Micro-investing is a way for anyone to invest, even if they don't have much disposable income. With the rise in spare change investing apps and the number of brokers that have eliminated account minimums and trading fees, it's easier than ever to invest with any sort of budget.
Should you try micro-investing?
Micro-investing is certainly better than not investing at all. It's a good way to get the ball rolling on your investment portfolio, and it doesn't take any work on your part if you use a round-up app. You can also still build a diversified portfolio, even when you're not investing a ton of money. There are plenty of exchange-traded funds (ETFs) with minimum investments of just $1.
But there are potential downsides to micro-investing. Round-up apps may be convenient, but they typically charge a flat monthly fee, with some of the most popular apps starting at $3 per month ($36 per year). When you're starting out and haven't saved much yet, that's expensive. On a $500 account, $36 in fees would be the equivalent of paying a 7.2% expense ratio. To be fair, flat fees get comparatively cheaper as your portfolio gets more valuable.
You could also avoid excessive fees by micro-investing through a broker with commission-free trading and no account minimum. Whichever option you choose, keep in mind that there are limits to how much you'll make by investing small amounts. It's a good start, but if you're trying to save enough for retirement, you'll eventually need to progress beyond micro-investing.
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How small investments can grow
For an example of how much you can make by micro-investing, imagine you're able to invest $20 per month. You get a 10% annual return on that money, which is in line with the average stock market return. Here's a quick breakdown of how much you'd make:
- After the first year, you'd have $264 total from $240 in contributions.
- In 10 years, you'd have $4,207 from your $2,400 in contributions.
- In 30 years, you'd have $43,426 from just $7,200 in contributions.
Over time and with compound interest, micro-investing can lead to significant financial progress. And if it motivates you to gradually start investing more, you'll get even better results.
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