Personal Finance

4 Reasons to Automate Your Savings

February 10, 2017
A systematic approach to investing can help you meet your goals.

Key Points

  • Systematic investing moves money into your accounts automatically and consistently.
  • Setting aside money on an automatic schedule can help you avoid impulsive investment decisions.
  • Contributing consistently over a long time period provides a steady approach to buying assets as prices rise and fall.

A powerful financial technique, called systematic investing, can help you put saving for retirement and other financial goals on autopilot. It involves regularly—and automatically—contributing a set amount of money directly to an investment account (401(k), individual retirement account (IRA), taxable, etc.).

Setting up a contribution schedule removes the work involved in actively transferring money. More importantly, it reduces the chances of making impulsive changes that can negatively impact your long-term savings, such as trying to time the market or leaving it altogether.

"When you make the decision to set up a savings plan, you're less likely to stop and start in the future," says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. "Effective long-term systematic investing is about staying steady, buying assets as prices rise and fall, and benefiting from compounding."

Systematic investing is about staying steady, buying assets as prices rise and fall, and benefiting from compounding.

- Judith Ward, CFP®, T. Rowe Price Senior Financial Planner

THE BENEFITS OF SYSTEMATIC INVESTING

It helps control emotions.
Systematic investing mitigates the influence emotions may have on your financial plan. You contribute consistently every month regardless of global events and sudden shifts in asset prices, times when emotions can drive investment decisions. Automatically saving a fixed amount of money each month also means you won't put off investing until you feel you have enough money to make it worthwhile.

You buy more shares at lower prices.
Contributing consistently—whether the market is rising or falling—can make you a more effective investor. You will buy more shares when prices are lower, which can increase the growth potential of your portfolio. In this way, systematic investing allows you to take advantage of down markets. In addition, you'll buy fewer shares when prices are higher, which can lower your overall risk.

You pay yourself first.
You can set up your plan to deposit a certain amount, just as you might set up automatic bill pay for your mortgage or car payment. And there’s no chance of forgetting to invest or inadvertently using the money for another purpose. "This way, you are paying yourself first," says Ward. "You know for certain you are saving for your financial goals."

You can benefit from the power of compounding.
Systematic investing maximizes the potential for compounded returns, because you won’t miss making contributions. If your shares earn interest or dividends, you can choose to have that money automatically reinvested to buy additional fund shares.

Systematic Investing in Action
Buying assets in regular, equal payments throughout the year reduces the average cost per share.

Consider a hypothetical investor who systematically invests $150 per month in a fund whose shares start at $10 each. As the market rises, the investor’s monthly contribution buys fewer shares and his overall portfolio gains value. In a falling market, however, lower prices allow the investor to buy more shares automatically, positioning him to benefit when an upturn begins.

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This chart is for illustrative purposes only and does not represent any specific investment. Your results will vary.

HOW TO SET UP YOUR SAVINGS STRATEGY

Here are the steps to setting up a systematic investing plan:

1. Set a target. Ask yourself now much you will need to reach your goal and whether you're saving enough to achieve it. For goals such as retirement, you can systematically invest to save up to the IRA contribution limit ($5,500 in 2016 and 2017). Overall, aim to save at least 15% of your gross salary each month (including any employer contributions) in tax-advantaged accounts.

2. Stick to the plan. The simplest way to take advantage of systematic investing is through a plan that automatically and regularly transfers a preset amount of money from your bank account or paycheck to your investment account. You can do this in your workplace plan, IRA, taxable brokerage account, or other investment account.

3. Set it—but don't forget it. When you set up your plan, establish an asset allocation—a mix of stocks, bonds, and cash—that will help you reach your goals. To simplify the process, you may want to consider an investment that is already allocated for you that you select based on your time horizon and risk tolerance. For example, for your retirement savings, you can systematically invest into a target date fund with an asset allocation that best fits your needs. The target date fund will do the rebalancing for you, periodically adjusting to keep an age-based asset allocation.

A STRATEGY THAT PROVIDES YOU PEACE OF MIND

Systematic investing cannot guarantee your portfolio will earn money, and it can't protect your portfolio from losing value in a downturn. This type of investment program involves continuous investment in securities regardless of the fluctuating price levels of such securities. Investors should consider their financial ability to continue making purchases through periods of low and high price levels. But systematic investing can provide a greater opportunity to benefit from compounding over time. It also ensures that you are always doing something that can help you achieve your financial goals.

View investment professional background on FINRA's BrokerCheck.