Explore automatic investing and see how regular, scheduled contributions boost your financial goals. Reduce stress and ensure your investments work for you.
How automatic investing could help you save more
What's an automatic investment plan?
Automatic investing is a strategy where you set up your investment contributions to be routinely made on a set schedule. This strategy can help you build wealth over time with minimal effort.
Setting up an automatic investment plan is a great way to make sure you don't miss investment opportunities, as it maintains your consistent schedule for contributions. Making regular investments can help you stay on track and reach your goals faster. Automatic investment plans also offer flexibility, because while you set the amount and schedule, you can make changes or stop the plan at any time.
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Why consider automatic investing?
Automatic investing is like using autopay for your monthly bills, since you're establishing recurring contributions. Once you set up automatic investments, you're ensuring that you're investing in yourself first.
Setting up automatic investments offers several benefits:
- It reduces the stress and hassle of making regular manual contributions. You won't have to worry about remembering to contribute to your investment account since you've set them to occur consistently.
- It helps you form positive investing habits. Regular contributions allow you to commit to your future savings goals by minimizing the need for repeated decision-making.
- It can instill a sense of control by taking proactive steps toward your investment goals. Automatic investing ensures you're prioritizing your financial success.
The role of reinvestment and compounding
By setting up automatic investments and choosing to reinvest any dividends you earn, you're making sure that your money grows over time through compounding—when your investment earnings generate their own earnings. The more frequently you contribute to your account, the more time your money has to work for you. When you wait to invest, you have less time to potentially reap those benefits. If you forget to invest, you miss out on them altogether.
Tailoring your strategy to your goal
The chart below shows how making automatic contributions can help you achieve your goals. Even small amounts can add up over time. Once your automatic investment plan is established, you can revisit it each year and increase your contribution amounts to help you reach your goals even faster.
Small investments, big milestones
Even small, consistent contributions—like $100 a month—can grow meaningfully over time and help you reach big life goals. And as you stretch your savings rate, the impact grows even faster. Whether your monthly amount is $100, $200, or $300, starting early, staying consistent, and increasing your contributions over time, if possible, can accelerate your progress.
This hypothetical example assumes a 6% annual return and recurring investments at the beginning of each month.
The illustration doesn't represent any particular investment, nor does it account for inflation, and the rate is not guaranteed.
Getting started with recurring investments
Getting started with automatic investing is easy. If you're new to investing, it's okay to start small. The important part is knowing your goal. Having your goal in mind will help you determine how much you'll need to save, how much you can realistically save, and how you want to invest your money.
Automatic investment plans are available in both retirement accounts and taxable accounts. Note that eligibility and contribution limits apply to retirement accounts like IRAs. When you establish automatic investing for your IRA, you can choose the maximum contribution limit, which helps ensure you're maximizing tax-advantaged growth opportunities.
If you're investing in a taxable account for a shorter-term goal, or looking to grow your wealth, an automatic investment plan is a great way to create a disciplined approach to get there.
Other common ways to use automatic investment plans include:
- 401(k) plan contributions. Most companies will allow you to choose a dollar amount or percentage of each paycheck to automatically invest in your employer-sponsored retirement plan.
- Dividend reinvestments. If you have an investment that pays dividends, you can choose to automatically reinvest the dividends rather than have them paid to you.
- Managed accounts that offer automatic investing. A robo-advisor like Vanguard Digital Advisor® allows you to automate your investments and offers additional personalization like asset allocation monitoring and goal planning to make sure you're on track.
How to set up automatic investing
Follow the steps below to set up an automatic investment plan:
- Create an investment account. You'll want to start by opening an investment account for your goal.
- Choose your investments. Learn about investment options and select those that align with your time horizon, risk tolerance, and financial goals.
- Link your funding account. Add a bank account to your investment account.
- Set your amount and automated schedule. Provide instructions stating how much you'd like to contribute and the frequency. Note that there may be a minimum required deposit amount, depending on the account type.
Choose your asset allocation
As noted above, you should select your investments based on your financial goals, time horizon, and risk tolerance. If you're just getting started with investing, consider taking our investor questionnaire. This quiz is designed to help you decide how to allocate your investments among different asset classes (stocks, bonds, and short-term reserves).
Build a diversified portfolio
Diversifying your portfolio involves spreading your investments across different asset classes, sectors, and geographies and using different investment styles. Ensuring you have a diversified portfolio can help reduce your overall investment risk. Since you're spreading your money across multiple investments, if one investment were to drop in value, the others could potentially offset the losses and stabilize your portfolio's value.
Consider investing in mutual funds and ETFs
Mutual funds and ETFs (exchange-traded funds) can offer built-in diversification because they consist of professionally managed baskets of securities. While mutual funds and ETFs are similar, there are key differences between them. One difference is how they're traded. Mutual funds are priced at the end of the trading day and bought or sold based on their NAV (net asset value), which is calculated after the market closes, typically around 4 p.m., Eastern time. ETFs, on the other hand, trade throughout the trading day at market prices, providing real-time pricing and the ability to execute trades quickly. Another difference is account minimums. If you're new to investing, you may want to consider ETFs because of their lower account minimums.
Monitor your savings amount
It's important to revisit your automatic investment plan each year to make sure you're on track to reach your goal. If you usually get a pay raise, consider increasing your savings amount to coincide with that raise. If your income is less predictable, then you may want to update your savings rate as it changes.
FAQs about automatic investing
Setting up automatic investing simplifies your life by automating the process. It can help you reach your savings goals because it ensures you stay consistent with your investments.
The amount you earn from investments will vary based on your contribution amount, how frequently you contribute to your account, and the underlying investments.
All investing involves some level of risk. Different investment types have different levels of risk. When it comes to investing, time is usually on your side.
Whether you choose to set up automatic investing depends on your financial situation and goals. However, if you have an investing goal, using an automated investment platform can help ensure you reach your goal by encouraging consistency.
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