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Micro-investing: how to invest with as little as $100

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Micro investing is turning mobile phones into investment tools, enabling you to get a stake in shares, property and fixed income with your small change.

It allows wouldbe investors with little starting capital to bypass the roadblocks that usually keep them out of the game, such as minimum investment levels, trading costs and market research.

It appeals especially to millennials – roughly those aged between 20 and 35 – who are comfortable using technology to manage their finances.

Many older members of this cohort have been locked out of home ownership – a traditional path to building wealth – due to very high prices, especially in Sydney and Melbourne. Most micro investing is facilitated by apps and it’s growing fast both offshore and locally.

 

Micro investing gives those who have no idea where to start an easy-to-follow path. It encourages saving and educates you about investing and investment options.

It makes you aware of the power of compound interest: for example, if you start with $100 and put away $100 a month for 30 years you will have more than $84,000.

This assumes an average 5% interest rate.

But although investing your small change is a step up from living payday to payday, realistically you’re unlikely to become a millionaire or fund an early retirement from it.

Many will only invest a few hundred dollars in a year but at least this will give you a buffer to cover unexpected expenses. Others will catch the savings and investing bug and use micro investing as a stepping stone to building more substantial wealth.

A trap to watch out for is fees, which can be exorbitant on small balances, although this may incentivise some people to save more.

While many of us appreciate being able to get a stake in the expensive Sydney and Melbourne residential property markets with less than $100 through BrickX, the net rental returns are woeful.

They range from 1.14% to 2.69% a year and will be further reduced in the first year by the 1.75% acquisition fee for each share, or “brick”, bought.

You’re banking on capital growth to make money and there’s a big question mark over whether this will be as strong in the next couple of years as it has been in the past, especially amid signs that the Sydney market in particular is cooling

You should also be aware that saving and investing through apps is not without risk, especially as all markets, including property and shares, can fall.

It’s important to do some research on the company behind the app, including the track record of its executives, and how your money is protected if something goes wrong.

RateSetter

What is it?

RateSetter is a P2P (peer-to-peer) lender enabling you to invest in fixed income, earning higher rates than those available through banks.

How does it work?

RateSetter’s online platform matches investors (lenders) with creditworthy borrowers. Investors can start with $10 and lending terms are a month, a year, three years and five years.

Interest rates are set by lenders and borrowers and are based on the supply and demand for funds at different rates.

Your money may be matched with a single loan or multiple loans. You’ll generally receive interest monthly and you can access cleared funds in your holding account at any time.

What are the pros?

Higher interest rates than those available from bank accounts and term deposits. Advertised rates at the time of writing were 3.7% for a month, 4.6% for a year, 7.6% for three years and 9% for five years. All are after fees.

A provision fund, paid for by borrowers, to help protect lenders in the advent of default by a borrower. RateSetter stresses that this isn’t a guarantee or insurance product.

Easy-to-use website providing clear, up-to-date information about your investment.

Flexible lending options that allow you to have payments received reinvested automatically.

What are the cons?

If a borrower pays late or defaults, you may suffer a financial loss.

In the one-month and one-year markets, your funds may need to remain on loan to a borrower beyond the indicative term if there aren’t sufficient lender funds to replace your funds.

Your deposit isn’t protected by the $250,000 federal government guarantee that is available for deposits in banks and other institutions.

No interest is paid on your funds that are in your holding account or on market (see below for more details).

What are the fees involved?

10% of gross interest, deducted before interest allocated to a lender.

A fee equal to any interest generated on cash held for a lender in RateSetter’s trust account.

Carrott

What is it?

Carrott is a savings app on your phone that allows you to sweep your virtual spare change from your everyday transactions into your super fund.

How does it work?

You download the free Carrott app on your iPhone or Android device. When you buy a coffee for $3.70, the 30¢ is “saved up” and once it reaches $5 it is swept into the Carrott account. Every month Carrott sweeps the balance in your account into your super fund.

What are the pros?

It is a painless, automated way to contribute more to superannuation.

It can add up over time. For example, $10 a week means you are contributing an extra $520 a year (minus the fees) into superannuation.

You are also keeping in touch with your super. Being aware of how much you have in your retirement savings is a good thing, as you can notice any employer contribution shortfalls and chase them up.

A recent survey commissioned by ANZ found that 15% of Australians have no idea how much they have in their super.

What are the cons?

Not all super funds have joined so you may not be able to contribute to your fund, although more funds are signing up. Carrott checks your fund with you to see if it allows contributions through the app.

The cost is high compared with setting up your own top-up with your super fund – either before tax with your employer (salary sacrificing) or after you have paid tax from your bank account. You can do this at no cost.

What are the fees involved?

You pay 3.98% plus 30¢ for each transaction, plus $1 a month for account maintenance. For example, if you contribute $20 a month in two $10 transactions, totalling $240 a year, your total fees will be $28.75.

This works out around 12% of your contribution, which is expensive.

Instead of going through Carrott, why not set up an automatic debit each month to your super fund directly via your bank account or pre-tax salary? You can do that easily and pay no fees.

property brickx investment investing micro-investing $100

BrickX

What is it?

BrickX is a property investment platform that allows investors to acquire fractional interests in residential properties.

How does it work?

BrickX is a managed investment scheme. It buys properties and splits each asset into 10,000 units (or “bricks”), which it sells to investors.

Each property is held in its own unit trust, separate from the BrickX business.

The price of each brick is based on the initial purchase price plus acquisition costs and a cash reserve.

At the time of writing there were 14 properties available and for nine of these the price of a brick was less than $100.

What are the pros?

Enables those with very low funds to enjoy the benefits of investing in residential property, one of the best performing asset classes in Australia. These benefits include regular rental income distributions and capital growth.

