How To Microinvest (Part 2 of the Microsaving Series)

This is Part 2 of the microsaving series. Part 1 shows you how to save in tiny amounts to help build savings.

What Is Microinvesting?

You know what investing is, the buying of stocks and bonds. Microinvesting is the same thing, but on a micro level.

Are you surprised that microinvesting is even a thing?

You’re not alone. Millions of people are afraid to invest because they believe the following lies:

• You have to be rich to invest in the stock market

• You have to pour a lot of money into the stock market

• If you can’t buy the stock for the listed price, you can’t own any of the stock

• You’re always going to lose money

The thing is, for people who’ve long been excluded from financial spaces, this is something that’s easy to believe. If you grew up poor or from an immigrant family, chances are you never learned about how investing in the stock market can help you build wealth. Or if you were taught, you were made to believe “it’s not safe,” or “it’s not for us.”

But investing IS for you and this blog post will get you started easily and with very little money.

If you have a workplace retirement plan like a 401k or 403b, or a government pension, guess what? You’re already an investor! Which is great, but in this post, we’re gonna talk to people who don’t already have a workplace plan and to people who want to invest OUTSIDE of their workplace plan.

This is where microinvesting comes in.

Let’s Define Stuff First

Your investments need a home, but you have to know what to look for and where to find it. So let’s start with some definitions.

Brokerage firm. Financial services company. These are general terms for companies that offer a range of investments and places to put them. The four biggest ones in the United States are Fidelity, Charles Schwab, Vanguard and J.P. Morgan Chase. (Disclaimer: I use Fidelity and all my kids use Fidelity.) To find a brokerage firm, start with your employer plan, if you like it. Check Investopedia, NerdWallet and Bankrate for reviews, features, and how to choose.

Investment account. Depending on the structure, it’s either taxable or has tax advantages. Brokerage accounts and IRAs are examples of investment accounts.

Brokerage account. This is a taxable investment account. Buy and sell stocks, bonds and other securities.

Cash Management Account. This account works like a checking account and some brokerage firms offer at least two types, one that is tied to the stock market (not FDIC-insured) and one that is FDIC-insured.

Individual Retirement Account. The two most common types are the Traditional IRA and the Roth IRA. You can microinvest in these accounts for retirement!

Core Position. Every brokerage firm will have one of these accounts, and they may have a different name. This is the name used by Fidelity for this account, which is described by Fidelity “for processing cash transactions and for holding uninvested cash. It’s a position in your account that acts like a wallet.”

ETFs (exchange-traded funds).

Index funds.

How To Microinvest In The Stock Market

When you’re looking for a brokerage firm, find one that allows you to buy securities at a microlevel. For example, Fidelity and Schwab allow you to 1) open an account with $0 and 2) deposit single-digit dollars for buying and investing. (I bring up Fidelity and Schwab throughout this post because they’re the companies I’m most familiar with. Please do your own research to determine the best brokerage fit for you.)

How do they do this? Fidelity calls them “fractional shares” and Schwab calls them “slices.” This means that you can buy a part of a stock or fund, for less than the price of the entire share.

And the cool thing is you don’t have to do the calculations because the brokerage does it for you!

I strongly recommend that you set up the process to do this for you automatically. This way, you don’t have to go in every time you have money; the auto transfers will do it all for you.

TIP: The customer service reps I’ve encountered at both Fidelity and Schwab have been VERY helpful when I’ve rolled over funds, couldn’t figure something out and wanted to open an account.

1. You click on the menu item, which will say something like “Buy,” or “Trade.” Enter the name or ticker symbol for what you’re buying. In our example, we’re using MSFT for Microsoft.
2. Indicate the number of shares you want to buy, or in our case, the dollar amount. For simplicity, let’s say we’re investing $10 every two weeks. Enter that in the box that asks how much you want to invest.
3. Once you’re finished filling in the boxes, hit “Enter,” “Submit” or “Buy.” And that’s it!

If you want to set up recurring purchases, say, every two weeks or every paycheck, you’ll need to look around the account, like in “Profile” or “Settings” to connect your funding account (if you didn’t do that when you opened the account).

