- Automating your saving and investing simply means establishing regular transfers into your investment account. In some cases, you can have the cash automatically invested for you.
- Taking the decision points out of the saving and investing process can help ensure that you do both regularly.
- Starting with a financial plan can help you determine how much to save and how to invest to reach your goals. Using automation can help put your plan into action.
Having one less thing to think about can free up your time and lower your overall stress. For instance, inventions like the dishwasher and washing machine revolutionized life at home—few people long for the days of manually scrubbing clothes. Even the programmable coffee maker was a significant step forward in convenience, allowing tired people to add water and coffee to the machine before bed in order to wake up to a steaming hot cup.
Similarly, putting your saving and investing on automatic is a small change that can lighten your mental load—and it may significantly impact your net worth over the long term.
What does that mean?
Automatic investing is the practice of contributing money to your investment accounts on a regular basis through direct deposit from your paycheck or recurring bank transfers. The idea is to establish this routine of saving and investing regularly with no extra effort on your part.
Making it automatic can help keep your savings plan on track no matter what else is going on in your life. Not only can you make saving automatic, you may be able to make investing automatic as well.
- Reduces the temptation to spend
- Reduces the likelihood that you will overreact to market ups and downs
- Avoids spending time on an activity you may not enjoy that saps your brain power (thinking about money and investments)
- Eliminates the temptation to try to time the market (which history suggests reduces investor wealth)
- Helps your saving and investing stay on track while you live your life
Why automating savings works
Automating your savings doesn't sound like a big investing insight. But it's a small trick that actually works because permanently changing behavior is hard. "People tend to stay on the course that they're on. Whether that's eating patterns, exercise habits, or investing—people stick with the tried and true," says Andy Reed, vice president of behavioral economics research at Fidelity.
Think about the most effective automatic investment plan around: the workplace savings plan. The money you contribute never hits your bank account. Since you don't see it come in or go out, you don't think about it. After the account is set up, all you need to do is check in and marvel at your savings progress—and maybe rebalance your investments as necessary.
When it comes to investing outside of the workplace plan, you'll just need to open an account, if you don't already have one, choose investments, and set up the transfer of money. Those steps may be easier than you think.
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Saving regularly and investing your savings can be a powerful combination. The illustration below shows the potential outcome after saving and investing consistently over time.
What's the best way to automate?
It can make sense to start with a financial plan. It doesn't have to be extremely detailed or extensive if you're just starting out—but the idea is to understand how much you need to save, or how much you have available to save, and then how you should invest that money. And you may have several different accounts that are invested differently to reach separate goals.
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Here are a few options:
- Direct deposit into your investment account from your paycheck. Your employer may offer the ability to set up direct deposit from your paycheck into multiple accounts. You can have part of your check sent to a bill-paying account and part to an investment account if that's available. Once the money is in the investment account you can move it into your investments or you may be able to set up automatic investments which could move the money into your funds for you.
- A recurring transfer from your bank account. If your investment account is at a different institution, you can generally set up transfers on either end—from the bank or the investment account.
- An automatic investment plan in your investment account. At Fidelity, you can set up automatic investments into funds you already own in your brokerage, retirement, 529 savings, or other eligible retail Fidelity accounts. The investment can be made from the cash available in the account or by linking to a bank account.
- A managed account. Once your account is set up, you can add extra money at any time—including through direct deposit or recurring transfers. Then the funds will be invested according to your investment plan. Managed accounts include everything from affordable robo advisor services to full-service investment advisors.
Overcoming investment reluctance
Investing can be complicated and it can be scary for a lot of people. There are many small obstacles your brain presents as reasons to avoid doing it. These obstacles are called cognitive biases and they're patterns of thinking our brains rely on to make quick decisions.
For instance, "One is loss aversion—or the fear of losing money. People are so focused on the risk of loss that it can actually outweigh the potential for gain. There's also the notion of temporal discounting. A lot of people place greater value on getting money today versus more money tomorrow," Reed says.
Studies have found that if you ask some people if they would like $100 today or $125 in one year, many people will take $100 today instead of more money later. A bird in the hand is worth 2 in the bush, as the old saying goes.
Then there's the question of timing. Investors often delay getting into the market on the hope that there will be a better time to invest. But research has found that as soon as possible is generally the best time because attempts to time the market tend to reduce long-term returns. Remember the old saying, "it's about time in the markets, not timing the markets."
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"So there are all these decisions that have to occur in sequence, and if any one of them falls through then you just don't invest if you're on the sidelines," Reed says.
That's why making it automatic can help. You make the decisions once and then move on with your life—if you don't think about investing again for 3 months, your savings plan is still on track.
"From a behavioral standpoint, when you're planning ahead of time, you're thinking about the future. That makes it more abstract so you're more rational versus thinking about the present. So if you automate, if you make that plan and you follow through, then you let your sober-minded, cool-thinking, rational self make a decision so your emotional, excited self in the present doesn't drive your behavior," says Reed.