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This story originally appeared on MarketBeat
When you first graduate from college, you may not feel comfortable investing a lot of money in unfamiliar stocks or ETFs. Even if you're not a recent college graduate, consider another approach if you don't have a lot of extra cash lying around. Why not try microinvesting?
Micro investing takes the daunting feeling out of investing, and that is its real magic. Let's look at what it can do for you and how it can find a place in your portfolio.
What is microinvesting?
Put simply, when you microinvest, you are investing with small amounts of money. In other words, you are investing money to buy fractions of stocks or ETFs instead of whole stocks.
As of today, a single share of Amazon (NASDAQ: AMZN) is priced at $ 3,383.87. You may know that you can't even afford a share of Amazon, let alone two shares!
Enter micro-investment apps. You can buy Amazon for a much smaller amount – even for very small amounts like $ 10. You can also buy multiple stocks to aim for diversification (always a great thing!) And lower your risk in the long run.
Small amounts that build up over time can have an effect. Compound interest makes your money grow faster. You can calculate interest on both accumulated interest and your original principal. Compounding can create a snowball effect: both the initial investment and the income from those investments grow.
Let's say you save $ 1 a day. Your $ 1 a day adds up to $ 365 a year. Instead of spending that $ 365, you could put it in a microinvestment app at 5% interest per year. Their small amount would grow to nearly $ 466 by the end of five years. After 30 years, the amount originally invested would grow to $ 1,578.
If you make even more microinvestments, your investment could grow even faster.
How does microinvesting work?
Ever heard of the Acorns app that invests change for you? This is microinvestment. A micro-investment app rounds up your purchases to the dollar or carries out automatic transfers for you. Think of micro-investments as “spare change investing” – many apps round off your transactions from a linked bank account and invest the difference.
In other words, let's say you go to Chipotle and order a mega burrito with these delicious lime chips. They spend $ 10.34. The app would take your remaining $ 0.66 and invest it.
You don't have to invest a lot to get started either. Stash allows you to start with just a dime.
Interested in microinvesting for your favorite college grad or for yourself? Check out the steps below to get started microinvesting.
Step 1: choose a micro-investment app.
What is often the hardest part? Choosing the right system app. Often the most important question arises: Do you want to get your hands on your investments directly or do you want an app that controls and controls your money for you?
Quick overview: Acorns and Betterment will put together a portfolio for you based on your preferences. Stash and Robinhood allow you to choose the direction your money should go by choosing your own investments.
You may want to choose an app that allows you to control the ship yourself, especially if at some point you want to tinker your investments yourself.
Step 2: fill in your information.
Once you've decided on a micro-investment app, it's time to let the robo-advisor do its job. You put information into your micro-investment app that will help it "understand" how to put together the best portfolio for you. You enter your age, income, goals and risk tolerance and your investment is allocated accordingly.
Your money flows into a portfolio of Exchange Traded Funds (ETFs) based on the level of risk you choose. Based on the information you provide, you could be thoroughly diversified with interests in many (sometimes hundreds) different companies.
Step 3: set up recurring investments.
You can set up investments that regularly go into your investment account for just a few dollars a month. You can also make one-time deposits. Your robo-advisor will automatically rebalance your account if you over-invest in a particular asset class.
Setting up recurring investments means you can invest without thinking about it. (You won't miss a penny!)
Step 4: don't stop there.
You can easily keep track of your earnings when microinvesting as these apps are very slick. You can even project your earnings through the app's earnings calculator so you don't have to wonder how much you'll have later.
But this is important: remember that microinvesting may not get you rich (if that is actually your goal). Even microinvesting probably cannot save you enough for retirement. You probably won't have enough net to save for bigger goals, e.g. B. a down payment for a house. They can generate a few hundred dollars a year, which can potentially save you enough to raise an emergency fund, but that's about it.
The real gain is in building the confidence necessary to invest.
Consider other ways you can invest, such as B. Investing money in a 401 (k) or Roth IRA after familiarizing yourself with microinvesting.
Microinvestments could work wonders
Microinvestments can work wonders by breaking down investment barriers. One of the biggest complaints from young students who are just starting out is that it is too expensive to invest.
Microinvesting can give you or a new graduate the confidence to try bigger things, starting with small steps. If micro-investing is required for a new graduate to get comfortable with smaller investments (and then scale investments up later) then this is a great option for young investors who are just starting out.
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