What is an automatic investment plan?
An automatic investment plan is when you put your money on autopilot with investments. Usually you’ll place some startup cash and some sort of continued deposit, like from your weekly check. An automatic investment plan is a pivotal part of any portfolio if you’re serious about building long term wealth.
If you don’t want to automate your finances, that’s ok. It’s not for everyone. However, you will have to put aside a few hours per month at least to manage your money. Even if you want to control your money, you should still setup that automatic investment plan. Don’t be afraid to invest and don’t delay it longer than you already have.
Learning How to Dollar Cost Average
Dollar cost averaging is when you don’t buy shares in a lump sum. You spread it out over a period of time to get the range of prices for each share. If you were to buy $500 of a fund at a price of $50, you would own 10 shares. If you invested that $500 over the course of 10 months you may get a price in the range of $45-55 depending on how volatile the share is. The idea is that you won’t spend as much in one go and you may end up with even more stock than if you were to buy it all at once, bringing you out ahead.
Pay Yourself First, Invest Second
Anyone who is successful in saving and building wealth have these in common: they invest and they pay themselves first.
When you invest in a stock and you cash out, make sure you replace that startup cash you initially invested. Take the profits you’ve made and use that to start over again. At that point you’re technically playing with “free” money since it’s money you’ve never owned in the first place. This is a practice you can rinse and repeat your entire investing career.
Once you’ve paid yourself you shouldn’t just go spend the money or throw it in a savings account. We suggest setting up a 401k or Roth IRA and begin to make regular contributions with your earnings from investing.
Keep Yourself Contained
With investing in anything it’s easy to get out of control. You don’t want to splurge on that hot stock everyone is talking about because everyone is talking about it. You need to do research and stay calm. By using an automatic investment plan you can shave off some temptation knowing your play is in action all the time.
How to Set Up Automatic Investments
Nearly every mutual fund or online stock broker has the ability to set up automatic investments. Most even waive the minimum deposit fee if you’re automatically enrolled. You set up the transfer from your bank to your investment account. You’ll then pick out which funds to invest and your money is automatically invested at the current price. The key to making this affordable and not losing your money is to invest directly with a mutual fund company and avoid trade fees.
What About Stocks?
Mutual funds are great for automatic investing because you can buy fractions of a share unlike stock where you have to pay the entire price for one stock. There are ways to buy shares of a stock by using services like ShareBuilder. We suggest learning how to invest in stocks before you jump into this service beneficial. These are a great alternative to mutual funds if you’re on a budget.