Allows you to choose the specific property/ properties you want to invest in from those available through BrickX, which enlists professional help to choose them.

Gives investors, including self-managed super funds, the opportunity to diversify their property portfolio at a very low entry cost. Currently the properties available are spread between suburban Sydney, Melbourne and Adelaide.

Investors can have exposure to residential property with none of the usual hassles of being a landlord.

Members can benefit from professional management including measures to mitigate risks, such as landlord insurance and a cash reserve to cover about three months of expenses for each property.

The transparent website provides a lot of information on each property in an easy-to-access format.

The fee structure is simple.

What are the cons?

Property market risk, including the potential for interest rate rises and oversupply in some sectors, could see values in some markets fall, which may cause the value of some specific BrickX properties to fall.

The danger that some of the BrickX properties have been bought in very hot markets and capital growth may be quite slow, non-existent or indeed negative.

Some valuations have not changed in the past six months; for example, a two-bedroom, two-bathroom unit in the lower north shore suburb of Mosman in Sydney was valued at the same amount ($1.4 million) in both December 2016 and June 2017.

The updated brick valuation is $143.43, representing a 0.51% decrease from the December 2016 brick valuation of $144.17.

Bricks were available at a slight discount, $142, at the time of writing. The downward movement in the brick valuation is in line with the continued amortisation of the acquisition costs for the property, according to BrickX. •

Potential investors must realise that hypothetical capital growth illustrated on the website is based on past growth, which is in no way guaranteed to continue in the future.

For example, Sydney house prices stalled for the first time in 17 months in September, falling 0.1%, according to CoreLogic figures. Annual growth fell from 13% in August to 10.5%.

Net rental returns are very low, as is normal for residential property in Australia, ranging in Sydney from 1.14% for a Balmain home to 2.69% for a Mosman apartment.

Indeed, in most instances the first-year rental return is almost entirely wiped out (or more than wiped out) by the 1.75% transaction fee.

All rental properties run the risk of not being tenanted for a length of time (known as “tenancy risk”).

If this happens investors will not receive monthly rental distributions. Tenancy risk in BrickX properties is mitigated by landlord insurance and cash reserves.

Tenant default risk, which would adversely impact rental distributions.

No control over the property, including decisions about tenants and renovations.

Stake

What is it?

Stake is essentially an online shopping site for investors who want to invest in the US, giving Aussies access to more than 3000 US stocks and exchange traded funds (ETFs) including well-known brands such as Apple, Amazon, Netflix and Tesla.

How does it work?

The site aims to give an online shopping-like experience and you can search out investments in your areas of interest.

For example “shoes” would bring up companies like Nike. There’s also a filtering option that lets you narrow down your search based on a range of factors including lifestyle, region, industry and values.

The drop down “discovery bar” lets you search for shares based on what’s trending. Some of the current options include “bet against Trump”, “invest in female leaders” and “see what Buffett owns”.

Stake takes a “dollar-based investing” approach, which basically means you can buy an exact dollar amount of a security and don’t have to invest in a multiple of a share price.

For example, Apple’s share price at the time of writing was $US155.90 (about $A200). If you invest $US100 you’ll get about 0.6414 Apple shares, or invest $US500 and you’ll get 3.2072 shares.

The minimum investment amount is currently $US50 but you have to transfer a minimum of $A500 into US dollars to start trading.

At the moment Stake is only available to individual investors over the age of 18 but there are plans to make it available to self-managed super funds, trust and company accounts and minors.

A unique feature is the gift card concept, allowing you to purchase US shares as a gift for someone else.

You can buy a gift worth between $US10 and $US500 in any company you like and have it sent to whoever you like.

They will need to “redeem” their gift within one year to register the shares in their name. You can even buy a gift for yourself.

What are the pros?

It is a fairly low-cost way to invest in the US market and the site is very easy to use, so buying the shares is a breeze.

What are the cons?

The smaller the amounts you transfer the more expensive it is as you’ll pay $A5 if you transfer less than $A2500 into US dollars and don’t use POLi.

Stake doesn’t give investing advice so you’re really on your own. You need to do your own research into the shares and be confident in your own decisions.

ING Everyday Round Up

What is it?

It is a digital savings tool, available to those with an ING Orange Everyday account, which lets you round up your purchases and have that money automatically deposited into your Savings Maximiser account.

P&N Bank offers a similar automatic feature called Pay&Save on its transaction account.

How does it work?

Every time you use your card to make a purchase (this includes transactions made using Visa payWave, Apple Pay and Android Pay and when you use your card details on file to make an online purchase such as a Netflix subscription) any leftover change will automatically be transferred to your linked savings account.

You can choose your round-ups to be set to the nearest $1 or $5. If you bought something for $2.50 then 50¢ will be transferred to your account if you have chosen to round up to the nearest $1, or $2.50 would be saved if you had opted to round up to $5.

If you bought something that was exactly $2, though, there would be no round-up – it only applies when cents are involved.

A round-up will not be debited if doing so would reduce your Orange Everyday balance to below $20. You can earn up to 2.8%pa interest on your savings in your Savings Maximiser.

To get that rate you’ll need to deposit your pay of at least $1000 each month into your Orange Everyday account. If you don’t the interest rate is only 1.5%pa.

What are the pros?

It’s such an easy way to save some money without even having to really think about it and you’ll probably barely notice the money has gone.

You don’t have to empty coins out of your wallet every night and it is all done for you.

What are the cons?

There’s not much to fault, other than the fact that you are tied to the one institution for your everyday account and savings.

The interest rate on the Savings Maximiser account isn’t the highest on offer but, that said, it is still quite competitive.

You do need to deposit at least $1000 a month to get that higher rate of 2.8%pa though.

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