If you’re enrolled in a 401k plan with your employer, you’re likely already using recurring contributions and automated investing. Part of your paycheck gets deposited into your 401k plan and automatically invested into your portfolio of mutual funds. Your retirement savings grow on autopilot without you having to remember to deposit money into your plan every month.
Many investment platforms will let you set up the same automations for your other retirement plans and investment accounts.
Here’s how it works.
What are recurring contributions?
Recurring contributions are automatic recurring deposits that you set up for your brokerage or retirement accounts.
Money gets automatically deposited from your bank account into your investment or retirement account allowing you to save on autopilot, without having to repeatedly decide how much money to invest. Depending on the platform you’re using, you get the option to choose different frequencies such as daily, weekly, biweekly, monthly, or quarterly deposits.
The benefits of setting up recurring contributions
The main benefit of setting up recurring contributions is that you only need to make the decision to save and invest once, and everything from that point is done automatically for you.
- It eliminates the stress of having to decide when and how often to invest.
- It enforces smart investment behaviour by forcing you to invest first, and then spend what’s remaining rather than the other way around.
- It saves you time so that you don’t have to repeatedly log into your account and deposit money into your accounts.
- If you’re struggling to keep up with your calendar, it gives you one less thing to remember.
- It allows you to dollar-cost average into your investments rather than trying to time the market.
How to set up recurring contributions
Setting up recurring contributions is available on most major investment platforms. Simply choose the account you want to make contributions to and determine the amount and frequency you want to be deposited automatically. Next, choose the bank you want deposits to come from, and you’re done.
Which accounts can I set up recurring contributions for?
This depends on the platform you’re using. For example, with Carry, you can set up recurring contributions for any investment and retirement account including:
- Roth IRA
- Traditional IRA
- Solo 401k
- Taxable investment accounts.
Automatic investing
Many platforms (like Carry) will also let you automate your investments. Once your recurring contributions land in your account, your money gets invested automatically into the assets of your choice, or into a portfolio built by a robo-advisor. To set up automatic investments, you’ll need to set up an automated account.
Dollar-cost averaging
One of the major advantages of setting up recurring contributions and investments is that you’ll be investing using a strategy called dollar-cost averaging, which can reduce the impact of volatility in your portfolio and lower the average cost per share of your investments.
Dollar-cost averaging is an investment strategy that spreads out your investment purchases over time so you’re not buying a bulk of your shares at a high price point. Rather than trying to time the market into a lump sum investment at one point in time, you’re spreading your investments based on the frequency you set up your recurring contributions and investments.
The natural inclination for most people is to buy stocks when prices are rising and sell when the prices are falling. But dollar-cost averaging allows you to continue investing on autopilot even when the price falls. It forces you to think about your investments long-term, avoid mistiming the market, and eliminate emotional investing.