Step 4 to Wealth: Automatic Investing


4steps_transpAre you still with me? Have all of your debts paid off yet? As I mentioned before, the four steps to wealth are,

  1. Follow a budget
  2. Build an emergency fund
  3. Pay off debts
  4. Invest automatically

What

So before investing, most or all of your debts should be paid off. Once that’s done, you can start to build wealth automatically – this means setting up regular automatic transfers that go towards an investment.

Something similar has been popularized as “pay yourself first.” It’s a fine method I’m sure, but I disagree with the details. Pay yourself first means that you setup an automatic transfer to go towards saving even before you have all of your debts paid off. The reasoning is apparently because it gets you in the habit of doing what you’re supposed to do, even though it’s not necessarily the smartest financial decision. Also, you’ll read a lot about savings accounts when reading about the plan, which makes it an even more horrible idea if you have high interest debts that could be paid down. No, do not “pay yourself first” if you have high interest debt – pay off the debt. Taking a few dollars and saving it up for yourself feels nice, but being closer to debt free feels nicer.

How

The right way to do this then is to invest automatically. This means setting up a regular monthly transfer into any kind of investment vehicle. The three most popular ways to begin are an already existing 401K, rental property, and stocks.

401K

Investing money automatically into your 401K has lots of benefits. Often companies will match a certain portion of your investment – i.e. they give you free money just for preparing for retirement. It’s also the easiest option because you don’t have to do a lot of research. If you’re currently feeling lazy about the research or want to put off that part for a few months down the road, just raising the amount contributed to your 401K is a simple way to do it because you’ve likely already chosen which funds to invest in and how to diversify.

Rental Property

rooms-for-rentInvesting in a rental property is a popular way to invest automatically because people “fall into it” when a property doesn’t sell, and because it’s easy to understand and easy to begin. Rental properties give you a lot of personal control. You can choose the tenant, set the rent, and decide how things will be done. To be successful as a landlord (as with anything else in life) you don’t have to be an expert at what you do, you only have to be better than most other people. Being a landlord also comes with a fair amount of work, however, and trying to avoid that work by having a management company really eats into your profits.

Note: Don’t confuse the property you’re currently living in as an investment! As Kiyosaki explains, it’s not an investment if it’s not making you money. A rental property is an investment because someone else is paying the mortgage for you!

Stocks

The next most popular way for getting started in investing is with the stock market. It can seem like a daunting task before any research is done because there’s a fair amount of vocabulary to learn. When investing for retirement, here are some basic guidelines.

  1. Do not use a managed fund or a broker.
  2. Invest in index funds.
  3. Invest at regular intervals with automatic transfers that require no action on your part.
  4. Use Betterment because of their low fees and ease of use.

Plan on leaving your money there until retirement. Do not check the current value regularly. Do not try to time the market. Do not become an “active trader.”

Do not use a managed fund or a broker.

The chances of a managed fund outperforming an ETF are low. Even if they break even, the additional fees (higher expense ratio) of a managed fund make a big difference in the long run.

Invest in index funds.

The idea here is to diversify. Investing in the stock of a single company is more risky because if the company fails you could lose all of your money. If you invest in 500 companies then all 500 of them would have to fail for that to happen, which is unlikely. An “index fund” is made up of many different stocks and is meant to track a certain part of the market.

Invest at regular intervals with automatic transfers that require no action on your part.

Setting up automatic transfers is the best thing to do – for bills because you’re less likely to miss a payment and for investing because you’re less likely to spend the money on some ridiculous product that you don’t really need instead.

Use Betterment because of their low fees and ease of use.

You don’t have to use Betterment for your investing (Vanguard sells their ETFs directly), but they are known for having low fees. If you choose another company, check the fees first!

When

The perfect time to get started is after using the debt snowball to pay off your debts. You’ve been using a big chunk of money now every month that you’ve been putting to good use. When the debts are paid off, you can redirect that into investing. There is some debate as to which debts should be paid off before redirecting into investing. Obviously, high interest rate debts should be paid off first, but what about student loans and mortgages? Since we can’t tell the future we can’t know whether it’s a better investment to pay off a student loan with a 6% interest rate or to invest in an index fund which may have a better return. It’s really splitting hairs though – the most important thing is to invest automatically.

Another great time to adjust the amount you invest regularly is whenever you get a raise. Since you’re already living on a budget with a certain amount of income, it’s no trouble to continue living at that spending level.


There are lots of ways to invest and the key is to do it automatically. Once automatic investing is in place you can spend your time enjoying life, and years later when you look at what’s happening you’ll be pleasantly surprised.

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