Human nature often gets in the way of the dual tasks of saving and investing. Saving is difficult enough, and once you've saved, it takes yet more effort to put those savings to work for you. But there are a couple of ways to easily accomplish both tasks without having to lift a finger. Both of them involve electronic transfers of money to an investment account. It's tough to get your hands on money that's transferred electronically.
- Automatic withdrawal. If you participate in a retirement savings plan at work, you're already benefiting from automatic withdrawal since the money is taken out of your paycheck and invested on your behalf. It's also easy to request an increase in the amount of money that's going into the plan. Go for it. If and when you begin to build up your investments outside your employer's plan, keep in mind that most mutual fund companies and brokerage firms also a allow you to invest automatically. You specify a fixed amount to be withdrawn at regular intervals from your bank or credit union account and voila, the money is moved into your investment account. Your employers may also permit money to be withdrawn from your paycheck and automatically transferred to an IRA or brokerage account. It's a great way to begin and stick with a regular investing program. For example, a lot of people who have the best of intentions about contributing to an IRA every year have trouble coming up with the cash to make a contribution. The cash is just, well, gone. Solve that problem by having money withdrawn each month and automatically put into the IRA account.
- Automatic reinvestment. You can also take a page from your workplace retirement plan which automatically reinvests interest, dividends and capital gains by arranging to have the same done for money held outside your 401(k), 403(b), tax sheltered annuity, or other retirement savings plan at work. This can work for any mutual funds, exchange-traded fund, or dividend-paying stocks that you own. Just make sure you don't have to pay a fee for the privilege. One other caveaTOPIC: If you're reinvesting investment income in a brokerage (as opposed to a retirement) account, you'll have to pay income taxes on that income even though you didn't receive it in cash. That's a very small impediment to doing the right thing by automatically reinvesting, however.
Dollar cost averaging. Investing regularly and painlessly through automatic withdrawal and/or automatic reinvestment is easy to do. It's also a very smart thing to do. While you may not realize it, you're actually dollar cost averaging, which has been hailed since before your parents were born as one of the best ways to add to your investments. Dollar cost averaging involves investing a fixed amount in a particular investment – a mutual fund or stock - on a regular basis. The trick is to stick with your plan regardless of whether the investment value rises or falls. Because you're investing a
fixed amount at fixed intervals, your dollars buy fewer shares when the stock or mutual fund price is high and more when it is low. The typical investor does the opposite, preferring to buy more when the price is high and getting rid of an investment that has declined in value. That's why the average investor barely makes money while you, the disciplined automatic investor, will do very well.