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When I talk with coaching clients one of the biggest fears I hear is investing. Anything from not having enough money to invest to not knowing what and where to invest. Probably not surprising is that only around 50 percent of American families have any exposure (direct or indirect) to the stock market. Big technical words, fancy graphs, paid experts, it all is a little scary. There has to be something simple out there, right? I think the answer is an automatic investment plan. Let me explain.
According to Investopedia an Automatic Investment Plan is an investment program that allows investors to contribute money to an investment account at regular intervals to be invested in a pre-set strategy or portfolio. Funds can be automatically deducted from an individual’s paycheck or paid out from a personal account.
For example, my wife has her company’s 401K plan. Each pay period she automatically has 15% of her pre-tax income deducted from her paycheck. This money is then distributed into investments of our choosing from the company’s array of investment options.
These investments vary from provider to provider but most commonly you will find mutual funds, index funds, and target date funds. Don’t worry about the specifics right now, just know that an automatic investment plan is fantastic.
Ever since my first job out of college I have had some sort of automatic investment plan. I started with an IRA and automatically investing with Sharebuilder. Although truth be told I believe I was investing in individual stocks including the now bankrupt Lehman Brothers!
The thing is back then I didn’t really have a plan. I had the automatic but not really the investment plan part. Automatic is great but if you are automatically investing your money in junk bonds or a money market account you are missing out on how to build wealth.
Everyone needs a plan and I would argue that an automatic investment plan is the stuff of champions. But why?
If my wife and I wouldn’t have an automatic deduction from her paycheck we would have an extra $1,583.33 which is the monthly amount needed to max out your 401K in 2019. Having this money hidden from us is the best way to not spend money.
I refer to this as the “no cookie method”. I tell my clients this all the time. If I bought cookies from the grocery store and put them in our house, I would devour them. Cookie dough is gone even faster but you get the idea.
So instead I choose not to buy cookies. By simply not bringing cookies into the house I save myself thousands of calories, the need to only wear sweatpants, and all of the great health benefits of not binge eating cookies that come along with it.
Just like the no cookies method we have chosen not to bring this “extra money” in our checking account and spend it or try to invest it ourselves every month.
I can’t even imagine having to make an investment decision every month. We already make 35,000 decisions every day. Imagine adding something with as much math and psychology behind it as investing! Are you kidding me.
Having an automatic investment plan will save you a ton of stressful hours trying to figure out if you should invest this month or what to invest in. Once our investment philosophy was in place I rarely took the time to think about our investments at all. Mostly I’m checking if our investments went up or down.
As you can also imagine the amount of time spent is reduced drastically when you have all of the work done for you. Most of the time you will spend is setting up and deciding your investments. I’ll talk about that in a minute.
I have made many mistakes when investing. But I have also learned from those mistakes and what makes the most sense for me.
It’s actually why the majority of our investments are in index funds. I’m basically taking out the bad investment ideas and instead investing in the stock market. For example an S&P 500 index fund or a Total Stock Market Index make up a large part of our investment portfolio.
Making regular investments each month makes reaching your goals that much easier. Investing $19,000 sounds like a ton of money to me. However having a small amount of money taken from our paycheck hardly even gets noticed.
When you have your spending plan aka your budget figured out, setting aside money to pay yourself first certainly makes life and investing easier.
Now I know you may be thinking that you don’t have a spending plan or have any money left over at the end of the month. That’s actually what I work with my money coaching clients to fix.
First is to get the spending plan figured out. Then when they are comfortable knowing how much money is coming and going they can move to investing. That’s when the automatic investment plan really makes all the difference.
I make a spending plan every month. Although now there isn’t much that changes as everything is set up automatically. I personally use the Zero Sum budget. This simple spending plan allows me include what I expect to spend on groceries right along with my savings and investments.
We are all smart people, I mean you are reading a personal finance blog but don’t overthink any of this take action. Who knows maybe you are considering getting your financial life on track and want to work with me as a money coach.
If you work with me I preach the brick by brick method. The summarized version is to get a spending plan aka budget, track your expenses, build an emergency fund, pay off debt, and then save and invest.
So you have created your financial foundation and ready to invest. As a cold sweat begins to break don’t worry it’s a lot easier than your financial expert that charges asset management fees for their services makes it out to be.
The main components of an investment strategy are your age and your risk tolerance. I’m currently 37 years old which means I have almost 30 years left in the stock market before I hit 65, a common age used for retirement.
Risk tolerance. Sounds fancy and maybe even a little complicated. It’s not. It’s ultimately the automatic investment plan that allows you to sleep at night when the stock market crashes.
Nobody wants to lose money. But the reality is whether you put your money in a savings account or the stock market you will lose money at some point.
With the savings account you are losing money to inflation and the opportunity for the 8th wonder of the world known as compound interest and ability to make you a millionaire.
With the stock market, stocks go up and stocks go down. Whether you have an individual stock, an index fund, or a bond. What’s more important is answering the question will you freak out and sell it all if the stock market goes down?
That’s risk tolerance. Like I tell my clients, a good plan is the plan that you are going to stick with. Once you have this figured out you now have the beginnings of the “investment plan” in the automatic investment plan.
I’m not here to give investment advice, but I think one of the simplest things to do when investing for retirement is invest into a target date retirement fund. Remember not all retirement date funds are made equal which is why I recommend using a low fee brokerage like Vanguard or Fidelity (I personally use both companies). Both Vanguard and Fidelity allow you to set up automatic investment plans.
As an example, if I simply wanted to set it and forget it, I personally would go with Vanguard Target Retirement 2050 Fund (VFIFX). The 2050 Target date fund invests like I plan to retire between 2048 and 2052, which is when I will be between 66 and 70 years old.
The target fund has a low expense ratio of 0.15% and keeps investments simple by allocating the funds into stocks and bonds.
What’s great about a target date retirement fund is as you get closer to your retirement age the fund adjusts accordingly. This is one of the simplest ways to invest.
Of course we need the automatic in the automatic investment plan. Now most people will invest through their companies 401K plan. However others will create IRA or taxable brokerage accounts.
In either situation the plan is the same. Choose an amount or percentage of your income and have this automatically deducted every paycheck, month, or time frame you are comfortable with.
For example with our personal brokerage account, we have an amount automatic deduction at the beginning of every month. The funds are transferred right after the last paycheck in the month has been deposited into the account.
Investing is important for your long term goals and it’s one of the best ways to create passive income, grow your money, and build wealth. With the new year approaching it’s a great time to sit down and adjust your current automatic investment plan or create a new one. Remember always do you your research. Let me know if you have any questions, remember I love talking about this stuff!