Automating your investments is one of the best tactics for saving and investing for the future. Your employer, bank, or investment business (or a mix of the three) regularly transfers funds to your investment accounts.
Automatic investing allows the gradual accumulation of a portfolio. According to historical statistics, while the stock market rises or falls in any given year, it typically offers a return of roughly 10% yearly. There are never any guarantees regarding the future. Nonetheless, investing in U.S. equities is usually profitable for the average long-term investor.
Employer-sponsored – 401(k) plans are one of the most prevalent automatic investment strategies. But, several other methods exist to invest without further effort beyond the first setup. When you comprehend how automatic investing functions, you are in the ideal position to make intelligent investment judgments.
How does automatic investing operate?
With automated investing, a portion of your wage or savings is automatically deposited into your investment account and invested according to a rule or set of criteria. For a better understanding of automatic investing, moving backward from the investments you intend to make to your income is helpful.
Initially, select the optimal investment portfolio. Accomplish this using your investment skills, the assistance of a financial advisor, or a robo-advisor. Each offers distinct advantages and disadvantages, including variable costs and support.
After establishing your investment portfolio, automate the transfer of cash. Often, this involves transferring a portion of your paycheck to your investment account via an automated bank transfer or your investment account. How the money arrives makes little difference, as it ultimately comes from your income. What is most important is that it gets there and that it does so automatically and securely over time.
9 best ways to automate your investments
Having an investing account that knows how to handle incoming funds is crucial. So, it will only lie idle once you decide on a new investment. This guide to automated investing strategies provides information on this set-it-and-forget-it type of investing.
Automate your financial decisions by adhering to these nine ways.
1. Invest in an employer-sponsored retirement account automatically
An employer-sponsored 401(k), 403(b), or 457 account is a tax-advantaged retirement account. A portion of your paycheck is routinely taken and deposited into your investing account. Your company will match your contributions.
A workplace retirement plan such as the 401(k) is one of the simplest automatic investing alternatives (k). If your employer gives this benefit, take full use of it. Try to maximize your company’s matching contribution, at the very least. Several employers will match 50 to 100 percent of your contributions to a specified proportion of your pay. You forfeit a portion of your entire remuneration package by declining this option. In ensuring you receive your total retirement benefit, you have also helped automate your finances.
In 2021, the contribution limitations for 401(k)s were $19,500, or $26,000 if you are 50 or older. Most employer matching is capped before you reach these limits. Nonetheless, if you prefer your investing selections, contribute the maximum to this plan. This is an effective method for automatically investing in the stock market.
2. Combine your financial accounts
On average, individuals change employment every five years. Sadly, many still bring their 401(k) plans. The Center for Retirement Studies at Boston College estimates that people have abandoned 24 million 401(k) plans and $1.35 trillion in assets from their previous employment. Even though transferring an existing 401(k) to an IRA is cumbersome, doing so has some advantages.
- It is easier to manage your investment portfolio when all your former retirement accounts from work have been merged into a single charge.
- Specific 401(k) plans have higher costs, so they often save you money
- Your earnings improve if you leave your previous 401(k) assets in a lower-yielding investment.
- If you have investment accounts with various brokers, consider combining them. Having everything in one location will facilitate the simplification and automation of your investments.
Now is the time to consider establishing additional automatic investing accounts. For instance, if you have children, develop a 529 plan to save for their college fees. Also, determine if you qualify for a health savings account (HSA).
3. Automate contributions in other retirement plans
Maximize your 401(k) and then call it quits. Yet, many opt to stop at the employer match because they would instead invest their remaining funds in a different vehicle. Because of high expenses and restricted investment options, a 401(k) is only sometimes the optimal solution for automatic investing.
Set up a monthly transfer to your retirement account if you are looking for ways to automate investing (IRA). Consider contributing the maximum to your IRA. Consider setting up extra automatic transfers to your consolidated brokerage account, 529 plan, or HSA if you still have excess funds to invest after you’ve maxed out your retirement plans.
4. Create a plan for automatic investments
If monthly contributions are sent to your retirement plans and other investment accounts, consider automated investment purchases so that cash doesn’t accumulate. Several brokerage accounts provide the creation of an automated investing program.
Using a low-cost index fund mimicking a stock market index is one of the best methods to automate investing. Most brokers permit you to set up an automatic investing plan for your brokerage, retirement, 529 plan, and other accounts. Hence, your automatic transfers will be invested instantly.
5. Automate dividend reinvestment
Consider setting up dividend reinvestment automatically if you prefer to hold individual equities. Most brokers enable you to automate the reinvestment of your dividends to purchase additional shares of the same company or mutual fund via dividend reinvestment plans or DRIP.
So, the dividend payments only accumulate in your account, collecting little or no interest if you invest in them. With the power of compounding, reinvesting dividends automatically leads to a significant profit increase over time.
6. Division of direct deposits
Divide your direct deposit between various accounts depending on your employment. For instance, you contribute enough to your IRA or Roth IRA each pay period to achieve the yearly maximum contribution amount.
7. Recurring transfer
Establish recurrent transfers on various schedules with your bank account or investment account, depending on your brokerage, which includes
- Other repeating schedules
Exercise caution to avoid mistakenly overdrawing your connected account with a scheduled transfer.
Many micro-investing applications round up your everyday transactions and invest the spare change after you reach a specified minimum amount.
There are a variety of robo-advisors, including those that provide access to human financial advisors to assist with investing decisions. Once configured, your robo-advisor account will automatically assign new assets to your specific portfolio.
Steps for automating your investments
Creating an investing account begins with selecting the appropriate brokerage and accounts for your investment objectives and experience. Brokers offer various services, prices, and automation tools, so research before selecting the appropriate account for your needs.
When you are ready to set up your automated investing plan, do the following general steps:
- Choose your assets and then determine your investing plan. In the past, mutual funds (mainly target date funds) were the most popular choice if you wanted to ensure that your entire monthly payment was invested promptly. Nevertheless, many stock brokers accept fractional share investments and ETFs regardless of their share price.
- Connect your financing method. It’s time to link your fundraising method. Choose a split direct deposit or link your bank account to send an EFT. Pick the one that makes the most financial sense.
- Specify your financing schedule. The investment schedule you set is specific to your requirements. Every payday, savvy investors frequently make an automated investment. For instance, if you acquire a small amount of Bitcoin each week, then make a substantial retirement contribution every other week. Mix and combine strategies until you reach your financial goals.
Avoid the urge to check their financial accounts daily, but don’t ignore them. Monitor periodically to ensure that your automated investments align with your objectives. Adjust your portfolio as necessary to keep it working for you.
Numerous robo-advisors incorporate functions such as automatic rebalancing and tax-loss harvesting. With them in place, you have fewer concerns regarding managing your finances.
Lastly, track progress and make modifications. Your investments are now automated. Congratulations!
Automate your investing operations to meet your financial objectives
Automatic investing provides several advantages. In addition to automatically saving money for the future, you also take advantage of dollar-cost averaging – investing consistently over time despite market fluctuations. Automating your investing is the best option if you don’t engage in active trading or stock picking. Simply put, it’s a way to automatically and regularly contribute to your retirement or other long-term savings plan.
About Author- Fatema Aliasgar is an experienced B2B and SaaS content writer based in Mumbai, India. She has done her Master’s in Business Management and has written B2B content for seven years. She likes to read non-fiction and play board games with her kids during her free time.