There was a time when most people in Australia did their driving tests on a manual car.
Those days are long gone and now it is rare to even see many new cars offered with a stick shift as the automatic gearbox rules supreme.
Which got me thinking about how great it would be if most people adopted the same automatic approach to saving and investing.
Most of us have tried the manual method, bravely setting aside some savings in an account only to raid it some time later when a bill arrived or even if a night out beckoned.
Or it might be that after a few weeks of disciplined savings, we simply didn’t get around to topping up the savings account and found it difficult to catch up.
Automatic Payments Really Work
Just like a manual car, doing investments manually takes a fair bit of skill and more discipline compared to the easy cruise of going automatic.
As we all know from the success of superannuation, the mere fact that payments are made automatically and are unable to be accessed easily makes savings so much easier.
So, what is the best way to set up an automatic savings and investment model?
Well, just like driving an automatic car, it should be really simple and easy once you get used to it.
Pay Yourself First
The first thing to do is to set up a realistic savings plan and to pay yourself first.
Come up with an amount that you are sure you can maintain over time and synchronise it with your pay cycle so that the withdrawal is made weekly, fortnightly or monthly with the rest of your pay then landing in your everyday account.
Paying yourself first is the simplest way to ensure that you spend less than you earn, which is the most basic building block on which all savings are based.
Then it is a matter of setting up your accounts so that money flows directly into your savings account every pay cycle.
Income Not the Key Here
The amount of income you earn is irrelevant here—many high-income earners fail to save anything while some pensioners manage to generate savings off a very limited income.
Once the realistic savings amount is decided on and diverted into a separate high interest savings account, the hard part becomes automatic and the savings will build up much faster than if they are managed manually.
Then it is simply a matter of ensuring that you budget the rest of your income successfully so that there is a neat match between your income and living expenses.
An emergency fund can be a useful tool here, with the aim being to have up to three months worth of living expenses set aside to be used for the inevitable unpredictable big bill that comes along.
Once your savings are automated, it is time to come up with a strategy to ensure you don’t keep increasing your lifestyle spending to match your hopefully rising income.
Harnessing Pay Rises for Savings
One successful idea is to treat all income inflection points as an opportunity to increase your savings.
When you get a pay rise, make a conscious decision to save part—or even all—of the increase into your automated savings.
The same sort of thinking can apply to a reduction in your mortgage or a tax return.
Without some sort of savings plan for pay rises, the money can very quickly disappear into a bit of lifestyle inflation.
Dollar-Cost Averaging Works Too
Just as saving works better when it is automated, so does investing.
Rather than following the crowds who try to time markets by buying assets at the bottom and selling them at the top, the strategy of dollar-cost averaging through automated investing is a really proven way of sustainably building wealth.
The idea is that by buying assets at regular intervals – say, weekly or monthly – you will automatically buy more of a particular asset when prices are low and less when asset prices are higher.
That sort of disciplined and consistent behaviour is highly rewarding and also quite easy to implement because once the investing is automated, it is effectively set and forget.
ETF provider Betashares produced an example of someone who had $12,000 to invest at the beginning of 2020.
On the first investible day of each month, they invest $1,000 in Betashares A200 ETF, which tracks the ASX 200.
By the end of the year, their portfolio is worth $13,617, and they’ve made a total return of $1,718.
If, on the other hand, they’d invested it all at once at the beginning of 2020, their portfolio would be worth $12,781.12 by the end of the year, with a total return of $960.69.
Super, Offset, Property, Shares
A monthly investment could also be made into extra super, a mortgage offset account, or into buying shares in a diversified property ETF or shares in a listed investment company.
Automating the payment of dividends or distributions back into the savings bucket is also a powerful way to ensure that savings compound rather than being sucked back into general living expenses.
The slow and steady approach of automated savings and investment might not have the excitement of jumping on the next hot share tip or cryptocurrency coin but, in the longer term, a steady and deliberate automated approach to savings and investment is much more likely to produce great results.
