What is micro-investing?

Tim Falk 25 October 2016

micro investing feature image

How to turn your spare change into big bucks.

When micro-investing platform Acorns launched in Australia in February 2016, it heralded the beginning of a revolutionary new way for Australians to invest their money. Micro-investing involves investing very small amounts of money on a regular basis, with the hope that over time every little bit you invest adds up to a lot.

Acorns garnered more than 100,000 users in its first six months in Australia, a clear reflection that micro-investing is a popular option for the next generation of Australian investors. But how does micro-investing work and what are its advantages and risks? Let’s take a closer look.

Click to download Acorns

What is micro-investing?

The “micro” in micro-investing refers to investing small amounts of money, even as little as a few cents, to help build an investment balance. This offers a convenient and easy way for everyday Australians to invest their spare change, much in the same way you used to put loose coins in your piggy bank when you were a kid.

The basic premise behind micro-investing platforms like Acorns Australia is quite simple. Once you create an account with a micro-investment provider, you link that account to your Internet banking. Then, whenever you make a purchase using a linked debit or credit card, the purchase amount is rounded up to the nearest dollar and the excess cents are automatically moved to your micro-investing account.

For example, let’s say you purchase a coffee for $4.60 with your debit card. The total purchase amount will be rounded up to $5, with the excess 40 cents automatically diverted into your investment fund. While each small amount doesn’t sound like a lot on its own, it can quickly add up to a much more sizable investment balance over time. 40 cents a day adds up to $146 over the course of a year. If you wish, you can also set up a regular recurring investment or deposit lump sums into your investment fund whenever you come into any extra cash.

The funds in your investment account are then invested in low-cost exchange traded funds (ETFs), which provide access to Australian bonds and Australian and international shares. In this way, even people who may not think they have enough disposable income to invest can start building an investment portfolio. You can then monitor your account balance through a smartphone app or by logging in online.

Many banks also offer savings accounts that operate on a similar basis. These accounts can be linked to your everyday transaction account, for example, so that purchases made with your debit card are rounded up to the nearest dollar and the excess amount is moved into the interest-earning savings account.

Who may be suited to micro-investing?

Micro-investing is a suitable option for anyone looking for an easy and convenient way to start building an investment portfolio. However, micro-investing platforms in Australia and overseas tend to be most popular with a younger demographic – people who may not have a substantial amount to invest, or who may be less inclined to even think about investing for the future at this stage of their lives.

That said, you don’t need to be a millennial to take advantage of the benefits of micro-investing. In short, anyone who thinks they might benefit from the convenience of an automatic investment plan should consider the benefits of this approach.

Which providers offer micro-investing in Australia?

Micro-investing is still a relatively new sector on the Australian financial scene, so at the time of writing there were only two micro-investing platforms up and running: Acorns and FirstStep. You can learn the basics of each platform below, but keep an eye out for other fintech startups looking to break into the market in the coming months and years.

Acorns Australia

Acorns is a mobile app that rounds up the spare change from your daily purchases and invest the excess into a diversified portfolio of ETFs. There are five different portfolios to choose from based on your appetite for risk and you can also set up recurring payments or make lump sum instalments. There are no minimum account balances and deposits and withdrawals are free. All you need to do to get started is provide your bank account number, BSB number and online banking login details.

Account balances of less than $5,000 attract a monthly maintenance fee of $1.25. Balances of $5,000 and above attract a monthly fee equal to 0.275% of your balance.

FirstStep

FirstStep is a mobile app that allows you to automatically invest loose change from your day-to-day purchases. You can also make voluntary contributions from your income or set up a recurring transfer. Your funds are invested in a low-cost, diversified portfolio of ETFs spread across Australian shares and bonds, US shares and world shares. There’s no minimum investment limit and you can choose from three different portfolios tailored to suit your risk appetite, with the option to link up as many bank accounts and cards as you want.

Account balances under $5,000 attract a $1.25 monthly fee, while accounts of $5,000 and over incur a management fee of 0.275% per year.

Benefits of micro-investing

There are many potential benefits of micro-investing, including:

It’s easy

  • It’s quick and simple to set up an account with a micro-investing platform and link it to your bank accounts. It then acts like a sort of electronic piggy bank for your spare change.

It’s convenient

  • Micro-investing requires minimal input on your part. Because the entire process is automated, you can start building an investment balance without even realising it.

You can start a savings habit

  • By getting into micro-investing from a young age, you can create positive saving habits that will last a lifetime. It’s a very effective way for Australians who have never invested their money before to make a start.

Minimal investment required

  • You don’t need a huge bank balance to take advantage of a micro-investing platform. You can start by investing your small change and then watch your balance grow.

Choose from diversified portfolios

  • The money in your investment fund can be balanced in a diversified ETF portfolio based on your financial goals and your appetite for risk. You don’t need to be an investment expert or have specialised financial knowledge.

What are the risks of micro-investing?

Like any other investment option, micro-investing also comes with a certain level of risk. There’s no guarantee that the investment portfolio you choose will perform as you hope, and you could end up losing money. The investment portfolio recommended for you is chosen based on your risk tolerance, so, depending on your financial goals, you have the option to minimise your risk exposure.

It’s also worth pointing out that micro-investing platforms don’t offer their services for free. You’ll need to pay an account management fee that’s either a flat fee or calculated based on a percentage of your account balance, while brokerage and ETF management fees also apply when you purchase ETFs through your account.

These fees may also differ depending on your account balance, so it’s important to monitor your account regularly to make sure the fee structure continues to work in your favour.

The last thing to remember with a micro-investment account is that because the investing takes place in the background, it can sometimes be easy to forget about your account. While this can be a good thing for those investors who might be tempted to “over-manage” their savings, it’s still important to regularly review the performance of your investments to ensure that they are meeting your expectations.

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