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You have enough mundane tasks on your to-do list. Remembering to invest in your portfolio shouldn’t be one of them.
Automating your investments not only frees up your time, it also helps ensure you consistently invest over time. No additional work ethic or discipline required.
There are lots of ways to automate your investments, from opting into your job’s 401(k) plan to reinvesting dividends inside your brokerage account. It’s simple to set up recurring transfers and contributions, and taking a few minutes to automate your investments now can save you lots of time and potential missed opportunities down the road.
Ready to put your investments on cruise control? Here’s how to create an automated investment plan, along with tips on how to streamline your deposits.
Benefits of automated investing
Automating your investments is like putting your bills on auto-pay. Both approaches ensure consistency and timeliness. Bills get paid on time, and investments contributions get made on time, without you having to think about it.
Automated investing also helps you take advantage of dollar-cost averaging. It’s the process of consistently investing a fixed amount of money at regular intervals, regardless of market conditions.
This strategy smooths out the impact of market volatility, helping you buy more shares when prices are low and fewer when they’re high. The result? A lower average cost per share over time — a huge advantage for any investor.
Here are some other perks of automated investing:
- Reduces temptation to spend: Since the money is automatically allocated to your portfolio, you eliminate the risk of spending it on something else.
- Avoids overreactions to market fluctuations: With automated investing, you’re less likely to day trade and make other impulsive decisions during market volatility. It also takes the guesswork out of when to invest or trying to time the market.
- Frees up your time: Instead of constantly eyeing the markets, you can automate your investments and use the spare time for things you enjoy.
How to create an automated investment plan
Many people delay investing — or fail to start at all — because they’re intimidated by the process or afraid of the risk. An automatic investment plan can help ease those concerns by outlining a clear action plan you can follow and reference later.
Here’s how to create your plan, step by step.
- Determine your contribution percentage: Start by deciding what percentage of your salary you can comfortably contribute to investments. Make sure to use a percentage, not a dollar amount. This way, as your salary increases, your contributions rise in lockstep. Most experts recommend investing 10 to 20 percent of your salary. But first, make sure you’ve built up an emergency fund with at least three to six months’ worth of living expenses in cash.
- Pick your account: Select a workplace retirement account, a taxable brokerage account or an individual retirement account (IRA) to contribute to. We’ll have details on each of those accounts later.
- Select your investments: Most experts recommend low-cost index funds that track market indices like the S&P 500. They can provide an efficient, affordable way to diversify your portfolio without needing to own multiple mutual funds or a wide selection of stocks. You can also explore exchange-traded funds, or ETFs. These funds can track an index, but other ETFs offer exposure to more specific sectors of the economy, such as small companies, international companies or high-yield bonds.
- Set up automatic transfers: Decide how often you want to transfer money — weekly, bi-weekly or monthly. Nearly all online brokerage platforms make it simple to set up automated transfers.
6 ways to automate your investments
Automating your investments might be easier than you think, especially if you contribute to a 401(k) or similar retirement plan.
When it comes to investing outside of work, you’ll need to open an account if you don’t already have one, choose investments and set up recurring transfers.
1. Contribute to your workplace retirement account
One of the easiest automatic investment options is a workplace retirement plan, such as a 401(k) or a 403(b). If your company offers this benefit, make sure to take full advantage of it.
A 401(k) plan allows you to contribute a portion of your salary directly to your retirement plan before your paycheck ever hits your bank account. Contributions reduce your taxable income, which can help you out at tax time.
Perhaps the biggest benefit is that most employers will match a percentage of your 401(k) contributions, effectively giving you free money for your retirement.
In 2024, the annual contribution limit for 401(k) plans is $23,000, with an additional catch-up contribution of $7,500 per year for those aged 50 and older.
When you enroll in your company’s retirement plan, you’ll choose a percentage of your salary to defer to the account. You may also get the option of automatically bumping up your contributions each year.
Next, you’ll pick your investments. Most employer 401(k) plans offer a selection of anywhere from 10 to 30 mutual funds.
Target date funds are a popular option. These funds gradually rebalance and reallocate assets as you near retirement, typically shifting the majority of your assets from stocks to bonds and cash. The process happens automatically, which takes some of the guesswork out of rebalancing your portfolio. However, it’s important to carefully review investments inside the fund — some target date funds are more conservative or aggressive with their stock allocations than others.
2. Set up direct deposits to an IRA
Not all workplaces offer a 401(k) plan. In fact, 31 percent of private industry workers didn’t have access to an employer-provided retirement plan as of 2022, according to the Bureau of Labor Statistics.
IRAs give people a way to invest outside of work. Even if a 401(k) plan is available at your job, you might find lower fees and more investment options within an IRA.
Many online brokerages offer IRAs, including Vanguard, Fidelity, Charles Schwab and even Robinhood. Many other financial institutions and mutual fund firms do as well.
You can open an IRA in minutes and link your bank account to make your first deposit. And to set up recurring transfers, of course.
