Automating Your Savings and Investments: The Low-Lift Strategy for High Returns

Introduction

In a world filled with countless daily demands, the idea of having one less thing to think about is truly appealing. Just as inventions like the dishwasher and washing machine revolutionized household chores, automating your saving and investing can revolutionize your financial life, offering you both convenience and potentially significant impacts on your long-term net worth. This blog post delves into the concept of automated investing, highlighting its many benefits and providing insights into how to make it work for you.

What is Automated Investing?

Automated investing is a simple yet powerful practice that involves contributing money to your investment accounts on a regular basis, typically through direct deposit from your paycheck or recurring bank transfers. The key idea is to establish a routine of saving and investing without requiring any extra effort on your part. By doing so, you can ensure that your savings plan stays on track, regardless of what’s happening in your life.

The Benefits of Automating Your Finances

1. Reduces Temptation to Spend
2. Mitigates the Impact of Market Volatility
3. Frees Up Mental Energy
4. Avoids Attempting to Time the Market
5. Keeps Your Financial Goals on Track

Automating Your Savings and Investments: A Small Change with Big Impact

Automating your savings and investments might seem like a simple idea, but it can yield substantial results over time. Behavioral economics research at Fidelity suggests that automation works because it relieves individuals of the burden of continually making decisions. Once you set it up, you only need to make the decision to start, and from there, the process unfolds seamlessly.

A prime example of effective automated investing is the workplace savings plan. Contributions are deducted directly from your paycheck, and you never see the money pass through your bank account. This means you don’t think about it, and it becomes a part of your financial routine without any ongoing effort.

When you venture beyond workplace plans and set up your personal investment account, the steps are straightforward: open an account (if you don’t already have one), choose your investments, and arrange for regular money transfers. With a little time investment upfront, you can streamline your saving and investing process.

Harnessing the Power of Consistent Saving and Investing

Consistent saving and investing can be a potent combination. When you automate these processes, you set yourself up for financial success over the long term. The chart below illustrates the potential outcome of saving and investing consistently over time:

How to Automate Your Investing

The process of automating your investments begins with creating a financial plan. While it doesn’t have to be overly detailed, it should provide an understanding of how much you can save and how you should invest those funds. Depending on your goals, you might have different accounts invested differently.

Here are some options to consider:

1. Recurring Investments from Your Paycheck
   • Your employer may allow direct deposit into multiple accounts, dividing your paycheck between bill payments and investments. Once in the investment account, you can either manually allocate your funds or set up automatic investments into specific funds.
2. Recurring Transfers from Your Bank Account
   • If your investment account is with a different institution, you can generally set up recurring transfers from either your bank or your investment account.
3. Automatic Investment Plans within Your Investment Account
   • Many financial institutions, including Fidelity, offer automatic investments into the funds you hold in your accounts. You can fund these investments from available cash or link your bank account for seamless transfers.
4. Managed Accounts
   • Managed accounts, including robo-advisors and full-service advisors, allow you to add extra funds at any time, either through direct deposit or recurring transfers. Your investments are then managed according to your predetermined plan.

Overcoming Behavioral Biases in Investing

Investing can be complex and intimidating, primarily due to the cognitive biases that can influence decision-making. Behavioral economics expert Brianna Middlewood mentions two common biases: “loss aversion” and “temporal discounting.” People tend to be more sensitive to the fear of loss than the possibility of gains, and they often value immediate financial rewards more than those in the future.

These biases can lead to procrastination or the temptation to make impulsive financial decisions. However, automating your saving and investing helps overcome these biases by making decisions just once and then following through consistently.

Final Thoughts

Automating your savings and investments is a low-lift strategy that offers significant long-term benefits. It simplifies the process, reduces the mental effort required, and keeps your financial goals on track. To embrace this approach, you need to set up automated contributions and check in periodically to ensure your savings are in line with your objectives. By taking this step, you can overcome common behavioral biases and work towards a financially secure future, all while freeing up your valuable time for more important matters in life. Remember, when it comes to investing, automation is your secret weapon against the hurdles our minds often create, such as procrastination and impulsive decision-making.