When I was in high school and college I used to mail in checks to dividend reinvestment plans (DRIPs). I had DRIPs for GTE and Ford stock and would mail in anywhere from $10 to $50 at a time.
When I started my career in consulting in 1998 I began my first real auto investing experience with a corporate 401k, where I got to put away around 3 or 4 percent of my paycheck.
Then somewhere between the late 90’s and early 2000’s I discovered Sharebuilder, which was my first introduction to the concept of DRIPs but through an online platform. According to this article, Sharebuilder is now part of Capitol One Investing. I cannot speak to their service now, but in the early 2000’s I remember they were the hip new online platform that allowed people to auto invest.
Over time I gradually expanded my auto-investing approach to where it is now.
So at my current auto investing rate, I save about $46,000 per year. If I make more and spend less, I can put away additional money. But if big expenses come along and I can’t save more, at least I have saved my baseline amount of $46,000 and I’m pretty happy with that.
The biggest benefit I’ve noticed with auto-investing is that it gives me a baseline savings rate. If I save anything more it’s a bonus.
Another benefit is that money is automatically allocated to savings and investments, so you get less in your checking account and over time get used to having less to spend. This has been an important psychlogocial lesson for me. As I’ve earned more I auto invest more, which in turn has kept me from constant lifestyle upgrades….which is the trap I find most people around me fall into.
Here’s what I do
- Money market ($8,000 to $10,000) – my payroll is set up to deposit my entire paycheck in my money market account. I keep my risk register cash in a checking account and a savings account. I decided rather than depositing my paycheck in my checking account like most people, I’m depositing in my savings instead. This way I’ve reversed the process of paying myself first, then paying out to checking and credit card to pay the bills. This is purely psychological as opposed to practical, but it works for me.
- 401K ($19,000) – I allocate enough money each paycheck to fully max out my 401k by around Thanksgiving. This amounts to around $880 per paycheck, or somewhere around 21 biweekly paychecks. That way I have a little extra cash coming in December that I can use over the holidays.
- Vanguard ($12,000) – I have set up my Vanguard account to take out $1,000 every month. It’s usually the first Friday of the month $1,000 is taken out of my money market and automatically invested in the asset allocation I have set up. Vanguard’s website is really easy to set up in this way.
- HSA ($7,000) – I max out my HSA by allocating around $270 per paycheck. This money goes into a cash account where I then have to manually go in and allocate it to an investment.
So my auto invest total for the year is about $46,000.
Note that the amount I save in my money market fluctuates. I’ll set up a cash goal when I set up my goals for the year. I put down $8,000 to $10,000 because that is what I expect to save this year; however, this can always change if I foresee big expenses or less expenses. Cash is the one area where I don’t mind seeing a little bit of variation from my plan. It’s tough to predict everything you think will come along in a given year.
At the end of the year, I’ll have have saved around $38,000 from steps 2 through 4 above. I can sit back and assess where I am with cash and figure out if I want to keep the cash or allocate it towards investments. In 2019, I’m likely going to stick with cash.
Here are lessons I’ve learned from my auto investing experience
Start small – I’m talking a few dollars, $5, $10, $25 a month. In my 20’s I fell in to the trap where I saved let’s say $100 a paycheck. I would do this for a small length of time and all of a sudden an expense would come up and I would have to tap into my savings to avoid going into debt. In hindsight I would have been better off if I saved less, say $25 a paycheck AND never had to tap into my savings.
It’s ok even if you start ridiculously small. The important part is to create a habit and a system you can stick with.
Cash – if you don’t have enough cash on hand, figure out how much you need and save that first. If you read Dave Ramsey’s baby steps, he has in there to save $1,000. Do that, and while you’re doing that, think about how much cash you’ll need. Once you reach that amount, you can hold on to that baseline amount of cash and start moving your money into investments.
Investing – if you’re auto investing with a brokerage you will want to find one with the lowest possible fees. One of the reasons I chose Vanguard is that not only do they have low fees, but if you buy Vanguard funds through your Vanguard account, there are no transaction fees. This is critical especially if you intend to allocate money on a monthly basis.
Hit your stride – now that you have the cash you need and are investing on a regular basis, you can step back and count up what you are auto investing. This is your baseline savings. When you make more money in your career, rather than upgrading your lifestyle you can now upgrade your savings.
I noticed after a few years of auto investing that I was getting better at forward predicting. It took some time to create that feedback loop of getting used to having less money to spend while also spending less, and then seeing the saving balances grow.
The ability to forward predict also in turn leads to predicting when you’ll reach FI.
So if you are auto investing $10,000 per year, then you can simply forward predict how much money you’ll have after 3 years, 5 years, and so on. Granted the farther out the harder it is to predict, but at least it will give you an idea. If your goal is to retire in 5 years and you predict that your current auto investing amount will take 8 years to reach your retirement number, then it’s good to recognize that sooner than later so you can figure out how to make adjustments. It make take months or years to get your spending/savings balance on track to hit your FI goal.
Auto investing is a great way to build wealth. The biggest lesson with auto investing is that you learn to live with less money. The more you make in your career the more you can save and invest. For me it was critical to start with a small amount, small enough that I never had to tap into my savings.