I’ve directed Fidelity to do the following for me once a month in my Roth IRA:

• Withdraw a set amount

• Fidelity automatically uses that money to purchase VTI

And that’s all! All I have to do is watch my investments grow!

Dividend Reinvestment

Microsaving takes a lot of forms and one way is to reinvest dividends.

But first, what’s a dividend?

A dividend is money that a company pays to stockholders for holding stock. For example, Microsoft pays a dividend each quarter of $.91. Dividends are paid out quarterly during a calendar year. Some mutual funds and index funds pay dividends. I have a lot of VTI, which currently pays $3.76 per share.

Dividends are a great way to earn passive income through DRIP, or Dividend Reinvestment Plan. If you have a dividend-paying stock on your Roth IRA, you can direct the brokerage to reinvest that money each quarter. The reinvestment buys more of that stock or fund, which increases your holding, which increases your dividends. It’s a circle of microsaving and reinvesting. The cool part is that you don’t have to do anything. It’s all done passively!

This is why slow and steady is the way to go. Over time, this money builds on itself, which increases your investments.

Microinvesting and Compound Magic

Reinvesting dividends is sort of like the interest on your savings account making you money. It’s another form of passive income that makes you money. And that money makes money on top of the money. See the charts below from DRIPcalc.com to see how dividend reinvestments pay off over the long term.

This chart shows a sample investment in Microsoft (MSFT). Initial investment is $100. The dividend amount is $.91 and it assumes a monthly investment of $100.

This chart shows growth over the long term of what you see in the chart above. That starting balance of $100. A few things to keep in mind: this is an estimate; Microsoft could change the amount of the dividend by raising or lowering it, which would change the end balance; returns are not guaranteed.

Stock Market Risks

Risks are everywhere. In relationships. When you drive. When you take medication. And of course, when you invest in the stock market.

When you put money into a savings account, your money is insured by the FDIC (Federal Deposit Insurance Corporation) up to a certain amount. Under certain circumstances, the SIPC (Securities Investor Protection Corporation) protects your cash, stocks and bonds.

For example, let’s say that the brokerage firm where you have your Roth IRA and a few stocks gets into financial trouble and files for bankruptcy. The SIPC will step in to make sure account holders don’t lose their money.

The SIPC DOES NOT protect your investments when the stock market crashes. This is why people who lost money during the 2008 financial crisis or during the COVID-19 pandemic didn’t recover. This was a stock market thing and not a failure of the financial company.

Can You Sleep?

Do your investments keep you awake? Do you get stressed when you hear that the stock market is at an all-time low or when you see the red arrows pointing down?

I’m not going to undermine your feelings or downplay the real stress you may feel. Or the fear. But I will give you a few facts and how-tos to help reduce that stress.

1. Investing in the stock market should be done over the long-term. And by long-term, I mean more than five years. Investopedia defines long-term as longer than 12 months. Maybe you can choose something in the middle
2. Long-term investing gives your portfolio the opportunity to take the punches. Weather the ups and downs
3. The S&P 500 Index has made/returned 10.56% since 1957. But when you take inflation into account, the number goes down to 6.69%. It’s still higher than your average savings account
4. Having a variety of securities (stocks, bonds) in a variety of sectors lowers your risk of losing money. If your portfolio is 100% Microsoft stock, you’re vulnerable to losing all your money if Microsoft declares bankruptcy tomorrow. Sames goes for having 100% of your portfolio in one sector, like tech. If 100% of your portfolio is filled with tech, and 10 tech companies do mass layoffs, that could affect your money. But if you have a combination of tech, hospitality, healthcare, retail and others, you’re better protected. If tech goes down the toilet, your other sectors may remain a bit more stable
5. Balance is key. Variety is the spice of life. Don’t put all the same eggs in the same basket. Choose your metaphor
6. Re-balancing your portfolio once a year helps you track and see if you need to make changes
7. If you have an employer-based plan, call up one of their reps and ask for a free meeting. Tell them you’re stressed and can’t sleep. Tell them your goals and ask them to review your investments
8. Remember that slow and steady is the way to go. Ignore people who want you to day trade or get into dodgy investments
9. Stop looking at your retirement plan holdings on a daily (or even weekly!) basis. The stock market changes daily and so will your portfolio. You’re not going to get a big picture. If it really matters to you, mark a date in your planner/calendar and take a peek once a month or every other month

