Put Your Savings Strategy on Auto-Pilot
You get built-in savings discipline
One of the secrets to making a long-term investment strategy work is making steady, uninterrupted account contributions. Whatever schedule you set up-weekly, monthly, bi-monthly-for consistent account growth, you need to make investment contributions with the regularity and precision of a Swiss watch.
For most people, that's easier said than done. There are all kinds of perfectly logical rationalizations for skipping the savings deposit "just this once." Hit and miss contributions get magnified over many years and can seriously reduce your bottom-line account growth.
Fortunately, retirement savings plans solve this problem by providing built-in savings discipline. Your contributions are automatically deducted from your paycheck and then automatically invested. You don't have to remember a thing. And you'll never miss the money, because it gets invested before you have a chance to spend it.
Reduce the average price you pay for investments
Another advantage of steady investing is something called dollar-cost averaging. This just means you're buying investments every week or every month with the same amount of money-your regular retirement savings plan contribution.
Since investment fund share prices go up and down, some months your plan contribution amount will buy fewer fund shares (if share prices are up), and other months that same contribution amount will buy more shares (if share prices are down). By ignoring investment prices and simply buying however many shares your established contribution amount will purchase, you can actually lower your average cost per share, compared to the average price per share over the same time period. Plus, you remove the worry of wondering if now is a good time to buy. With a retirement savings plan, now is always a good time to buy. It's automatic.
Here's an example of dollar-cost averaging at work:
An investor decides to use dollar cost averaging and spreads his $2000 investment amount over 5 months.
|
Price |
Investor Investment |
# Shares |
| January |
$8/Share |
$400 |
50 |
| February |
$10/Share |
$400 |
40 |
| March |
$5/Share |
$400 |
80 |
| April |
$8/Share |
$400 |
50 |
| May |
$10/Share |
$400 |
40 |
| Total @ End |
|
$2000 |
260 |
The investor's $2000 buys 260 shares at an average cost per share of $7.69 ($2000 / 260). The average price per share over the same time period was $8.20 ($41 / 5).
With dollar-cost averaging, the average cost per share was $.51 less than the average market price per share during the same time period.