How to Invest with Little Money

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Many millennials know they should be investing, but they feel that they have very little money to invest, so perhaps it’s not worth investing at all. We’re here to tell you that every penny counts. If you’re feeling like you can’t afford to start investing, here we will share with you how to invest with little money.

Why Invest Even When You’re Broke

As we’ve shared on ASF before, you should aim to be saving 20% of your income towards your retirement and other financial goals. 20% is a big goal that often seems hard to reach. 

But know that you’re not alone. I, too, struggle to hit the 20% marker consistently. And in a recent study by GOBankingRates, 48% of people said they cannot afford to invest. 

However, you must start investing, even if it’s just a few dollars a month. 

Let’s look at an example. Let’s assume that you’re struggling to get by, and all you can muster for your investment account is $5 per week. If you contribute $5 per week for 40 years at a 7% return, by the end, you’ll have $50,000. 

Now, of course, $50,000 isn’t enough for any retirement plan. But the point is that it doesn’t matter how little you have – you can find something, even if it’s just $5/week, to invest. And those contributions add up.

Over time, you can work to increase your savings rate. Maybe you work up to $20 per week. Now we’re talking $200,000 in 40 years. And then perhaps you ultimately work up to $100/week. Now you have almost a million dollars at the end of 40 years.

Start small and work to scale up your contributions over time. 

What is Micro-Investing?

In recent years with the rise of Fintech (financial technology), a new category of brokerage account has evolved called micro-investing.

Chances are, you’ve already heard about micro-investing. Yep, I am talking about those spare change apps like Acorns and Stash.

Micro-investing allows you to invest in tiny increments to grow your account over time.

Micro-investing is breaking down the barriers of traditional investing by lowering investment minimums and transaction costs. 

Many spare change apps now let you invest as little as $5. Here’s how it works. Connect your credit/debit cards to the spare change app. With each purchase you make, the app will round up the spare change. So if you go to Starbucks and buy a coffee for $5.15, you will invest the $0.85 to round up to $6.00. 

The funding source of your choice will then transfer this money to the spare change app. From there, you will be invested in a customized, diversified portfolio that aligns with your financial goals and risk tolerance. 

How to Invest with Little Money

Micro-Investing Apps

While there are many different flavors of micro-investing apps out there, we will focus on two:  Acorns and Stash.

Acorns

Acorns is perhaps the most well-known micro-investing app out there. Here are some key features:

  • Diversified portfolios based on modern portfolio theory (read:  maximizing risk-adjusted portfolio returns)
  • Portfolios include large and small companies, international stock, real estate, corporate bonds, and government bonds 
  • Choose a portfolio based on your risk profile and investment goals
  • Full automation (automatic contributions, portfolio rebalancing, etc.)
  • No account minimums or trade fees – just $1 per month for the Lite Account; $3/month if you want to use the IRA feature
  • Fund expenses are generally minimal
  • Free for college students

Stash

Stash is a little less well known than Acorns, and it offers less guidance, but it has some unique features:

  • Ability to choose investments, including individual stocks
  • Does not offer complete portfolios to choose from but rather just provides individual investment options (stocks, bonds, etc.)
  • Fractional share investing, allowing you to buy small slices of big-name companies
  • No automation
  • Just $1/month for the Beginner plan; $3 per month for the IRA feature
  • Some fund offerings are on the expensive side (higher expense ratios) 

Between the two, we prefer Acorns. It is easier to automate because it chooses funds for you based on your preferences. And if you’re investing in a micro-investing app in the first place, this is the way to go, as it requires little to no effort on your part. However, if you want to learn more, check out this comprehensive comparison of Stash vs. Acorns.

However, both of these apps can successfully help you save more – and that’s a win. 

What We Don’t Like About Micro-Investing Apps

We just told you these apps cost as little as $1 per month. And now we’re going to tell you why this is expensive. 

Let’s say you invest $100 in your account. The annual fee for the micro-investing app is $12. That means the management fee is 12% of your invested amount. Once your account is up to say $1,000, this drops down to 1.2%, which while still expensive, is not the end of the world. Until you reach a sizeable balance in your account, the account fee is steep relative to your investment amount.

If you were to use a full-fledged robo-advisor (like Betterment or Wealthfront) or invest on your own through someone like Vanguard or Schwab, you could invest for a lot less.

If you’re looking to invest independently, check out our guides on Where to Save and Invest and How to Start Investing.

But here’s the thing, costs are a secondary factor relative to the real goal of these apps. Micro-investing apps are designed to force you to save and invest in your future.

So, if Acorns invests say $5 a week that you would not have invested otherwise, that is a win. By helping you invest as much as you can, these apps earn their keep in our book. 

How to Invest with Little Money:  A Summary

Micro-investing isn’t for everybody. If you are highly disciplined and can force yourself to invest on your own, you probably don’t need a micro-investing app. Think of micro-investing apps as a hybrid between a fully-featured robo-advisor (which provides extensive guidance on portfolio selection) and an automatic savings tool. It isn’t the best investment platform, but it is there to help you get started. 

If you’re in the camp that feels they cannot afford to invest or are looking for some additional discipline, check out Acorns, our favorite micro-investing app. Remember, everyone can afford to invest, even if it’s a few dollars a week, and the more you invest, the less stressful your financial future!

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