photo: Fly For Fun
Article Provided by Learning Markets.
“Set it and forget it!” If you’ve ever watched infomercials, you have probably seen Ron Popeil and his Showtime Rotisserie—the dishwasher-safe oven that will cook two rotisserie chickens at a time to perfection—and heard his famous tag line. Did you know you can do the same thing with your investments? You can set them and forget them.
We’re going to discuss three ways to automate your investing. The first two focus automating your investing account deposits. The third looks at automating the reinvestment of any profits you may generate within your investing accounts. If you want to truly set your investing on autopilot, you should consider automating both steps.
Automatically Withhold Money from Your Paycheck
Having your employer withhold money from your paycheck and place it in your 401(k) account is the most popular form of investment automation. It’s nice because you never see the money in your checking account so you tend not to miss it as much.
All you have to do to set up this process is fill out a form with your 401(k) provider that authorizes your employer to withhold funds from your paycheck and deposit them on your behalf into your retirement account. On this form, you will determine how much you want your employer to withhold from each paycheck and how you would like that money to be invested once it is deposited into your account. For instance, you could state that you want $250 withheld from every paycheck and that you want to use that money to buy shares of the S&P 500 index mutual fund in your company plan.
Keep in mind, some employers may allow account opening only during the open enrollment period at work, which comes around once a year. (Once you open an account, you can make changes to your contributions and investments at any time.) But if you have just started a job or have experienced a major life event–marriage, the birth of a child, and so on–you may have an additional window opened to you during which you can enroll. Check with your HR office for specific details.
Automatically Withdraw Money from Your Checking Account
In addition to your 401(k) plan at work, you may want to have a certain amount automatically withdrawn from your checking account each month and deposited in an investment account, such as an IRA, a 529 Savings Plan (if you have children), or even a taxable brokerage account.
All you need to do is set up an account with a broker who offers automatic withdrawal and investment services. You then determine how frequently you want the withdrawals to occur and how much money you would like to withdraw each time. You can also specify the date on which the withdrawal will occur in most cases. Lastly, you instruct your broker how to invest the money. For example, you could state that you want to withdraw $100 on the 1st and 15th of every month and that you want to use that money to buy shares of a large-cap mutual fund.
As you might imagine, most brokerages who are more than happy to set up a scheduled withdrawal from your checking account to your investment account. An added bonus: automatic investment plans in many cases will allow you to go around the initial investment minimums that most brokerages and mutual firms have. (At $2500 or $3,000, these minimums are often too high for many investors, particularly young ones.)
Automatically Reinvest Your Dividends and Capital Gains
The original method investors used to automatically reinvest their investment profits was the Dividend Reinvestment Plan (DRP). DRPs enable you to buy shares, or fractional shares, of stock directly from the companies that issue it. Once you have bought the stock, the DRP takes your dividend payments and automatically buys more shares of the same stock.
These days, you can set up almost any investment account to reinvest your dividend payments, whether those come from owning individual company stocks, mutual funds or exchange-traded funds (ETFs). For example, if you own an ETF that distributes a dividend because the companies that are held within that ETF have distributed dividends, your broker could automatically take that money and use it to buy additional shares of that same ETF–continuing the virtuous circle mentioned earlier.
Most brokerages, including Vanguard, Fidelity, E*Trade, and Zecco, offer this service.
As you can see, there are a variety of ways you can automate your investing and make saving for retirement just a little bit easier and a little less stressful. Take some time today to set things up and save yourself a lot of time down the road.
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