Yahoo Finance Automating Your Investment Plan Can Help You Save — Ramsey Explains How To Do It
Saving for retirement isn’t just a matter of stashing cash in a bank account. Doing just that is, in fact, seriously risky, as it almost guarantees that you won’t have enough to comfortably get by in your golden years, because you’ll miss out on the beauty of compound interest. You need to have money invested. This could be in a 401(k) plan, 403(b) plan and/or various types of IRA plans, etc.
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Investing should not be not a one-and-done situation. You need to be investing on a regular basis if you want to build wealth over time. To stay on top of investing without expending much effort, you may want to automate your investment plan — a move financial guru Dave Ramsey recommends. In a blog posted in January on Ramsey’s site, Ramsey Solutions, Ramsey discussed how to automate your investing plan.
We’ll get into his blueprint for doing this, but first, let’s see what fellow financial expert Robert Johnson, Ph.D., CFA, CAIA, chairman and CEO at Economic Index Associates, thinks of this approach.
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There are no ifs, ands or buts about it. Johnson is 100% in agreement with Dave Ramsey in respect to automating investments.
“Accumulating wealth over the long term is really not difficult strategically,” Johnson told GOBankingRates. “Dollar cost average into a broadly diversified stock fund, and invest whether the market is up, down or sideways.”
Automating your investment plan takes some of the edge off, emotionally, too, particularly in a rocky investment climate.
“Behaviorally, it is very difficult for many to stay the course in bear markets,” Johnson said.
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Automating Is Easier Than Ever
Johnson noted that it is simpler to automate your investment plan now than in the past because of the proliferation of mutual funds and ETFs that make investing easy.
“In addition, there are many ways to automate investing for retirement via apps,” Johnson said.
Automating Is the Smart Choice on a Behavioral Level
“In 2017, University of Chicago Professor Richard Thaler received the Nobel Prize in economics for his work in behavioral finance,” Johnson said. “The premise of behavioral finance is that human beings are not rational profit maximizing machines, but often succumb to behavioral biases. One of the biggest behavioral biases that humans succumb to is the bias toward immediate gratification over delayed gratification. That is, our present selves tend to win over our future selves.
“It is exceedingly difficult for many people to imagine their future self and give up that vacation or new car today in lieu of having money to retire on in the distant future.”
Essentially, by automating your investment plan, you’re taking away temptations to spend the money that is being effortlessly routed into your future financial freedom.
When You Can Automate, Do It
Many financial experts strongly recommend automatically having a portion of your paycheck put into a savings account. An automated investment plan works along the same concept: Investing happens without you thinking about it, and it becomes a sort of underlying, unconscious habit.
“People should try and automate as many financial decisions as they can,” Johnson said. “One must make saving money a habit. And habits — good or bad — develop over time.”
Ramsey’s Plan for Automating Your Investments
In the aforementioned blog post, Ramsey discussed the pros of automating your investment plan and also provided a breakdown of how to go about it.
Here’s a brief step-by-step breakdown:
Invest a percentage of your income — 15% is Ramsey’s recommendation, unless you are in a very strong position to invest more. The sky’s the limit here.
Have that percentage of your paycheck directly deposited into your retirement plan accounts. Your employer can set you up with the paperwork to do this.
If you don’t have a company-sponsored plan, but instead have a Roth IRA, “you’ll need to do the legwork,” Ramsey wrote.
Though optional, you should enlist the services of an investing professional to help you get — and stay – on track with your plan.
Soon enough, you probably won’t even notice or much care about that 15% being automatically routed to your retirement account. You’ll naturally adapt.
“The biggest advantage of automatic plans are the behavioral underpinnings of the plans,” Johnson said. “If we are enrolled in an automatic savings plan, inertia and the inherent laziness of people tend to work in our favor. That is, once enrolled in an automatic savings plan, people tend to stay enrolled.”
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This article originally appeared on GOBankingRates.com: Automating Your Investment Plan Can Help You Save — Ramsey Explains How To Do It
