Many people think of investing and the stock market as a business for the rich. The old adage “It takes money to make money” reinforces this idea, but you might be pleasantly surprised to know that you can start investing with just a few dollars a week.
Microinvesting is about saving small amounts of money – such as change – and investing it consistently in the markets via ETFs or fractions of shares. In the long run, even small amounts of money can turn into tens of thousands of dollars if invested wisely.
Here’s how to get started with micro-investing.
How micro-investing works
In general, micro-investing allows you to invest your savings even when you don’t have a lot of savings per se. Skipping small purchases that have become a habit or rounding up the dollar when you spend can get you started. Personal finance apps like Acorns and Stash even offer debit cards that will automatically round up your purchases and invest the extra money in ETFs or stock fractions.
With shares of some well-known companies such as Amazon and Alphabet, the parent company of Google, each selling for over $ 2,500 per share, it can take time to save enough to buy a single share. Fractions of shares allow you to invest before you can afford a full share.
This approach of systematically investing savings in the stock market over time has paid off in the long run. Investing a fixed amount every week or month is called the average dollar cost, which removes the market timing decision from the equation. Consistent buying means you’ll buy more stocks when prices are low and less stocks when prices are high. With the costs averaged in dollars, you will buy over time and average your purchase prices.
Benefits of micro-investing
- Low minimum investments: Micro-investing allows you to start investing even when you don’t have a lot of money to invest. With just a few dollars, you can start investing in ETFs and fractional stocks, which is not possible with more traditional investments such as mutual funds, which typically require a minimum investment of a few thousand dollars. dollars.
- Diversification: If you choose to invest in low-cost ETFs linked to large stock indexes such as the S&P 500, you will be able to build a diversified portfolio for just a few dollars each month.
- Small amounts add up: Regularly contributing even small amounts of money to an investment account can add up over time, potentially turning your extra change each week into tens of thousands of dollars over decades.
- Automatic investment: Micro-investing helps automate the investing process, making it easier for people to stick to their plan in good times and bad.
- Make saving a habit: It also helps build a habit of saving early on in your investing life, even if you can only save a little extra money.
Disadvantages of micro-investing
- Will not lead you to retirement goals: While microinvesting can be a great way to start investing, especially if you’re young, it likely won’t translate into the type of savings that will lead to easy retirement. You will also need to save more to achieve this goal through retirement plans offered by your employer and by contributing to tax-advantaged accounts like traditional and Roth IRAs.
- Need to save more than change: Most experts recommend saving 10-20% of your income for retirement planning and an emergency fund. Therefore, if you can only save a few dollars per month, you may need to revisit your budget.
- Costs: Micro-investing platforms like Acorns and Stash charge users monthly fees. Fees vary across different plans, but the mid-tier plan offered by Stash charges users $ 3 per month. It’s not a lot, but if you can only put $ 5 or $ 10 a month into your account, a $ 3 fee is going to eat up a good chunk of your return.
At the end of the line
Microinvesting can be a great way to start investing when you don’t have a lot of savings. Contributing small amounts on a regular basis can add up over time when invested correctly, but you will need to contribute significantly more to secure your future retirement.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past performance of investment products is not a guarantee of future price appreciation.