Episode Transcript
Brenton: [00:00:00] One of the best things you can do for your investment portfolio is to take yourself outta the equation and let automation do the work for you. In this episode, we're gonna tell you six ways that automation can benefit your finances so that you can implement them in your financial life.
Let's get started.
Brenton: Hello, this is Brenton Harrison of New Money, New Problems, and your host with the New Money, New Problems [00:01:00] podcast. I hope you all enjoying the end of the summer. In this episode, I want to give you some really basic foundational elements that you can put in place tomorrow if you would like to. That can just really keep that ball rolling downhill when it comes to using automation to benefit you financially.
Some of them are things that we've covered on the podcast before, albeit briefly, others you'll hear for the first time. But here are six ways that automation can benefit your investments.
First up, auto transfers. We've talked ad nauseum about how I'm a big believer in setting a goal in terms of how much you wanna save on a monthly basis and automating at least a portion of that goal. But there are actually several ways that you can have automated transfers work to your benefit. When it comes to money that's going into cash, there is the obvious automation of setting up an automatic transfer from your checking account to your savings account.
If you get paid biweekly and your bank allows this type of frequent transfer, I often encourage people to break up that monthly [00:02:00] savings goal into two automated transfers from checking to saving each month.
Now if those funds are going to a savings account that aren't getting what is a competitive interest rate in this high interest rate environment, you could also consider setting up that transfer to a high yield savings or a money market account.
We're gonna put some links in the resources to this episode, and one of those links will be just some of the top high yield savings accounts that are currently available in the marketplace, because in this environment, you're seeing savings rates where they're giving you 4.5 or 5% on a savings account.
So if you have some significant funds in your reserves and you want to make sure that you're not leaving any money on the table, Going from a savings account at your local bank that may not be paying a high rate and having at least a portion of those funds getting a significantly higher rate could be one way that automation could not only help you in terms of money going to the account, but also just making sure that you're getting as much juice for the squeeze as possible, as you know, I am fond of saying. The last way you can [00:03:00] use automated savings, that I actually think is one of the strongest ways is to do a split deposit, where if your employer allows it, instead of having all of your money direct deposited into a checking account, you could have what you want to spend deposited into that checking account and actually have the amount you plan to save split into another account on a biweekly period.
Next automated Roundup accounts. If you go back a few years with me, you might remember a bank called Wachovia Bank.
They were the first bank that I actually remember who did those roundup savings accounts where every single dollar or every single 99 cents you spent was rounded up to the next dollar and that extra penny was pushed over to a savings account. Now you see those all over the place and there are apps and there are companies that you can work with who will not only round up your savings in terms of pushing it to cash for every dollar that you spend, but also companies that will round it up and push those extra pennies over to an investment account.
When it comes to cash savings, there are companies like [00:04:00] Chime that are available that push everything to savings, but your local bank might offer this as well.
And when it comes to investing, I would say the most popular, this is not a recommendation of any of these companies, but the most popular one in that space is probably Acorns. That's most people's introduction into roundup investing. And I may not be the hugest fan of the platform itself in terms of people who get more than a certain amount, still using Acorns as their primary investment tool, but I would say I prefer that to you not investing at all.
So those types of services are a great way to take those spare pennies that you weren't gonna use or miss, and make sure that it's going to the market and giving you an opportunity to Earn a rate of return.
Number three is auto increase plans in your 401k, 403b or company retirement account.
Now, historically, there's a talk that I've given where I talk about the power of auto enrollment plans and auto increase plans. Auto enrollment plans are when a company sets up a 401k and new employees are [00:05:00] automatically enrolled, and they have to formally take themselves out of the program. And that's something that has worked very well.
As a matter of fact, if you look at the stats that tell you about participation rates for companies who automatically enroll employees in their 401k as compared to those who don't, participation in those auto enrollment plans greatly exceeds that of those who don't. So it's a really powerful tool. But we've also shared that typically those auto enrollment plans start your contribution rate out at 3%, and for most people, that's just not going to be enough for them to save what they need to cover their retirement needs. So what they do is they partner with an auto increase plan. Auto increase plan simply says, we're gonna start you at 3% or 5%, but every single year we're gonna increase that savings rate by 1% up to what is typically the cap of maybe 10%.
Now the interesting thing about these plans is, number one, they give you a better shot of eventually getting to the point where you're saving enough to meet your [00:06:00] needs, but you'd also be surprised how few people pull out of those plans. As a matter of fact, in those same studies that I'm referencing where they're talking about those participation rates, they also look at the pairing of auto enrollment plans with auto increase features, and they found that when you look at the people who are participating in that auto enrollment plan, several years later, when you pair it with auto increases, Nine out of 10 employees in this situation are not only still taking those automatic increases, but they even in many cases, save more.
There's something about knowing that you're saving 7% of your pay towards your 401k and it hasn't greatly impacted your lifestyle that encourages you to go and say, what would eight look like? What would nine look like? What would 10 look like? As compared to a plan where they might start you and leave you at 3% and you just get used to it, but never have that desire to go back and adjust your contribution.
So those are three of the six ways you can use automation to help your investments. After the break will [00:07:00] tell you the last three, and we'll bring this thing on home.
[00:08:00]
Brenton: The fourth way to automate your investments is by utilizing dollar cost averaging. Now we've talked about the benefits of automated savings. Dollar cost averaging is when you are automatically contributing a consistent amount into an investment on a monthly basis or a quarterly basis.
And the reason that this consistent investment plan is something that people abide by is because you don't know what the market's going to do on a monthly or weekly or quarterly basis. It could be going up, it could be going down in terms of the investment that you're purchasing into, and dollar cost averaging seeks to give you the best opportunity to pay the lowest average price for the investments that you can. It takes advantage of that volatility. And it says that if we just contribute the same amount in each incremental period, as the market falls and [00:09:00] rises, we're gonna be able to just stay right in the middle and get the best average price. And I'll give you an example.
