Successful Investing - Just Automate
An automatic investment plan makes sense for two reasons:
It lets you invest on a regular schedule.
It sets you up for success.
Once you set-up your account to automate your investments, you have placed the cornerstone upon which your will build your wealth. Mindlessly putting away part of your paycheck each week keeps your plan on track even when you get distracted by life. It is really easy to decide to spend your money rather than save, but true wealth is built upon the habit of paying yourself first and when you do it automatically, it is not longer a challenge, but a habit.
Pay yourself First
Most of us get paid, and then use all of our money to pay bills and meet living expenses, Successful people who are building wealth do two things consistently every month:
They pay themselves first.
They invest, rather than leaving all of their cash in a bank account.
Start by paying yourself first as a strategy for building cash savings for emergencies, and then do the same thing with your investments.
Your employer may make this easy by offering a 401(k) or similar retirement plan to which you can contribute through automatic payroll deductions.
Otherwise, you can start a regular or Roth IRA and begin making regular contributions on paydays in addition to cash you transfer to a savings account.
Are you already saving enough for emergencies and retirement? Then it’s time to open a non-retirement investing account and put money away for “life”.
Set Yourself Up for Success
You can’t rely on willpower to reach your financial goals. Use automation prevent your emotions from influencing your financial decisions and helps to make sure your are paying yourself first each and every month.
Investor and financial author Robert G. Allen sums up the biggest reason: "How many millionaires do you know who have become wealthy by investing in savings accounts?"
Many of us delay investing (or fail to start at all) because we’re either intimidated by choosing investments or we’re afraid of the risk. An automatic investment plan can help. It’s as easy as opening a bank account. And, when you put your investments on autopilot, you take your emotions out of investing. Let’s look at how an automatic investment plan does this.
How to Set Up Your Automatic Investments
Nearly every mutual fund company and online stock brokerage makes it easy to set up automatic investing in mutual funds, whether it’s in an IRA or nonretirement account. Most will waive minimum investment requirements when you enroll in an automatic investment plan.
This is how it works:
You set up an automatic transfer from your bank account to your investment account (for example, on pay day).
You specify which mutual fund(s) to invest in and your money is automatically invested at the current price.
The key to keeping automatic investing affordable is to invest directly with a mutual fund company (for example, buy Vanugard funds through Vanguard or Fidelity funds through Fidelity) to avoid paying a trade commission each month. Alternatively, some online brokers (TD Ameritrade*, Schwab and others) offer hundreds of no-transaction-fee mutual funds in which you can automatically invest with no extra fees.
Start With A Company Retirement Plan
Start with a company sponsored retirement plan if available. If your employer offers a 401(k) plan, enroll in the plan. This can be a great way to put your savings on autopilot.
Simply sign up for the plan and contributions will be automatically taken out of your paycheck, increasing your savings and decreasing your immediate tax liability.
If your employer offers to match your contributions up to a certain percentage, be sure to contribute enough to get the full match. It's like getting free money and a guaranteed return on your investment. Finding the cash to stash may be a challenge, particularly when you're young, but don't let that stop you from pursuing future riches.
Almost everyone with a retirement plan invests in the account with automatic contributions, but what are some other ways automate your investments? Here a few to try and the best part it’s simple:
Arrange for an automatic transfer from your checking account to your savings account at your bank or credit union. Start with an amount you can manage, it can be as little as $50 each month. It will help you develop the discipline of savings. You can use this approach to start your emergency fund. After a few months, try increasing the amount until you have some money available for emergencies and maybe to invest.
Use one of the newer “Robo-advisors”, to get your investment program started. Many of the newer providers, will set-up your account from your mobile phone, and automatically take money from your checking account to invest in a wide range of financial products, often low-cost index funds.
A robo-advisor (robo-adviser) is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners.
Most mutual funds and discount stockbrokers will also allow you to set-up a plan for automatically investing by transferring money from a checking or savings account.
You can even use a automatic transfer from your checking account to purchase shares (and even fractional shares) directly from many of America’s best corporations. (More on this in a later chapter.)
Dollar Cost Averaging
The technique of buying a fixed amount of an investment at regular intervals is known as dollar cost averaging.
If you were to buy $1,000 of a stock or a mutual fund when it’s per-share price is $100, you would own 10 shares.
If, however, you invest $100 a month for ten months and the fund’s price varies from $80 to $120, you may end up slightly more or less than 10 shares depending on the stocks prices. As the market climbs, the notion is you will end up buying more shares at a lower price than if you invested in a lump sum. The market goes up in the long run, so you want to get money in as soon as possible.
Mutual funds make automated investing easy because you can invest any amount in a mutual fund regardless of the current price. (You can buy fractions of a share.)
There are several services that help you select and set-up automatic transfers to purchase shares of stocks on a monthly basis. One way is ShareBuilder.
ShareBuilder’s entire model is built around automatic investing plans, and for $4 a month you can invest a fixed amount in individual stocks as well as mutual funds (you can hold fractional shares).
Computershare.com is another service that allows to set-up an account, and then enroll in dividend reinvestment plans where you can purchase additional shares (or fractional shares) for as little as $10 a month (the example I am thinking of is the 3M company).