traviswright

Make It Automatic

This is the best piece of advice that I feel I can give. Make it automatic. Choose what you want to invest in and then automatically contribute the same amount to it every month. Have it set up to automatically come out of your checking account the SAME DAY you get paid. In the book “Automatic Millionaire,” David Bach calls this “paying yourself first.” It’s a good book to read, or at least skim through. I don’t agree with everything, but it’s a good place to start with some very valid points. However, you just have to remember, that whatever money you put into an IRA is hard to get back out until you are 59 1/2. Unfortunately, many people in today’s economy of spend first and pay later are having to borrow money from their 401(k) plan at work. Not a good idea. I would hate to spend my career saving money only to have to borrow that money back before retirement.

One reason to make it automatic is called dollar cost averaging. It’s a very simple strategy that is easy to understand.  Dollar cost averaging is basically investing a fixed amount of money at regular intervals over a very long period of time. The amount of money contributed each time is the same, but the number of shares you are able to purchase will be different each time based on the current market value of the shares at the time of purchase. If the market is up, you buy more shares, and if the market is low like it is now, you are able to buy more shares. Therefore, you aren’t trying to time the market. The cost of all of the shares you have bought over the life of the investment is averaged out.  This is a great strategy for investing in mutual funds, whether it be through an IRA, 401(k), or other tax sheltered or non-tax sheltered plans. Just remember that this is a long term strategy, and is not to be used for quick short term gains.

Another reason to make it automatic is because of Compounding. According to our friends at Wikipedia who are always 100% correct in my opinion, “compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on.”
Kiplingers, a trusted financial publication had this to say in a recent article:

-”Compound interest has been called the eighth wonder of the world. And with good reason. It magically turns a little bit of money, invested wisely, into a whole lot of cash. Even Albert Einstein — a bit of a smarty pants — is said to have called it one of the greatest mathematical concepts of our time.”

-”Here’s the gist: When you save or invest, your money earns interest or appreciates. The next year, you earn interest on your original money and the interest from the first year. In the third year, you earn interest on your original money and the interest from the first two years. And so on. It’s like a snowball — roll it down a snowy hill and it’ll build on itself to get bigger and bigger. Before you know it … avalanche!”

*I’d strongly advise you to go and read this whole article. It’s very easy to understand and probably says it a lot clearer than I’ve tried to in these last 4 posts*

We have one advantage right now that we will not have forever. We are young. I have 40 years until I retire. I want to do as much as I can. Right now, what I contribute does not seem to be a lot, but I am at least doing something.

Series Wrap-Up
This is the final post in the investment series. I hope that some of this has been helpful to you in your financial journey. I am not an expert, but this is something that I am passionate about. I want to see people that I care about be wise with their finances and really take an interest in planning for their retirement. I hope that you are encouraged to start investing now. I hope that you don’t think you don’t have enough money to invest, because you do. I hope that you don’t think you are too young to invest, because when you are young, that’s the best time to star. Whatever you do, just start now.

Do something!

*leave some comments and let me know if this has been helpful to you, and if you’d like to see more of this in the future*