Want to learn how to invest but don’t think you have the cash? It’s time to automate your way to a nest egg. Automatically investing, even small bits at a time, is considered dollar-cost averaging.…
Want to learn how to invest but don’t think you have the cash? It’s time to automate your way to a nest egg.
Automatically investing, even small bits at a time, is considered dollar-cost averaging. The concept is that you set a predetermined amount and interval that you’ll invest the money, and it is automatically executed regardless of what’s going on in the world or with you, says Michael Tanney, managing director of Wanderlust Wealth Management in New York. This is a good way to build wealth, without much hassle or stress.
But the key to doing so is finding an approach that is straightforward and easy to implement, says Megan Gorman, managing partner of Chequers Financial Management in San Francisco.
Thanks to the proliferation of robo advisors like Acorns, Betterment and Wealthfront, online personal finance and wealth advisors that help automate investments and savings, it’s become easier than ever to automate your way to wealth. Apps and online services make it easy for users to engage in micro-investing, or micro-saving by automatically rounding up purchases and investing the difference, or helping investors set goals.
“It’s a really great service for people to build up savings and invest without having to think about it,” says Chris Burdick, founder of BestRoboAdvisors.org, which rates and reviews robo advisors and automated investing tools.
Experts offer the following tips for automating investments so that it can become natural to you:
— Set an amount you want to invest.
— Start a new brokerage account.
— Set up direct deposits.
— Don’t ignore your 401(k) plan.
— Take on the “bucket” strategy.
— Invest in target-date funds.
— Try credit cards with cash back to investments.
Set an Amount You Want to Invest
And if you don’t know, start with 20 percent. “The 50/30/20 rule, or 50 percent for required expenses, 30 percent on discretionary and 20 percent saved savings will serve most people well,” says Laura Webb Rogers, founder of the blog Success to Saving.
“Think of an automatic contribution as paying yourself a salary every month. In reality, you’re reducing your current spending power and exponentially increasing it in the future. This approach is single-handedly the most impactful way to grow substantial wealth, regardless of how much you earn,” he says.
Start a New Brokerage Account
Now that you know how much you want to regularly invest, open a brokerage account online with firm, such as Fidelity Investments, Vanguard or T. Rowe Price. Most discount brokerage firms allow the establishment of an account that starts with a very small initial investment and links your bank account to that new brokerage account, says Gage DeYoung, founder of Prudent Wealthcare in Colorado.
“You can set up a monthly draw on your checking account to go directly to the new brokerage account and usually a day later buy more of the investment you selected,” he says.
Directly Deposit From Your Employer
Have your set-aside investment savings directly deposited from your employer into the investment account so you don’t see it first, Rogers says.
Most payroll systems allow employees to deposit their paychecks into more than one account, Gorman says. “All you have to do is ask your employer for the direct deposit form,” he adds.
Don’t Ignore Your 401(k) Plan
Your employer may already offer a 401(k) plan, sometimes with a match of funds, so you should try to contribute at least as much as the dollar-for-dollar match on funds would be.
“Participants who enroll in employer plans quickly become accustomed to the deferral contributions and find it an effortless way to save for retirement,” says J.R. Robinson, a financial planner at Financial Planning Hawaii.
Plus, the pretax contributions are a great way to save on your tax bill now. The hardest part may be getting started, but many employers now automatically enroll employees, who have the right to opt out.
With the bucket strategy, members give their accounts nicknames that symbolize the goal the account represents. Examples include downpayment account, financial freedom, college fund or travel funds, says Rick Vazza, president of Vazza Wealth Management in San Diego.
“Naming the account provides a powerful behavioral incentive that helps the members stick to, and regularly increase, their saving strategy,” he says. “The process I recommend is to schedule automatic transfers to each bucket from their checking account, which receives their direct deposit. The automation ensures the transfers are never accidentally missed.”
Invest in Target-Date Funds
Ideally, automatic investing should also be directed to automatic investments like target-date and index funds, DeYoung says, because “the whole point of automatic investing is simplicity.”
“Index funds are ideally suited for regular contributions as they already balanced. If you only have a hundred to invest each paycheck it is very difficult to invest in stocks or bonds and be balanced,” Webb says.
Some 529 plan sponsors offer credit cards that automatically pay cash back into a 529 plan, Robinson explains, such as the Fidelity Rewards Signature card, which offers 2% cash back on all purchases to a Fidelity-managed 529 plan.
Just be sure to maintain realistic expectations for this strategy: “While it is not realistic to expect that credit card cash back or round-up apps will necessarily accrue to huge sums, in a world where consumers struggle to find the discipline to save on their own … every little bit helps,” he says.