Manual or Automatic? For Your Saving and Investing That Is.
I’m not exactly talking about car transmission here, although on a side note, I have a feeling that the current generation in American will soon not be able to drive a manual/standard/stick shift vehicle as these seem to be on the verge of extinction. These types of cars seem to be a dying breed as more and more drivers want the freedom to use their hands for distractions like drinks and smart phones. If you ever plan to rent a car in Europe, you are advised to learn to drive a stick shift, because the automatics are less common and more expensive. That’s your free travel advice for the day and how to get a less expensive car in Europe.
Now, what does automatic have to do with my finances? I’m primarily talking about saving here. However, many people first experiment with automatic systems by paying their bills electronically, whether automatically or manually by check each month? When I first got married and we bought a house in the mid 1990’s, I think almost every bill was paid by a physical check. Then a few merchants or banks started to do auto-draft, which saved me from writing a check every month. I was happy for the convenience and now fast forward to the internet and smartphone age and now you can pay almost every bill either electronically, automatically, or from your smart phone. Of course you could be like a friend of mine who says he still writes checks for all his bills because he wants to “feel the pain”. I can appreciate the emotion behind what he’s doing, but for me, I’ll stick with automatic.
Automatic bill paying is quite common now, but why would automatic saving/investing be a good thing?
• We all have way too many things on our mind to remember to manually send a check or even do a manual trade or investment on a particular day each month. My memory stinks, how about yours?
• It will be done for you without thinking. It’s easy to forget to invest for my future or a particular savings goal that is far away.
• You won’t have to worry about trying to time the market because you’ll get to take advantage of dollar cost averaging. This will result in a lower price per share due to the fact that you’re able to buy more shares when the price per share is lower and you are investing a set amount each month.
• There is never a better time to start saving and investing than now. We can all probably think of a thousand excuses why we “can’t afford” to do it when the reality is you won’t even know it’s gone after a couple of months and you are used to living off the remaining funds.
Automatic Saving/Investing Step 1: Employer Programs
Do you pay all your bills for the month and see what’s left that you can put into some investment? I have news for you, there will rarely ever be money left over. You will spend what’s in your account (hopefully not more). Why do you think the government takes out income tax every paycheck throughout the year? If it was up to us to remember, we would likely forget. Some people do submit quarterly tax payments though, so they are hopefully good at remembering to pay or have a system set up that works for them.
You may have heard it said before that you need to pay yourself first. This is exactly the same thing I’m talking about here. One great way to pay yourself first and set up an automatic system is through your 401(k)/403(b)/457 at your job. You set up what percent you want taken out each paycheck and then you are on autopilot. Many employers now are even automatically signing you up in the 401(k) at a minimum amount that will typically get the matching contribution from them. I know some of you may be think this is bordering on “big brother” doing things for you, but for many people, I think this is really not a bad idea. You’ll likely need to go into your plan and pick an investment portfolio that suits your needs/goals, but I’m actually an advocate of an automatic sign-up. Of course you are not going to amass enough for a comfortable retirement or financial independence if you just do their minimum initial investment percentage, but it’s a good start.
Automatic Saving/Investing Step 2: Individual Accounts
Now that you have your employer investment plan on automatic, the next step is to set up your other investments so the funds come out of your bank account automatically every month. Most banks and brokerages have easy ways to get your account set up to do monthly automatic withdrawals in whatever amount you have designated. If yours doesn’t have this easily on their website, you may need to call them to set it up or maybe even find a new broker/fund company that is up to date with the modern era because this is pretty basic technology now. You can pull the funds out on whatever day you specify. If you get paid on the 15th, you may want to have it come out on the 17th for example. You can do this if you have an IRA, mutual fund, or brokerage account.
Automatic Saving/Investing Step 3: Increase your Savings
After you’ve got your investments on automatic, then comes the fun part of ramping up the percentage that you are saving. Instead of inflating you lifestyle and spending each additional dollar you make from a raise/promotion take the added money and keep stashing it away. You’re already used to living off of a certain income, so it really shouldn’t be too difficult. Keep striving at work and get more and more income, but then go into those automatic investments and bump them up higher and higher with each income increase. Do this continuously for 10, 20, or 30 years and you will be excited to see how your net worth grows and likely you’ll be either at or almost to a point of financial independence.
Great tips! We’d add: when you set up direct deposit at work, you usually have the option to split it across two accounts. Set some to go to a savings or investment account, so you never “see” the money and therefore don’t miss it.