When I talk to millennials about investing, I always hear the same few reasons for not doing it– a lack of knowledge, feeling like they don’t have the money, plus the whole risk factor. However, there has been an influx of apps recently that take the edge off of investing, making it painless and easy to invest with small amounts of money, aka micro investing. Still, a lot of us in the personal finance world is wondering… is micro investing worth it?
Let’s back up a second and talk about investing in general and why it’s important. Investing works on the “smarter not harder” premise of making your money work for you.
There are lots of different types of investment vehicles too, like ETFs, mutual funds, stocks, bonds, even real estate, all adding to the complexity. Traditionally people would invest through a brokerage like Schwab, Fidelity, TD Ameritrade, etc., and until micro investing popped up as an option, one of the drawbacks to investing in the traditional sense is a large amount of money you need to buy in. That commonly held belief, needing like tens of thousands of dollars to start, isn’t actually the case.
You can kind of micro invest with those brokerages, but the apps I’ll be talking about here are specifically set up for investing without much money at all, and that means buying partial shares of ETFs and avoiding high fees and commissions.
The key thing with investing is that it’s a long game, and that means you continue to put money in without pulling it out too soon. There are going to be dips in the market, like what’s been going on right now, but that’s what the market does… so stop freaking out and leave your money alone.
The average millennial isn’t going to get rich in a few years, but after two or three decades you will see how that money has grown into something you can retire off of. You are setting money aside that will eventually turn into passive income. Cool, right?
What I just wrote was a pretty big simplification of it all, so keep that in mind. People write entire books about investing and this is just a little blog post about investing on a small scale, or the very specific topic at hand: is micro investing worth it for you.
So then, what is micro investing?
Micro investing is investing with small amounts of money. Seriously, like spare change! Some of these apps even refer to it as spare change investing. This means you don’t need a huge lump sum to start, which makes it much more approachable for many millennials, and there are now several apps to start micro investing through, like:
- Acorns round up your credit and debit card purchases to the next dollar and invest that amount, and these “round-ups” are taken out once per month. There are three levels, and you can start for as little as $1 per month.
- Stash offers a little more flexibility than Acorns, as in you can choose a curated investment “theme” that aligns with your interests and beliefs. You can start your Stash portfolio with as little as $5, plus there is a $1 a month fee.
- Robinhood is known for 100% free commissions on stocks, options, and ETFs. And, there’s no account minimum. They have also started offering to trade in cryptocurrencies.
That’s just a really short list of what’s out there, and they all have different options to appeal to millennials.
All micro investing apps are a little different
I’m going to talk about more specifics as I go on, but as you wonder is micro investing worth it, you’ll need to be aware of the differences in what’s available.
Of the three I mentioned, Robinhood looks the most like a traditional brokerage, meaning you get to pick what you buy, and that traditional style of free trading is great for newbies wanting to buy small stocks here and there.
Stash and Acorns both build a portfolio for you, consisting of ETFs (exchange-traded funds), which are made up of a broad holding of stocks and bonds, and you are basically buying micro shares of those. The apps all work a little differently, but most of them give you some control over how your money is invested, based on your risk tolerance and/or interests.
Really, the goal of micro investing is to remove the barriers to traditional investing and help young people build good investing habits. Honestly, I think that’s awesome, but at some point, as you’ll see below, you may want to bump up your game to really make any big gains.
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What you can expect with micro investing
You get that micro investing is investing with small amounts of money, right? But before you jump in, you should know what you’re actually going to get out of it before understanding is micro investing worth it to you or not.
Low starting deposits
When you ask millennials why they aren’t investing yet, the number one reason is that they think they can’t afford it. According to this poll, nearly 80% millennials aren’t investing, and 40% say it’s because they lack the funds to do so.
Is micro investing worth it for those people? It very well could be. Depending on the app you use, you can literally start investing with less than $5. That’s just one cup of overpriced coffee. It also blows up the myth that investing is only for old rich dudes.
