Alison is a member of the Chartered Accountants Australia and New Zealand and currently works in public practice accounting.
The Rise of Micro Investing
Micro investing has been increasing in popularity over recent years. Micro investing means investing small amounts of money on a regular basis, sometimes referred to as investing your loose change. A number of investment companies offer phone apps to make investing and monitoring your investment more streamlined.
The investments work by linking your nominated bank account and 'rounding up' each ordinary bank transaction you make to the nearest dollar. The 'round up' is then invested into your chosen micro fund. As an example, if you spend $84.59 at Walmart, the 'round up' amount of $0.41 will be invested to your fund.
If your bank transaction ends with a whole dollar amount, an amount of $1 will be invested to your fund. This 'round up' method includes all bank transactions, not just debit card purchases, e.g. online bank transfers and payments. As an example, if you pay your AT&T monthly $30 bill via online banking, an amount of $1 will be applied as a 'round up' to your micro fund.
The idea behind this micro investing is the amounts you are saving are so small, you don't notice any impact on your day-to-day cash flow. Most micro investment funds wait until your 'round ups' have reached $5 before deducting the amount from your nominated bank account and applying the funds into your micro investment.
Micro investment funds also allow recurring savings to be invested, as an example a direct debit of $10 per month on top of your 'round up' amounts. The recurring investment can be set up on a daily, weekly or monthly basis, and can be adjusted via your chosen micro app at any time. One-time investments can also be made into your micro investment account, which can be completed via the app with just a small number of clicks.
Invest Your Loose Change
Is It Worthwhile to Micro Invest?
The average person makes 30 bank transactions per week, making the average amount invested per week around $7 - $8. Over a full year, this would be over $364. Whilst this may not sound like much, it's money that you otherwise wouldn't have essentially 'missed'. You also receive dividends and interest from your chosen investment, which is automatically reinvested into your micro investment account.
The micro investing apps do charge a monthly fee, which is $1 per month in the USA ($1.25 in Australia) for balances under $5,000 with Acorns (the market leaders in USA & Australia for micro investment apps). In the UK the fees are higher at £1.00 per month + 0.57% per month in fees with Moneybox (this equates to an extra £0.57 per £1,000 invested). Acorns do not currently operate in the UK. Moneybox waive the £1.00 fee for the first three months, to help your investment start to grow.
The fees are quite small; however in the first couple of months of investing the fees are more noticeable. Once you begin receiving returns on your investment in the form of dividends and interest, they essentially offset the fees being charged. With an average investment, you should see the return from investment covering the monthly fee within the first six months (depending on your investment option chosen).
How Much to Save?
Micro Investment Options
Acorns USA and Australia offer five different investment options: Conservative, Moderately Conservative, Moderate, Moderately Aggressive and Aggressive. Each offers a different level of risk, corresponding to the possibility of return. As an example, Aggressive offers the highest level of risk, but also offers the possibility of a higher return than the other four options. Acorns' five diversified portfolios were constructed with the assistance of Dr. Harry Markowitz, a Nobel Prize-winning economist.
Moneybox UK offer three different investment options; Cautious, Balanced and Adventurous.
As micro investments are a financial product, it is essential you read the product guides available on the website of the financial service provider. Any micro investment (or other investment) you are considering must be registered with the appropriate financial body in your resident country.
The Western markets have been subjected to increased volatility since the GFC. Whilst some may argue this is the nature of stock and property markets, many investors are still very cautious and un-trusting of the investment markets.
Others feel that, with interest rates on cash so low, some risk is worth taking. Due to the small amounts being invested, some investors are willing to accept the risk of micro investing. It is important to consider your own personal circumstances, and obtain financial advice if required.
Saving for a Goal
If you seek to purchase a particular item at some point in the future (e.g. a new computer, a vacation), micro investing may be an option worth investigating. If you provide yourself with a time frame (e.g five years) and calculate the minimum funds you will need for your future purchase (e.g $3,000), you can then calculate how much you need to micro invest per month. In this example, you would need to invest $50 per month to reach your goal (subject to market fluctuations).
If you have a minimum goal, you can invest your 'round ups' each month, then 'top up' the amount to reach your $50. As an example, if you have $23.40 in 'round ups' for a particular month, you can then make a one-off deposit via the micro investing app of $26.60 to reach your monthly goal.
The Micro Investment Market Leaders
The micro investing apps also allow you to link a credit card, as well as a debit card. Linking a credit card would not be recommended, as the interest you will pay on your credit card is almost certainly going to be higher than any return you receive from your micro investment.
Both Acorns & Moneybox also have a simple 'swipe' option on their apps, whereby you can choose to cancel an individual 'round up' before it occurs. They usually allow a 48 hour period before applying the 'round up' to your account. As an example, if a 'round up' of $1 was applied because you completed an online bank transfer for $100, you can simply swipe on the app for this $1 not to be applied.
Acorns USA offer zero fees for college students with a valid .edu address for up to four years from date of registration, thus saving the $1 per month for investments under $5,000. Accounts over $5,000 in value are charged at 0.25% per year in the USA and 0.275% in Australia. Acorns Australia does not waive the fee for college students.
Acorns USA have also introduced Found Money™, which offers cashback to your micro investment account for purchases made with beta partners.
Long Term Outlook
A micro investment can take some time to 'build up' to a sizeable amount, however with patience you will see your funds grow into a worthwhile sum. If you consider the amounts invested are amounts you would otherwise have spent on disposable goods, you could view your micro investment as being a type of 'bonus' in the future. Due to the minimal impact on daily cash flow and budgets, the popularity of micro investments continues to rise.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.