Funding an IRA at a broker opens the door to hundreds, potentially thousands, of different investment options, including stocks, bonds, mutual funds and ETFs. That’s great if you’re comfortable taking a DIY approach, but you should have a solid understanding of investments before you start. These resources on how to start investing and five popular investment strategies for beginners are good places to start.
There are two broad types of IRAs: traditional and Roth, each with their own specific tax treatment.
A Roth IRA provides for tax-free withdrawals in retirement, though contributions won’t lower your taxable income in the year contributions are made. In contrast, a traditional IRA lets you deduct your contributions from your taxable income but you’ll face a tax bite when you withdraw money in retirement. Both of these accounts levy a 10 percent penalty if you withdraw money before age 59 ½.
The annual contribution limit for both Roth and traditional IRAs is $7,000 in 2024, with an additional annual catch-up contribution of $1,000 for people ages 50 and older.
3. Set up automatic transfers to a taxable brokerage account
While retirement accounts like 401(k)s and IRAs offer superior tax advantages, some investors prefer the flexibility of a brokerage account.
Unlike retirement accounts, taxable brokerage accounts don’t impose annual contribution limits. You also won’t face a 10 percent IRS penalty if you need to withdraw money before the age of 59 ½.
However, it’s crucial to note that selling investments that have appreciated in value inside a brokerage account leads to capital gains taxes, even if you don’t withdraw money from the account. In contrast, you can avoid capital gains tax on trades inside an IRA and only pay income tax when you withdraw the money in retirement (or, in the case of a Roth, avoid income tax entirely on retirement withdrawals).
The process of opening a brokerage account and setting up automatic transfers is as simple as opening an IRA. Link your bank account, choose how often you want to contribute money and select your investments.
Many investors choose to have a taxable brokerage account as well as an IRA. Most major online brokerages offer both these days. Speaking with a financial advisor can help you determine which investment accounts are right for you.
4. Use a robo-advisor
Robo-advisors use algorithms to create and manage a diversified portfolio tailored to your risk tolerance and financial goals. Investing with a robo-advisor is super simple: Send in money, and the robo does the rest. They also offer lower fees than you’ll find with a human financial advisor.
Companies like Betterment and Wealthfront introduced low-cost automated investing to the masses over a decade ago, but major financial institutions have jumped into the robo-advisor arena too, including Schwab’s Intelligent Portfolios and Vanguard’s Digital Advisor.
Once your account is open, you can set up direct deposits and recurring transfers. The funds will be invested according to your investment plan and automatically rebalanced as needed.
Robo-advisors like Wealthfront and Betterment offer IRAs as well as traditional brokerage accounts, so you can choose the type of tax treatment you want before you get started.
5. Work with a financial advisor
Not everyone needs a financial advisor to help manage their investments. But if you’re navigating a complex situation (like inheriting an IRA) or simply want some one-on-one counsel with a professional, a financial advisor can provide the expertise and guidance needed to make informed decisions.
An advisor can evaluate the investment choices within your 401(k) and recommend the best options. They can also assess your current financial situation, create a tailored investment strategy, and periodically review and adjust your portfolio as needed.
By delegating investment decisions to a financial advisor, you’re essentially automating the management of your portfolio. They’ll take care of the day-to-day monitoring and periodic rebalancing.
You’ll get to reap the benefits of freeing up your time while retaining a fiduciary you can call on when you have questions about your investments or other aspects of your financial life.
Need expert guidance when it comes to managing your money or planning for retirement?
Bankrate’s AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals.
6. Use a micro-investing app
Micro-investing apps like Acorns and Stash offer a unique approach to automated investing. These apps let you round up your everyday purchases to the nearest dollar and invest the spare change. You can also set up recurring transfers on a daily, weekly or monthly basis to boost your contributions.
Micro-investing apps are a type of robo-advisor. They use algorithms to automatically invest your money in a portfolio tailored to your risk tolerance and goals. However, the spare change round-up feature is unique to micro-investing apps.
While these apps offer a convenient way to start investing with small amounts of money, be aware that they charge relatively high fees, especially for investors with small account balances. For example, Acorns charges a flat $3 monthly fee for its basic taxable brokerage account. That might not sound like much, but $36 a year — regardless of your account balance! — is a sky-high price to pay considering none of the major investing platforms charge investors an annual or monthly fee.
Reinvest your dividends
Some stocks pay qualified dividends, or a distribution of earnings, usually paid quarterly by a company to its shareholders in the form of cash or stock reinvestment.
Most brokerage companies let you set up your account to automatically reinvest in shares of the company or fund that paid the dividend. By reinvesting, your account value compounds more quickly. Over time, this compounding effect can help you purchase additional shares of the stock or fund, significantly boosting your overall returns.
Automating your investments is a strategic move that puts your money on auto-pilot. Whether you choose an employer-sponsored retirement plan, robo-advisor or an IRA, the key is to put a system in place and let it run.