When you are just beginning to think about financial planning for your future self, apps are a great way to start investing. This type of investment strategy is targeted to the small investor who does not need a typical hands-on personal financial advisor. Investing at an early age is ideal because when you start early, your investments have more time to increase in value.
But before you start investing, some financial basics need to be in place.
Before you even thinking about investing, get a handle on your monthly expenses, by developing a basic budget, a strategy for paying student loans and a plan to pay off high-interest credit card debt.
If you are just starting your adult financial life, save for an emergency fund of $500, then build it to $1,000. You eventually want to get to the point where you have 12 months of income saved. An emergency fund needs to be in a liquid account such as a savings account or a CD so you can get to it immediately and it is not subject to the stock market dips.
Money you are saving for a long-term goal (10+ years) is where you want to target your investments. Your gains will be higher than with a simple savings account and since you don’t need the money immediately, the up and down fluctuations of the market will be less painful.
Retirement is a long-term goal, so start your investments with a 401(k) if your employer offers one, especially if your employer matches any part of your contribution.
After those basics, you can start investing on your own. The apps we reviewed have four basic functions, and some apps are a combination of these functions.
The first function is micro savings—saving very small amounts of money based on regular financial transactions. An example is the round-ups. If you use your debit or credit card, micro savings will round up your transaction to the nearest whole dollar and put the differences between what you paid for your purchase and the next highest whole dollar amount into your savings.
For example, you buy something for $10.29. Micro-savings rounds up your purchase to $11.00 and puts $0.71 into your savings account. It’s the electronic version of saving your pocket change. Micro-savings accounts typically have no minimum initial deposit or funding requirements and there are often no, or incredibly low, account fees.
The second function is a robo-advisor, which serves as professional investment manager for new and small investors. The methodology is based on unique algorithms designed by each robo-advisor and it’s based on a questionnaire you complete, including age, goals, risk tolerance, amount you initially invest and what you plan to contribute regularly.
From that info, a unique portfolio is created for you. Robo-advisors usually have very low minimum initial deposit requirements and sometimes none at all. Fees are based on a percentage of your account balance and can run between 0.15% and 0.50% per year, which is well below the 1.00% or higher that are typically charged by traditional investment advisory firms.
The third function is online trading. They allow regular people to make their own stock market trades for a fraction of the usual cost. In addition to facilitating stock purchases, this type of app can compare fees, offer investing suggestions, analyze mutual funds, aggregate net worth and even track cash flow.
Anyone with Wi-Fi and a bank account can start playing the stock market from the comfort of their phone, which could be very dangerous if you don’t know what you’re doing. Even if you understand theoretically how the stock market works, seeing your money disappear in a falling market can be traumatic.
The fourth function is apps that deal with information about investing. This category includes Yahoo! Finance, CNBC, Bloomberg, Sound Mind Investing, etc. These apps provide the ability for users to sync portfolios and quotes across multiple devices, tracking stocks, currencies, commodities and more.
In looking at these different functions, there are two apps that stand out for beginning investors. The most appealing one is STASH. The minimum investment is $5 (with a $5 promo for joining). The first month is free, then the fee is $1/month up to $5,000 invested and 0.25% over $5,000. The STASH website has a ton of articles and videos that are simple and easy to understand. It is a good resource to explain both personal and global finances. STASH also has several simple but very effective tools such as a sliding scale to show how much your investment is worth in 5, 10 and 20 years at 5% interest based on how much you invest weekly.
The second recommended app is Acorns. Your money is in a diversified portfolio of index funds chosen by Nobel Prize-winning economist Harry Markowitz. The first month is free then it’s $1/month up to $5,000 and 0.25% over $5,000. It is always free as long as you are under 24 years old and in college. The automatic roundups at Acorns make saving and investing easy, and most investors will be surprised by how quickly those pennies accumulate.
Do some personal research to pick the app that’s right for you. Be sure you understand the fee structure and find out about required minimum contributions or initial deposits. The costs listed above may change by the time you are ready to get started. Once you make the initial investment is there a minimum balance you have to maintain? What happens if you fall below the minimum?
Become familiar with how to withdraw your funds. Is there a waiting period? How do you request the money? Do they send you a check or transfer the funds to your bank?
Check out the options available to help you learn and become a more knowledgeable investor. Another huge consideration is ease of use. Some platforms may be too sophisticated for newbies and others may be too simple for you.
Be realistic. Investing is a long-term goal and you won’t make a killing in the short term so be prepared to invest for the long term. “The plans of the diligent are sure of profit, but all rash haste leads certainly to poverty.” (Proverbs 21:5) The earlier you start and the more you learn, the more you’ll build serious finance skills you can use in other areas of your life.
Join us on the Compass Catholic podcast to get started with an investment strategy that will help you have a secure financial future.