Ryan Guina, On Tuesday June 15, 2010, 4:23 pm EDT
My first real job was as a junior enlisted member of the United States Air Force. I had great benefits, but as a low ranking enlisted member my take home pay wasn't worth bragging about. I was earning a comfortable living for a 19-year-old, but I didn't think I had enough money to invest. It turns out I was wrong.
A talk with one of my mentors, a senior enlisted member in my squadron, made me rethink the way I viewed investing. During one of our conversations I brought up the topic of investing and mentioned I would like to start in a couple years when I had more money. He listened to me give several excuses why I couldn't invest and then he said something that changed the way I think and act about investing.
He told me saving and investing wasn't hard, you just have to treat it like a bill. He said, "When your paycheck comes in each month, you pay your bills, right?" I nodded. "So treat investing like a bill. If you want to max out your Roth IRA, divide the maximum contribution by 12 and send that amount to your investment account each month. If you want to make it easier, then go to the finance office and set up an automatic allotment from your paycheck and you'll never think about it again."
It turns out he was right. It's not that I didn't have enough money to invest. I just wasn't prioritizing how I used my money. Treating investing like a bill forced me to make investing part of my budget. I followed his advice and set up an automatic withdrawal from my paycheck and I began investing in a Roth IRA. I maxed out my IRA contributions in each of the eleven years following our conversation. That 15 minute conversation literally changed my life and might just make me a millionaire by the time it's all said and done.
This concept of paying yourself first applies to different types of investments as well. Perhaps the most common way to take advantage of automatic investing is through an employer sponsored retirement plans such as a 401(k) plan, 403(b), 457(b), or the Thrift Savings Plan. You can also apply this to savings goals, Roth or Traditional IRAs, or taxable investments. In fact, many brokerage firms will waive account minimums if you agree to fund your account with a minimum contribution each month. Some brokerage firms even offer lower transaction costs with automatic investments.
Here are three reasons you should consider automatic investing.
It's easy. You don't have to remember to do it. Just set it up once and you know it will get done.
There is no emotional barrier. It can be difficult to write a check each month for a future goal when you have current wants you could easily fulfill with those funds. Automatic investing makes it easier to stick to your long term plans.
You don't try to time the market. Market timing is almost always a losing battle. For the average investor, dollar cost averaging can be a great way to avoid market timing and ensure you get your money in the market for a longer period of time. Automatic investing gives you the greatest opportunity to realize the growth of compound interest.
Ryan Guina is a U.S. military veteran, writer, and professional in the corporate world. He blogs at Cash Money Life and Military Finance Network.
From Yahoo Finance published on June 15, 2010, 4:23 pm EDT