The Triple Power of Auto-Investing
Do you auto-invest? Auto-investing is having a set, recurring amount of money taken out of your salary or savings, and automatically invested for you. For example, you are auto-investing if you are having a set amount deducted from each paycheck and invested in your company retirement plan. Or you may have set up an automatic transfer from your checking account into an IRA, brokerage account, or 529 college saving plan.
Auto-investing offers 3 advantageous disciplines:
1. Investment discipline. When you auto-invest, you are far more likely to keep investing, come what may. You’ll also decide at the beginning how the money will be invested. With fewer chances to mess with your choices, you’re less likely to make costly investment mistakes in reaction to inevitable market fluctuation.
2. Dollar-cost averaging discipline. The price of your chosen investment will fluctuate. When the price is down, you’ll automatically receive more shares for your same-dollar investment. When the price is up, you’ll receive fewer shares. As a result, your average investment cost will be lower than if you instead purchase the same number of shares every time, regardless of price.
3. Budget discipline. Most importantly, you probably won’t even miss money that is auto-invested before you see it. It’s much harder to set aside money to invest after it’s in your clutches. By treating investing as another household bill to be automatically “paid,” it’s easier to pay yourself first, and live off what’s left.
How much should you set aside? It depends on your goals and how long you have to save. My son just got his first job after graduating as an engineer. I told him, if he starts saving 15% of his salary now through age 67, he’ll have around $4 million. This assumes 7% annual investment returns and 3% annual salary increases. If he waits 20 years under these same assumptions, he will need to save the unrealistic amount of 43% of his salary starting at age 42 to reach $4 million by age 67. Unrealistic at least for someone used to living on 100% for 20 years.
Paying yourself first using auto-investing is a powerful skill to learn at an early age. But any age will do.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.