Microinvesting My Way to $1378 With The 52-Week Challenge

I have my brokerage, IRA and Roth IRA accounts at Fidelity. So do my kids. I used to use Schwab, which is another low-cost brokerage. Both are good and offer a range of accounts. One of my best friends is a money coach and uses Schwab. Both companies offer ways to get into microinvesting.

As a money coach, I’m always looking into microinvesting.

This year I’m doing the 52-Week Challenge with Fidelity. The way it works is that they’ll take out one dollar for each corresponding week of the year, from $1 to $52. So Week 1 they take out $1, Week 2 they take out $2 and so on. At the end of the year, I’ll have $1378. This money will go into my brokerage account.

This is a great way to microsave because 1) Small amounts are taken out of my account, with the maximum amount being $52 in the last week of the challenge; 2) It’s free; 3) You tell them where to put the money; 4) I can withdraw the money at any time without penalty; 5) Building the amount each week gets me in the habit of increasing my savings; 6) It’s a free service from Fidelity; and finally; 7) I don’t have to think about building my savings because it’s all automated.

Building The Habit

Now that we’ve talked about microinvesting, let’s talk about building habits. An important thing to remember is that even if you’re investing $1 per paycheck or $1 per week, the amount isn’t as important as the ACTION. Microinvesting is the perfect way to start somewhere.

Let’s say you want to start the routine of going for a walk every day. Your end goal is to walk 45 minutes a day, five days a week.

But getting started is HARD. So you decide to create a pattern that includes movement. Maybe you take some time in the morning to stretch for five minutes. You do this every other day.

Then you move on to daily stretching.

Then daily stretching for 10 minutes.

Your body and your brain are learning that movement is something that you’re starting to do regularly.

Then you decide to walk to the end of the driveway, back and forth for five minutes every other day. Or maybe you do it for the length of your favorite song.

Then you decide to walk down the street for the length of an audiobook chapter.

The idea is that you start slowly so you don’t get too distracted by your surroundings or people in your surroundings.

The habit of walking took me a long time to develop. As a caregiver to both my mother and sister, I had to set boundaries and say, “This is my time.”

Habits don’t start overnight. Walking everyday for a month is going to make you drop 30 pounds during that month. But it can make you feel better physically and mentally, which could lead to bigger changes in your life.

Investing $10 a month isn’t going to make you wealthy. But adding to that $10 and watching that money grow can create motivation and a desire to build more. It’ll take time, but you did the hard part by getting started. It could take months, or even a year. Everyone’s different and there are no rules.

Put up a chart or a sticker or Post-It note every time you invest. Make a note and celebrate when you increase your investments. Then in December, look back on where you were a year ago and see how much you’ve changed.

Microinvesting can change your life and teach you things you’ve never dreamed.

Why Does Microinvesting Work?

Microinvesting works because it does two things: it helps you develop a habit that leads to building a retirement fund.

It also works because it makes investing easier by starting you off on small amounts, making it doable. This can be motivating. You take tiny, micro steps to save money for a goal, turning those micro steps into a decent wad of cash for your retirement. This motivation can fuel a desire to increase your investments. You’re microinvesting your way to an end goal.

Microinvesting is just the beginning. If it takes you a year or two to reach your goal, then that’s what it takes. You may have setbacks and it’ll be frustrating. You may lose a few dollars when the stock market takes a downturn, but you’ll recuperate that money as you continue to invest and let the money grow over the long-term.

Get In Touch

If you want more help getting to a place where you feel confident and need someone to hold your hand, get in touch! I provide coaching in a safe space, free from judgment. I’ll cheer you as you take steps and be there for you when things don’t go as expected. Find out more by scheduling a free 30-minute strategy session today.