah is missing out on some significant tax advantages of a retirement account, such as an IRA or a 401(k), if she exclusively uses a taxable brokerage account (k).


What other tools can I utilize to remain on track besides roundups?

Let's say Sarah contributed $100 a month to a tax-advantaged IRA rather than using a micro-investing platform. 7% growth over 20 years would result in savings of around $52,000. This is significantly more than the micro-investing method, but it is still less than the average for Vanguard.

What if these two tactics were used in concert, though? Sarah would theoretically have around $75,000 after 20 years if she could put that $100 into her IRA each month and invest $45 in spare change, which is significantly more than the average for her age group.

This is just one illustration of how cutting-edge new investing ideas might combine with tried-and-true methods.

It's crucial to realize that, despite roundup investing's ingenuity and creativity, you cannot achieve retirement through it alone, according to Walsh. Instead, micro-investing is only one component of a thorough retirement plan.

"It's a slice of the pie when you look at the full picture of what financial success looks like, but it's not something that will get you to retirement," Walsh asserts.

What, then, are the other ingredients in the pie?

Micro-investment applications, according to D'Agostini, "are ideal for the rookie investor to establish consistent savings patterns and create a habit around investing."

However, she cautioned, "you might want to transition to a more sophisticated investment platform that can provide additional education, counseling, and financial planning once you have higher income or savings capacity.

D'Agostini and Walsh both suggested contributing to your employer's 401(k), if one is offered, as a step after using micro-investing applications. Furthermore, if your employer gives a match, it's a good idea to contribute at least enough to qualify for it.

Why Do Individuals Enjoy Micro-Investing?

Investing a little dollars here is quite simple with micro-investing. It's a set-it-and-forget-it tactic, so you don't require a sophisticated saving plan. Instead, it uses any extra cash that may have been left on your counter after work, and that requires very little effort.

Additionally, you don't need a lot of money to start. Depending on the app, you might have to pay a small user fee. According to the account you select, Acorns charges a monthly fee ranging from $3 to $5. 1 However, after signing up, you may invest the spare change from your morning cappuccino! If simplicity is what you're after, it doesn't get much simpler than that.

Precautions Regarding Micro-Investing Apps

There's no problem if you wish to deposit your extra change in a savings account. However, some micro-investing programs allow you to make significant choices, and that's when things may get complicated.

Take Robinhood as an illustration. Users can purchase, sell, trade, and invest in company stocks and cryptocurrencies using this software without paying commission fees. You can invest in thousands of stocks for as little as $1.2 makes it a micro-investing app.

However, you can invest much more. The typical consumer of Robinhood has $5,000 in their account. Three, since anyone can sign up for the app and begin trading in just a few minutes, people may start to get trade-crazy without actually understanding how the stock market operates.

It's also important to note that the business is currently subject to 50 active litigation, increased regulations, and some very dubious methods, such as limiting trade.

All of this to say, use caution. Using micro-investing apps, the investment might resemble playing a game. But keep in mind that you are playing with your future.

Would We Suggest Micro-Investing?

It's not a bad idea to buy an investment app that automatically round up your Starbucks purchase to the nearest cent and deposit it into your 401(k). However, if that's your only option, be ready to be hungry in retirement.

Micro investing results in tiny outcomes, and we don't advise it as a significant portion of your investment strategy because of this.

On the other hand, it depends on where your money is going if you're considering investing in the stock market with a click of a button and higher dollar signs connected.

Due to their high risk, single stocks are not something you should invest in. You can only currently invest in such ways using applications like Stash and Robinhood. 5,6

Using a micro-investing app is not the best low-effort, low-risk strategy to increase your investments. You may begin by contributing enough to your company's 401(k) plan to receive the match (k).


What distinguishes it from conventional investing?

The good news is that it's not that different. You can benefit from micro-investing by increasing the growth potential of your funds and providing your savings a chance to outpace inflation. It merely increases the accessibility of that opportunity.

This is because traditional investing platforms frequently have prohibitive minimum commitment amounts, exorbitant fees, or both—potential hurdles for anyone just beginning to invest. For instance, many actively managed mutual funds demand a minimum starting commitment of $1,000. Even while you might only need $5 to invest in some stocks, most brokerage houses charge between $5 and $7 in trading costs per transaction, making such modest sums of money hardly worthwhile. Additionally, a portfolio with a single stock buy is not well-diversified.

On the other hand, Acorns offers micro-investing for just $3 a month, allowing you to invest your spare change. You set up your account, link it to a funding source (like your checking account), and then link it to the debit or credit cards you use to make transactions regularly. Each time you make a purchase using a connected card, the charge is rounded up to the nearest dollar amount if you use the Acorns Round-Up feature. The money is taken from your funding source and invested through your Acorns account into a combination of exchange-traded funds, a tailored portfolio created to match your unique financial condition and goals; after that, change totals at least $5. Recurring investments can also be set up for as low as $5 each day, week, or month.

