Why Automating Your Investing Is Good For Everyone
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The best way to guarantee you will be able to retire is to automate your investments.
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Our biggest enemy in personal finance is our willpower and if we can remove that from our equation the chance of success will skyrocket.
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This is why we want to keep our money on autopilot at all times.
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The more we automate the wealthier we will become. β
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I tested this with my own money. I used to manually move my investments over every month. Not because I needed to, but I got a dopamine hit every time I invested my money.
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The problem?
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I would sometimes invest late or worse forget to invest all together. One month I skipped investing because I wanted to spend the money on a big purchase.
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I lack willpower. You lack willpower too.
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How do I know that?
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The average American does not save enough in their 401(k). That can be shown in the below Vanguard chart.
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But there is good news. Companies are deciding to increase their automatic contributions to the 401(K) plan, which has shown to increase the amount someone saves for retirement.
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Take a look at this chart from Vanguard.
Vanguard elaborated below:
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Nearly a third of companies that use automatic 401(k) enrollment now start workers saving at 6% of their salaries or higher, about double the share of organizations that did so a decade ago, according to Vanguard Group.
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About 60% of companies automatically enroll new hires, bringing 401(k) participation rates to 82% of eligible workers, up from 66% in 2007, according to Vanguard, which administers 401(k)-type accounts for nearly five million people.β
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This is good for our savings rates in the U.S. although it would be nice if it was 10%+.
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Automatic investing has had a huge impact on how the stock market behaves. Think about it: with millions of people consistently putting money into their investments every paycheck, it's like a steady flow of cash into the market.
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This steady stream of investments has likely contributed to the gradual increase in stock market valuations over the years. It's a simple case of supply and demandβmore money coming in on a regular basis tends to push prices up.
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Plus, the beauty of automatic investing is that it encourages good behavior. When your contributions are automated, you're less likely to panic and sell when the market takes a dip. Instead, you keep investing steadily, even during downturns, which can actually help you buy more shares when prices are lower. It's a disciplined approach that can pay off in the long run.
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Now, automatic investing isn't a magical shield against market downturns. People will still panic, and markets will still fluctuate. But the sheer volume of money flowing into retirement plans through automatic contributions has had a lasting impact on how markets operate. It's reshaped investor behavior and contributed to the overall stability and growth of the market over the past few decades.
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Why I love Automatic Investing on the personal level.
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1. Consistency: It keeps me on track with my investments without needing to constantly remind myself. Every month, like clockwork, money goes into my investments. It's a game-changer for staying disciplined.
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2. Smooths out the bumps: I used to worry about market ups and downs, but automatic investing has changed that. Whether the market's soaring or taking a dip, I keep investing regularly. It helps me steer clear of emotional decisions, like panic selling during downturns.
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3. Time saver: Setting up automatic investing has freed up so much of my time. No more hours spent researching which stocks or funds to buy. Once it's set, I can relax knowing my investments are being handled consistently.
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4. Dollar-cost averaging: It's a neat strategy where I buy investments at varying prices over time. Some months, prices are high; other months, they're low. Over time, this smooths out the average cost of my investments, so I don't stress about timing the market perfectly.
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5. Compounding: This is where the magic happens. By investing regularly, my money gets more time to grow. Starting early and staying consistent means my investments can benefit from compounding interest, making my financial goals more achievable over the long haul.
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Automatic investing has truly simplified my approach to investing, making it easier to stay focused on my financial future without the stress. More coming on HOW to do it soon.
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