How often have you become excited about the prospect of growing wealth through investing, only to fall out of your good money management habits after just a few weeks or months?
It’s not unusual – the possibilities that can be created by religiously investing are incredibly exciting and motivating, but the reality of what you need to do to get there isn’t. As a society, we love instant gratification, and investing just isn’t that. A good wealth-building strategy relies on consistency, and consistency isn’t sexy.
If you invest when you’re excited about the prospect of growing wealth but fall off after a couple of months, either because you keep bumping your money management to-dos further down the list or have become infatuated with that new shiny thing, you’re in the right place.
Today, I’m going to guide you through not only what it takes to grow wealth over time, but also how you can set up your money management and investing habits so you automatically build wealth. Let’s dive into automatic investing.
The Most Important Factors When Building Wealth
- Your rate of savings – how much of your income you save
- Your time in the market – how long you’ve been investing for
Yes, of course, interest rates will have some say here, but as you’ll know if you’ve read even just a handful of other investing blog posts or books, the market, generally, will come out in your favor over the long term, provided you’ve invested in assets that have a “safe” average return, like ETFs.
The two biggest factors are also the simplest, to build wealth, you need a good rate of savings and as long as you can in the market. These are, seemingly, two factors that are easy to take care of, but it’s even easier for us to forget to move money over one month (or think we’ll use it for this other thing just this once) and develop a bad habit.
Before you know it, you’ve missed out on 3+ months of savings. If you’re making $100,000 a year, and save 5% of your income, that’s $1,250 that’s potentially gone forever.
If you’d saved it in something like an S&P 500 ETF, that money would have turned into $3,332.30 over 25 years at a very conservative 4%, or $37,715.98 in the same time frame if it achieved the 10-year trailing return of 14.6% it has recently. Now you can see why automatic investing is so important to the success of your long-term wealth-building strategy.
What is automatic investing?
In this context, automatic investing is simply the process of setting up as many automatic payments (sometimes called a direct debit, authorized withdrawal, or auto-pay) as possible so your money goes directly into your various investments when you receive it.
Let’s look at some of the best ways you can start implementing automatic investments in your wealth-building strategy.
4 of the Best Ways to Implement an Automatic Investing Strategy
- 401k – Most employers offer automatic payments into your 401k, which is especially beneficial for new investors because it’s taken out before you get your pay. That means it’s out of sight and out of mind, earning interest for you without you needing to do a thing. Many employers will match your contribution, so make sure you’re investing the full amount they’ll match.
- IRA – An IRA is another type of retirement account, and both a 401(k) and an IRA will allow you to benefit from tax-deferred savings for retirement. You can set up an automatic payment so the money goes to your IRA on the same day as you get paid.
- Investment Platforms Like Vanguard – Regardless of which investment platform you prefer, most of them will offer to set up a monthly contribution when you invest in a new fund. This makes it easy to make a monthly contribution to your investment accounts or funds, and if they come out the same day you get paid you won’t even need to think seriously about budgeting around them.
- Paying Extra on Mortgage – This point comes with a few caveats. Firstly, don’t start overpaying on your mortgage if you have any other debt with an interest rate higher than what you’re paying on your mortgage (which should be any debt you have). If your mortgage interest rate is high enough to be more concerning than any other debt you have, make sure you talk to a mortgage broker about refinancing.
Secondly, consider your long-term goals. Do you want to own your home outright or are you more interested in purchasing an investment property? Both are valid options, and they’re not mutually exclusive, but if you want to do the latter before the former, you may want to consider putting the additional money in a savings or investment account without penalties for withdrawing so you can invest in another property in the future.
How to Set Up Automatic Investments
How you go about setting up automatic payments for your investments will depend on the investment you choose, but most allow you to set up automatic investments when you open or “buy” into a certain investment, or allow you to set them up from your online account profile.
All you need to do is select which fund you want to pay into (if applicable), which bank account you want the money to come from, and how frequently you want the investment to be made. Once it’s set up, the investment will be made automatically.
If your income is variable or you are self-employed and don’t pay yourself a set salary, you can still implement automatic investing, it just may need to be more hands-on.
If you aren’t paid on the same day or date each month, try to keep “buffer” money in your main account (instead of keeping it all in a separate emergency fund bank account) so your automatic investments can go out regularly, regardless of when you get paid.
If you can’t or don’t want to do that because your income fluctuates and you want to be in control of how much goes into each account, set a non-negotiable day each week or month when you take the time to move your money into the right places. The next section will help you get to a place where you can set up automatic payments.
How to Find More Money to Invest
A lot of people resist setting up automatic payments out of a fear of not having enough money to hand. There are a few things you should do here to get to the point where you feel comfortable investing the same amount of money automatically each month:
- Budget – Don’t stress, you know it’s necessary! With a good budget that suits your spending style, you’ll be able to budget for all your needs and your investments so you can be consistent. (For more advice on finding the right budgeting method for you, click here.)
- Build a Healthy Emergency Fund – If you still fret about having enough to invest even though you have an emergency fund, you may need to feed it a little more to get it to a point where you feel comfortable. Just as people have different risk tolerances for investing, people have different tolerances for risk when it comes to their emergency funds.
If you have $5,000 in your emergency fund but hesitate to invest because you worry you’ll need it, boost it up to $10,000 (or whatever figure makes you feel more at ease) and then set up automatic investments.
- Pay Yourself First – You’ve likely heard the advice “pay yourself first”, but if you’re struggling to set up automatic investing or find that you’re still spending frivolously, take this advice to heart.
The concept of paying yourself first is taking out your rate of savings (the percentage of your income you want to save) and putting it elsewhere before you start thinking about paying all your bills.
If you struggle here, set up a savings account and an automatic payment from your main account to it with your chosen rate of savings, and don’t touch it. Budget with the money you have leftover, working as if you hadn’t received that money in the first place.
- Resist Lifestyle Creep – Got a raise or started making more money? Awesome, it’s time to celebrate! But then it’s time to get back to normal, funneling as much of that additional money as you can into your investments, rather than into a lifestyle change. A small improvement in your quality of life is fine, but you know that the real change in your quality of life will come when you gain financial independence. You’ve got to try and find the balance between feeling fulfilled and delaying some gratification.
As you’ll now be able to see, automatic investing can be the secret to growing wealth, especially for busy people who don’t want to spend all their time thinking about their money. You set it up, let the money go to all the right places, and budget with what you’ve got left.
It’s also (generally) better to somewhat “forget” about your investments – for most people, watching them closely leads to frustration (why aren’t they growing faster?) or making mistakes (the market’s dropping and I’m losing money! I’ll pull it out now!). Setting up automatic investments will put growing your wealth on autopilot, so you can live in the present.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.