Why not wait and make larger investments?

You could carry it out. However, for every second you put off making an investment, the market has less time to increase in value. And the secret to effective investing is time in the market.

 Compounding, or the potential of your money to expand when earnings are added to other earnings, and so forth, is one explanation for this.

Say, for illustration, that you put $10 down each week in your piggy bank, where money receives no interest. You finally feel like you have "enough" to start investing after a few years. So you invest $1,040 and continue adding $10 every week for the following 30 years. If the investment grows at a 7 percent annual rate of return, it increases to $58,769 during that time. Very good.

However, if you immediately began investing in smaller quantities, starting with $10 and adding an additional $10 each week for 32 years, you could accumulate $59,423 at the same rate of return.

Simply by frequently making micro-investments, you can earn an additional $654 without committing any additional time or money.

In any case, though, that's not a lot of money.

It's true that investing solely in your spare change won't enable you to achieve your long-term objectives, such as retiring, even with compounding and decades of saving. Nevertheless, it can add up to a respectable sum. For instance, $10 invested each week for ten years at a 6% return will increase to $7,072. That may be adequate for shorter-term objectives like a relaxing trip or a down payment on a car. Or it could just mean making a small amount of extra effort to earn a little bit more money than you otherwise would have. Nothing is wrong with that, really.

In any case, the true power of micro-investing lies in encouraging you to make your first market investment or in assisting those without access to a sizable lump sum in using investing to achieve their financial objectives. You may get started right away by overcoming the belief that you can't afford to invest with an entry point as low as $5. And once you're in, experiencing micro investing directly can help demonstrate how easy investing can be and inspire you to do it more frequently. Before you know it, you'll have worked your way up to setting aside and investing a minimum of 20% of your income, as advised by financial experts.

What additional benefits make a micro-investing offer?

Regular investing, commonly referred to as dollar-cost averaging (though the word is not just used to describe the little sums of micro-investing), can help you spend less per share on average. Because you invest the same sum of money regardless of the current share price, you can buy more shares when they are on the down and less when they are on the rise.

You can manage any fear you may experience due to market volatility by using a regular investing plan. Stocks have traditionally increased greatly over the long run, but it's very common for them to turn negative along the road. Maintaining a limited and consistent investing portfolio will lessen the impact of such natural falls and reduce the likelihood that you'll cut and flee in terror, locking in any losses. You could even forgo watching the daily market churns entirely if you set up automated donations and choose to just check in occasionally.


The Top 3 Micro investment Apps For 2022

Robin Hood

Consider Robinhood if you're searching for a micro-investing app that enables you to be really hands-on. Since its release in 2013, this app has worked to increase everyone's access to and affordability of investing.

Opening an account with Robinhood is free, and there are no commission fees. Additionally, money transfers to your bank are cost-free.

The advantage of utilizing Robinhood is that it's an easy-to-use software made for beginning investors. The app is made as simple to use as possible, so there aren't any bells, whistles, or jargon. According to Investopedia, more seasoned investors may find Robinhood inadequate because of its simple interface.

You can trade whole stocks on Robinhood, and Bitcoin can be used for both buying and selling. With Robinhood, you can access up-to-the-minute market information to manage your assets.

You may access your account from a laptop or PC even though the Robinhood platform is built on an app. You can find new stocks through the "Collections" portion of this feature, which groups investments into categories like gas and oil, social networks, and entertainment.

Additionally, you can view the typical share price investors paid for equities and their current values. A list of related stocks that other investors purchased, analyst stock ratings, earnings data, and general stock market news are additional elements.


Consider using the Acorns app if you prefer to take a more passive approach. Acorns will round up your purchases and put the money into your Acorns account once you've linked your bank account to it.

For instance, if you spend $15.49 on something, Acorns will save an additional 51 cents.

When your balance hits $5, Acorns will start investing on your behalf. You have the option to configure your preferences to direct the app's investment decisions. However, if you'd rather, you can set the app to invest on your behalf.

You won't get rich quickly with Acorns, but it's a useful addition if you want to start setting aside more money each month. You probably won't even notice the money disappearing from your account each month because the roundup amounts are so modest.


Public.com might approximate the end result if social media and investing were combined.

You can communicate with other investors using Public's iOS and Android applications in a similar way to how you communicate with friends online. Interacting with more experienced traders can be beneficial when unsure where to begin as an investor.

The public uses themes to make thoughtful investing simpler. The platform offers roughly 50 investing themes that group together related businesses.

Maybe you wish to put money into firms run by women or that care about the environment. The public has a theme for that, assisting you in investing using your heart and mind.