What takes 5 minutes and will change your financial life? Setting up recurring investments. How can one little thing make such a big difference? Here are the basics of recurring investments.
What are recurring investments?
Recurring investments are just what they sound like: Investments you make at a regular tempo into a portfolio of stocks. When you remove the human factor and make your investing automatic, you set yourself up for success.
How do they work?
It’s not so much how they work as why they work. When you remove the human element of temptation to spend from your saving and investment strategy, you’re bound to be more successful overall. Think of recurring investments as the personal trainer of your finances. Sure, you could do it on your own, but you’ll be in a better place in the long run if you’ve got it on automatic – it’s all taken care of for you. You still have to do a little work, but the gains will be worth it.
How are they different than saving?
Saving definitely has a time and a place, that’s for sure, but it isn’t planning for your long-term goals. Savings accounts are great for little emergency funds or saving for your vacation next year, but not so much for your far away future. The average savings account pays interest at under 1%, but the stock market has returned around 7% on average for the past few decades. When you’re ready to make big money moves, you invest.
So while the methodology isn’t so different, the results are – and dramatically so. Consider this:
Contributing $100 per month to a savings account will get you to $12,613.20 after ten years.
Investing that same amount of the same decade will get you to $17,409.45.
Yep. By investing rather than saving, you will have earned more than $5,000.
How is that possible? Through the magic of compound interest. The more frequently your money earns interest, the faster and bigger your balance will grow. As interest is added to your account, you earn interest on the original balance, plus the previously earned interest. Ta-da!
What about when the market is down?
Don’t let your brain succumb to fear. Certified Financial Planner Brad Klontz, PsyD, founder of the Financial Psychology Institute says it well: “When we become excited or fearful, our prefrontal cortex, which is used for logical thinking, shuts off. The amygdala—the primal, animal part of our brain—takes over.”
Basically, it’s fight or flight mode, and our frame of reference narrows to focus on immediate survival, rather than long-term well-being. Giving your amygdala a chance to calm down will allow the prefrontal cortex to re-engage and function properly.
How do you get started?
The first step is to find an investment platform that offers holdings you’re interested in. There are a lot of options when it comes to investing, but not all of them are as transparent as you’d like. Choose with your values in mind as well as your financial future.
The next step is simple: Set up a recurring monthly investment that falls within your budget. Having trouble setting a goal or wondering how much you should have saved? This savings guide can give you some direction.
Already have a Swell account? Log in and set up a recurring investment today.
Any past performance provided is for illustrative purposes only and is not indicative of future investment results. As with any investment, there is the potential for profit and the risk of loss. Support for the 7% market return assumption comes from studies identifying a 4% risk premium above a CAPM 10 Year Treasury yield. The 1% savings rate is based on average savings rate returns in the U.S.