The low buy-in is one of the most attractive things about micro investing, and it’s probably what is making it so appealing to millennials who want to try out investing while still eating their weekly avocado toast at brunch.
You know what, though? If you cut out brunch, maybe bought a little less craft beer, you’d have even more money for investing… sounds tough, I know… but it needed to be said.
What are the returns like?
If you’re thinking you like how little it costs to start micro-investing, then you’re probably wondering is micro investing worth it on the returns. I’m about to deal you a bummer here.
I don't necessarily agree with every piece of advice from Dave Ramsey on investing (although his debt-payoff stuff is awesome), there was an article published on his website that gave a really great description of what you can expect with micro investing. Put simply: “micro investing produces micro results.” Ouch.
So, if you were wondering is micro investing worth it as a retirement plan?
No. Freaking. Way.
Micro investing shouldn’t be your retirement plan because not even the power of compound interest will turn that spare change, or $5 here and there, into enough money to fund your golden years, especially if you’re wanting to retire early.
What are the fees like?
Millennials aren’t just turned off by the perceived high cost of investing, as in the actual investment, they’re also bummed out by all the fees– brokerage fees, commissions, advisory fees, even fees for inactivity. These all depend on the brokerage firm you go with, but fees are a reality of investing.
Micro investing, though, typically has much lower fees than traditional trading platforms, and I’m talking around $1 per month for most. The problem is that your fees are going to increase significantly when your balance hits $5,000. That’s a mark you will eventually want to hit.
So fee wise, is micro investing worth it? Kind of.
When you’re starting out those low fees are great, but those fees are going to start hurting when your balance exceeds $5,000. Plus, when and if you decide to pull money out of these micro investing platforms and put them somewhere else, it’s going to cost you.
The cost of moving your money from a micro investing platform to a traditional brokerage will vary, but it will be something like $50-$75 for transfers (and you can only transfer whole shares) or the taxes you’ll have to pay upon withdrawing your balance.
Is micro investing worth it for complete newbies?
The average millennial knows way too little about investing, and I’m not faulting them for that because investing isn’t the easiest thing to understand. Many millennials also think investing is something you have to do in person, at an office, with a dude who’s going to tell you about golf clubs or playing lacrosse in college.
Micro investing isn’t that at all. It’s ridiculously approachable.
Do you have a smartphone? Do you know how to log into your bank account? Do you have 5-10 minutes? If you can answer yes to all of those questions, then you have the knowledge, skills, and time it takes to start micro investing.
Seriously… it really is that easy.
The only downside here is that with a platform like Robinhood, which although I do think is really cool, it’s completely stripped down and free of many of the research and analysis tools other traditional brokerages offer. In a case like this, just be willing to do your own research.
I strongly believe that taking the educational aspect of investing in your own hands can turn you into a smarter investor overall. Remember too that despite being idiot proof, you shouldn’t be an idiot with your money.
Those small amounts of money are still money… real money… so if you’re going to choose any of these micro investing platforms, work on growing your knowledge of the market overall.
Unlike traditional brokerages who offer a variety of account options, micro investing isn’t going to have everything you need. They also lack the tax-deferred options you’ll see in things like a Roth IRA.
Option wise, is micro investing worth it? Not so much. Because to make your money really work for you, you’ll need more options as you go forward. This leads to diversification, and that’s where you see long-term gains and security.
Overall, is micro investing worth it for millennials?
There are very few things that I’ll take hard stances on, unless that’s paying off your student loan debt or starting a side hustle, and I’m not ready to add a definitive “yes, micro investing is worth it” to that list.
Micro investing isn’t going to make you rich. It’s not even going to give you enough cushion for retirement. But, what it does well is to introduce newbie investors to the market. It makes investing an approachable option for people who don’t feel like they have much money to put towards investing in the first place, and that’s pretty cool in itself.
It helps to build healthy financial habits too, like regularly investing, and I’d actually be really interested in seeing a study done a few years from now that looked at whether or not micro investing led to millennials investing in other ways.