Most people have difficulty saving money. Investing part of your income for the future sounds like a good idea in theory, but it’s much harder to execute in practice. Fortunately, the long-revered technique known as automated investing has evolved of late into an even easier and more practical form.
Dollar-Cost Averaging
Timing the market is a losing investment strategy for most average investors. The idea of buying low and selling high sounds simple enough, but most people who’ve tried it have learned the hard way otherwise. The safer and more reliable alternative to timing the market is dollar-cost averaging.
With this strategy, you only invest a portion of your total investment at one time. By buying into an investment incrementally, you avoid the harsh stings and blows of the rapid and unpredictable changes in value. Sometimes you buy in when the price is a little lower; sometimes you buy in when the price is a little higher.
By spreading out your overall investment into smaller purchases over time, you’re never paying the highest price for your total investment, and extreme price swings don’t significantly affect your investment’s value.
The Problem With Paying Yourself First
One of the most common pieces of investment wisdom is to pay yourself first. This means to invest a portion of your income as soon as you receive it, before you pay any bills or make any purchases.
Like timing the market, paying yourself first is a great idea in theory, but much harder in practice. Too often, the urgency of our financial demands overwhelms the discipline to put aside a portion of the pay we just received.
Enter Automated Investing
With the technological innovation of automated investing, the money you’ve earned is invested for you automatically. Once you set up the investment amount, schedule, choice of investment product and other parameters, you don’t have to take any further action to start building savings.
What people who use it love about automated investing is that it protects them from themselves. When the money is invested without the person even being aware that it was there or taken, there’s no resistance, reluctance or regret to get in the way of saving. Automated investing gets around people’s worries, excuses, and procrastination, and it does so without causing any new stressors.
An Alternative to Automatic Paycheck Withdrawals
Until recently, automated investing typically involved a portion of each paycheck being withdrawn for investing purposes before you receive that check. The logic behind this system is that you don’t miss what you never had to begin with.
For some people, however, even this “small” portion deducted from every paycheck is too much for them to do without at once and still afford their daily costs of living.
But what if, instead of investing dollars at a time, you were only investing pennies at a time? Apps like Acorns have made this possible. With Acorns and similar apps, instead of deducting a fraction of every paycheck to invest, every purchase you make with a credit card is rounded up to the nearest dollar, and the difference is invested into your choice of an investment portfolio.
For example, let’s say you bought groceries totaling $14.60. The Acorns app would round the amount of this purchase up to $15 even. The grocery store would get their $14.60, and the remaining $0.40 would get invested in your investment account. Users of the Acorns app can then select from a variety of mutual fund portfolios based on their personal degree of risk tolerance.
With Acorns specifically, all mutual funds are Vanguard ETFs, so you’re assured of the safety and security of working with a real and trusted brokerage, holding trusted and trackable investments. By spreading your total investment out over a portfolio of ETF asset classes, your savings are even safer.
Automated investing using apps like Acorns makes investing easy and accessible to everyone with a credit card and a smartphone. By automating the process of paying yourself first and keeping the size of your incremental investments negligible, you can employ the power of dollar-cost averaging to secure your financial future without ever having to give it a moment’s worry or thought.
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