How to Automate Your Investments And Why You Must

All things being equal, simple is better than complex. Do you agree? I am sure you do. My experience tells me that those who get rid of needless complexity from their financial life tend to do much better than those who don’t. And if you’re on board with that idea you’ll definitely want to automate your investing. It’s one of the best ways to simplify and improve your financial life.

What Is Automatic Investing?

This is when you arrange to have a fixed amount of money taken out of your paycheck or bank account every month and invested in a pre-determined allocation. Contributions to retirement plans at work are a good example of this. If your employer withdraws money from your paycheck each month and automatically invests in the 401k or 403b you have automated your investing. What I’m suggesting here is that you use the same method to fund a non-retirement account and invest automatically.

Note – You can use web-based services to do this for you but I am not in favor of that move. You can allocate and invest the money yourself just as well for free. Why spend the extra money on these services?

How Do You Automate Investing?

This is a very straight forward process. First, determine how much money you want to save and from which account. Then call your investment provider and tell them you want to set up an automatic investment plan and how you want the money invested. They will do all the paperwork. Once you sign off on the bottom line, the automated magic begins.

Second note – I am usually a big fan of using custodians like TD Ameritrade or Fidelity rather than keeping accounts at specific mutual fund companies. But there are limitations. Custodians can easily set up automatic investment plans where they bring the money into your account. But if you go this route you’ll have to execute the actual trade you want to make each month. When you keep your money directly at a mutual fund company, you probably won’t have that problem. Something to consider and check out Pilgrim.

Why This Is A Good Idea

There are 4 good reasons to automate your investing:

1. You Can’t Spend The Money

When you automatically draft money into your investment account that means the dough isn’t lying around tempting you to spend it. That cuts down on discretionary spending and helps you achieve your financial goals much faster.

Another Note From Neal:  When you automate your investing, it makes a lot of sense to consider equity growth.  I say this because people who set up auto invest usually do so to satisfy a long-term investment requirement.  And growth is usually a good fit for people with long-term goals in mind.

2. Fewer Arguments

When you automate your investing you also automate your savings and that leaves less room for fighting about how much to spend or save. The money is set aside for your future without any work or discussion. That means you don’t have to convince your other half of the virtues of retirement planning. You’ve automated it you genius you.

3. No Work Required

It does take a little effort to set this up – but not much. And once everything is put in place, your financial success will take care of itself. You won’t have to waste time worrying, calling, moving money around etc. The money will be invested for you while you are out doing more important things – like enjoying your life.

4. The Odds Are In Your Favor

If you are like most people I know, most of your savings and investments are in your retirement plans. There are two reasons for this. First, the tax penalties make it very difficult and expensive to tap into that money. And second, the money grows fast because you add to it each month.

While you can tap into your non-retirement account without incurring the same tax penalties, most people I know tend to leave these automated accounts alone. They are building them up. They don’t want to move backwards. Also, you still have those automatic additions working for you which really add up over time.

Automating your investing is easy to do and the payoffs are huge. It has the added benefits of making your future more secure, cutting your current spending and reducing financial friction at home. What’s stopping you from taking advantage of this cool free tactic?