You’re already doing a ton of great things with your money. You have money saved for emergencies, the debt situation is handled or on track to be handled, and you’ve been getting that full 401(k) match for a long time now. With your foundation nice and strong, you’re ready to turn the full force of your financial attention to — *pauses for effect* — building wealth.
Whether you’ve been investing toward your goals for years, or you’re just starting to invest beyond that 401(k), there’s something that could help even more: an automatic investing plan. Sounds fancy, but it’s pretty straightforward. It just means automatically depositing money into an account that then automatically invests it for you. Contributing money to your 401(k) out of every paycheck counts. So does setting up autodeposits into an Ellevest investment account.
But why stop there? Once you’ve got autodeposits set, they could help you do even more with your money if you increase them over time.
Tell me more, we hear you saying. Gladly, dear reader. Here’s why an automatic investing plan can be so powerful — and how often you should consider bumping those deposits up.
How automatic investing deposits can help you build wealth
It can help you save more over time
You’ll hear us recommend this a lot: aim to invest steadily and consistently, a little bit out of every paycheck.
Say you’re investing in a portfolio that’s made up of 60% stocks and 40% bonds, because it’s a common mix. The average 60/40 portfolio has had a 7.71% annual return over the last ten years — so to err on the side of caution, let’s assume you earn an average annual return of 6%. (Of course, investing returns are never perfectly linear, but it makes the math simpler. Also, returns from the last ten years aren’t guaranteed to repeat, but it’s the best info we have to try to project things out.)
If you were to deposit $250 in that account and let it sit for ten years, you’d net out with a total of about $455 — a return of $205. But if instead you were to invest $250 every month for ten years, you’d have put so much more of your money to work — $30,000! — and ended up with $41,000 total, a return of $11,000.
When we talk about “building wealth,” this is what we mean.
It keeps you consistent
But Ellevest, we hear you saying, couldn’t I just manually transfer $250 into my account every month and get the same result? Well, yes, you could — but autodeposits make it so much more likely.
You’ve probably heard it before: “Pay yourself first.” Or, as we like to say, invest in yourself first. It’s common advice for a reason. Automating your investment deposits keeps them out of sight, out of mind — which makes it a lot more likely that you’ll invest the amount you planned to invest every single month. You won’t forget, and you won’t get the chance to accidentally spend it on something else.
And when it comes to investing, consistency is huge. Let’s revisit our example above.
The chart below shows the difference in how much you’d have if you a) invested that consistent $250 every single month, vs b) invested $250 most months, but missed one month a year and only invested half your usual deposit three other months a year.
The difference? Nearly $8,500.
It helps to manage risk
The markets never go straight up. There are always going to be bumps and dips along the way. But automating your investment deposits can help, because it’s the best way to practice dollar-cost averaging. That’s the practice of investing consistently, no matter what’s going on in the markets — that way, you’ll invest on some good days and some bad days and pay an average price over time. Dollar-cost averaging takes the guesswork of, “Is now a good time to invest?” off the table completely — in fact, it’s historically worked much better than trying to time the market.
Here’s another fun fact for you: If you invested in the stock market in 1929 (right before the Great Depression) and then stopped, it would have taken you more than 25 years to recover your initial investment. But if you’d kept investing at the beginning of every year after that, it would have taken you less than seven years to recover. A similar story for 2008: If you’d invested at the market’s peak in late 2007 and then stopped, you’d have recovered your money in about five years; if you’d invested regularly, you’d have recovered in less than two years. So there’s that.
It gives you a better chance of reaching your goals
When you’re aiming for a specific investing goal, you (or, actually, Ellevest) can use your target amount and target date to calculate how much you should invest each month to give you the best chance of reaching your goal. Automating that deposit will help keep you on track.
The (compelling) case for increasing your automatic deposits over time
Consistent investing may be the fuel behind an automatic investment plan, but increasing what you’re investing over time can be like adding gas. We’ll let the math do the talking.
Remember our example above, where you invested $250 a month into that 60/40 portfolio earning 6%? Here’s what could happen if you were to bump your deposit up by just 10%, just once a year. (That works out to an increase of $25 after one year, and an increase of only $54 heading into year ten.)
Yep. That nets you more than $21,000 extra at the end of 10 years.
When should you increase your automatic deposits?
When you get a raise
Any time you get a raise at work is the perfect time to look at your budget and decide whether to increase your investment deposits. Sometimes that extra income is truly needed elsewhere, and any holes in your financial foundation should come first — but if not, putting it toward your investments can be a strong choice. It’s good for Future You, and it helps prevent the dreaded lifestyle creep, too.
When you’re off track on one of your goals
If you’ve fallen behind on one of your investment goals — and no longer on track to hit your target amount by your target date — there are three things you can do. You can lower your goal, extend your timeline, or increase your deposits. A lot of the time, those first two things are pretty fixed. In that case, you might want to look closely at your budget to see what can shift to make room for number three.
When retirement account contribution limits go up
If you’re currently maxing out a retirement account — like an IRA, for example — keep an eye on the news each January. Every so often (like this year!), the IRS increases the annual contribution limits. That means you’ll need to bump up your autodeposits if you want to keep maxing it out.
Regularly — or whenever you can
There’s a reason so many employer 401(k) plans let you sign up to automatically increase your contributions every year — it can often be a smart idea. This is especially true for retirement accounts, because you can’t really save too much. After all, none of us knows how long we’ll live (aka how many years we’ll need to live off our investments), whether we’ll have health issues, or even things like where, exactly, we’ll live. Plus, as your income (hopefully) increases over time, you might want to increase your retirement target, too — you’ll be used to a certain lifestyle that you may not want to give up.
And regardless of what you’re investing toward, there’s also the big “I” word to think about: inflation. Increasing your deposits regularly can help protect against the risk that by the time you reach the end of your goal’s timeline, you won’t have enough after all.
And yes, you can do all of this at Ellevest
In fact, this is exactly the kind of thing Ellevest was built for. Once you’ve created an account and started a goal, you’ll have the option to either set up a “recurring transfer” (out of your bank account) or “direct deposit” (out of your paycheck).
So … what are you waiting for?
© 2024 Ellevest, Inc. All Rights Reserved.
Projections are estimates only, based upon a simplified annual return of 6%. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.
All opinions and views expressed by Ellevest are current as of the date of this writing, are for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.
Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed for accuracy or completeness.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment, or tax advice.
The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.
Investing entails risk, including the possible loss of principal, and past performance is not predictive of future results.
Ellevest, Inc. is a SEC registered investment adviser. Ellevest fees and additional information can be found at www.ellevest.com.
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Victoria Sado
Victoria Sado is a CFP® Professional at Ellevest. She works with Ellevest clients to help them take financial control and make a plan to hit their money goals.