The best way to make a habit of saving and investing is to automate it. It throws behavior out the window, removes mistakes (or lowers the chance of it at least), and enforces discipline without trying. All you have to do is start an automatic investment plan.
Automatic saving has been around for years. Now there are tools available to help you automate investing.
Automatic Investing Works
Making systematic monthly investments is the best way to stick to your goals. Anytime you automate that process it increases your chance of success. Not to mention, it makes it simpler for you.
Like clockwork, every month your money moves from one account to another before its spent. But you still have to invest those savings.
The goal is to put the least amount of friction between yourself, your money, and your financial goals. Automatic investing does that.
You see how easy it works with direct deposit, bill pay, your 401k, and finally fund companies and brokers allow it with your IRA and brokerage accounts. It only takes a matter of minutes to get started.
Your 401k Does It
Your 401k automates this process very well. Pensions did it before that. Without thinking, your money is systematically saved from every paycheck, before you get paid, and invested in funds you chose. It’s the best way to remove forgetting from the equation.
How successful would it be if the 401k process wasn’t automatic? Imagine if you had to deposit the money after you got paid. Or if you had to invest those savings on your own. And remember to do it every month!
It’s proof the automatic investing process works wonders when you save enough money. All you have to do is set it up.
There are even online investment advisors that critique the funds your 401k offers and helps you build a plan based around all your accounts (401k, IRA, brokerage, and savings).
You can do this outside of a 401k too.
Directly from Fund Companies
Fund companies have offered this for years too. The automatic investment plan was a way to lock you into their products, while you saved. But fees and minimum requirements can be an issue.
When you’re shopping for funds don’t be surprised to see a half-dozen minimum requirements depending on how you might invest in a fund. Most fund companies have minimum initial investments on funds. These can be anywhere from $1,000 to $3,000 or more depending on the fund.
To get around this, some funds waive or lower the minimum in exchange for setting up an automatic investment plan. Minimums for funds bought through an IRA are often different too. There’s usually a minimum additional investment of $50 or $100 for monthly investments.
If you meet the requirements the set up is quick:
- Set up automatic transfers from your checking or savings account to the fund company
- Pick the funds you want to invest in
The biggest problem with mutual funds is the minimum requirements. Even the best fund companies, like Vanguard and Fidelity, have these limitations. Instead of having to save $100 a month for 2.5 years to get that $3,000 initial investment (and risk the chance of forgetting or spending the money), you can start investing now through a broker.
Go Through Brokers Too
Most brokers have no minimum balance requirements to get started. At least the best brokers don’t. You can buy mutual funds through online brokers too. The only way it works is to avoid transaction fees to keep costs as low as possible.
To stay competitive, the better brokers offer no transaction fee, no-load funds. You end up with a wider selection without being stuck with one fund company. But you still have to deal with minimum investments requirements.
ETFs are the best way to avoid those minimums. Since most brokers have no minimum balance, you can get started for the price of one ETF share. There’s the added benefit that ETF expense ratios are typically lower compared to mutual funds.
To lower your costs further, you should use commission-free ETFs. This avoids the cost of buying funds every month. Alternative brokers, like Betterment, automatically invest your monthly deposits into ETFs for a small fee, while adding automatic rebalancing too.
You can get started by setting a regular monthly transfer from your checking or savings account and pick the funds you want. With a broker, you should sign up for the DRIP (dividend reinvestment plan), which will automatically reinvestment dividends for free too.
I do this with TD Ameritrade and cover why in the review. The portfolio planner lets you set a target allocation for each account. You pick the funds you want for each allocation. In my case, I use commission free ETFs to lower costs further than what I’d pay with mutual funds.
For instance, I use the Vanguard Emerging Market ETF (VWO) for my emerging market allocation. When I add new money to the account, it invests a portion into that ETF.
Several brokers that offer automatic investing at little to no transaction costs. You just have to shop around for the one that best fits your investment strategy.