What is an Automatic Investment Plan?
An Automatic Investment Plan is one where you pay yourself first. This is a common bit of wisdom that has been passed along from financial advisors for years which is that one must find a way to make investing automatic so that the money comes out of your paycheck automatically (as opposed to being deposited in your bank account where you see it and may end up spending it). An automatic investment plan takes this concern out of the equation as money either goes directly into your 401(k) or SEP IRA (if self employed) or into a mutual fund or other automatic investment such as a Motif portfolio, etc. This is commonly done with 401k investments through an employer based retirement plan. This is great as not only is it automatic, but the money goes into your 401k before taxes and you are not taxed on the investments within your 401k account as they grow over time. In addition to the tax deferred treatment many employers offer a 401k investment contribution match up to a certain percentage. my present employer offers a 100% match up to 5% or your salary. To make the example simple, imagine you make $100,000 at company x. If you contribute 10% of your salary this year ($10,000) the company matches the first $5,000.
How Does this Benefit Me?
Having your investment plan automated will give you a clearly defined investment plan, and ensure that actions/steps are being completed to help you get to your financial goals (minimizing any potential disruptions/obstacles in getting there). Prioritizing your investments or making them a priority and planning appropriately is the only way you will ever reach your intended financial destination (or at least it puts the overwhelming odds in your favor). This has been used as a way to build wealth over time, and many future millionaires are using automatic investment plans right now to ensure they reach their goals that is a virtual certainty.
Some of the Companies that offer Automatic Investment Plans (where they will set up an automatic withdrawal on a monthly basis to your account) include:
- T. Rowe Price (which offers an excellent selection of mutual funds)
- T.D. Ameritrade
- Motif (which offers a selection of portfolios which automatically rebalance for you)
It is highly recommended to take advantage of your work based 401k account. Always get the employer match as this is a 100% return on money invested immediately.