Let's say that we have two investors and they're gonna have five months to invest, and over that five months, they're going to contribute $500 each. Now they can decide however they want to contribute it. It can be a hundred dollars a month for five months, they can split it up and in those five months, they're buying into an investment with the following prices.
In month one it's $10 a share. Month two, $20 a share. Month three, $50 a share. Month four, $10 a share. Month five, $20 a share. If we're looking at these two investors, we're gonna assume that the first in investor is going to invest irregularly.
They're gonna put $300 in their investment in month two and $200 aside in month five. And in each of those months, the price just happens to be $20 a share. That means that in month two, when they invest $300 at $20 a share, they get 15 shares for their [00:10:00] purchase.
And in month five, when they invest $200 at $20 a share, they get 10 shares. So when you total up, they get 25 shares for their $500 for an average price of $20 per share. Let's assume that our second investor, instead of investing irregularly, chooses to do a hundred dollars a month for the entire five months.
In the first month, they get 10 shares, and the second month they get five. The third month, two shares. The fourth month, 10 shares. The fifth month, five shares. For a total of 32 shares, they have seven shares more than their other investor, and because of this, they paid a lower average cost and come away with an average share price of $15.63.
now I should tell you, there's no guarantee that dollar cost averaging will give you the lowest price. There are some scenarios where it doesn't work out, but because you don't know when those scenarios come, like I said, this is about using automation to give you the best opportunity to come out [00:11:00] ahead in the long run.
Number five is the automation of dividends. And this can actually cut two ways depending on what your objective is when it comes to your investments. We have qualified investments. Those are your retirement accounts that you can't access until traditional retirement age. But you know, I'm a big proponent of establishing non-qualified investments that you can access in the here and now without restrictions. Now, when you have a qualified investment, you're investing in mutual funds and index funds and stocks, and there are scenarios where those investments can generate dividends. As you recall, a dividend is when you have a company that might have excess profits and that decide to distribute those profits to their shareholders in the form of dividends.
Now when it comes to a qualified account, those accounts are tax deferred. So when dividends are issued in a qualified account, they're often reinvested. Those excess profits from that stock or that mutual fund are reinvested into that account, and it's almost like having [00:12:00] an extra person contributing funds to your investment for you, and it can be really, really powerful if you're using them in a qualified or a non-qualified account. The problem, however, is that with a non-qualified account, when that dividend is issued, it's not tax deferred.
Non-qualified investments are taxable year to year. So if you have a dividend that's issued, you pay ordinary income taxes on that dividend. It's as if you earned that money, whether or not you choose to have those dividends reinvested into your account or if you actually cash them out and use them for your own expenses.
Now when I said this cuts both ways, it's because you can actually choose which one you want to do. When you set up an account, they're going to ask you for a non-qualified account, do you want to reinvest all of your dividends and have them go back towards the investment?
Do you want them to sit in cash inside of your brokerage account, or do you want them to be cashed out and deposited into your account automatically? And you can choose which one of those you prefer. Some people choose, which is [00:13:00] my preference if you're a long-term investor, to reinvest them.
And the more dividends you receive, it's just like extra coals going into the fire for that locomotion to make sure that more and more money is going to your account over time. But there are also people who invest for passive income sources.
So if you're that person, you could, rather than reinvest your dividends, look for companies that have a history of paying significant dividends and have them cashed out to supplement your income. Everybody has different goals, and if that's a goal of yours, you could automate your dividends so that they're deposited into your account.
And the more stocks you have that are paying dividends, the more investments you have that are paying dividends, the further it bolsters that passive income that you're trying to develop.
And then lastly, auto rebalancing. And I don't think this is one that we've talked about on the podcast before, so I'm gonna break this down as if it's the first time you've heard of it.
I know we've discussed allocations to portfolios when it comes to how they're structured, meaning that you might have, for example, [00:14:00] an account that has 80% stocks and 20% bonds. And those allocations have a lot to do with what your risk tolerance is.
How aggressive or conservative would you like to be when it comes to how you set up your account. The issue with setting those allocations, however, is that throughout the year, the performance of those different camps will differ. You might have a year where the stock portion of your portfolio is performing really well, but the bond portion is not. Or maybe they're both performing positively, but because one has a higher opportunity for large returns than another, which is typically stocks over bonds, they become out of balance.
So you might look up one day, and because the stock portion of your portfolio has outperformed bonds to such an extent, instead of having 80% stocks, 20% bonds as you prefer, you might have 85% stocks and 15% bonds because of that overperformance.
Now, when this happens, when that allocation has gotten out of whack as compared to your goals, [00:15:00] it's called being overweight. You are overweight in equities, or you're overweight in fixed income. And it just simply means that based on the preferred allocation of your account, you have more in one area than you would like.
When this happens, one of the things that you can do is to rebalance your account. What rebalancing entails is selling off the overweight portion of that high performing investment and using the proceeds to buy into the lower performing investment. In our example where that 80 20 portfolio became 85 15, you would take that extra 5% of the equities portion of your portfolio that was overweight and you would use them to repurchase the fixed income to bring you back to 80 20. It's a phenomenal concept when it comes to investing because if you think about it, When you sell off those excess returns, you are selling high. And when you buy into the lower performing asset, you are buying low, which is the first rule of investing. So it's a really [00:16:00] powerful tool, and what auto rebalancing says is that instead of you having to have the wherewithal or the discipline or the memory to do this on your own, you can auto rebalance and have it done for you.
You often see investment companies that will ask if you want to auto rebalance your account. And when you say that you do, you have to pick a frequency?
Do you want to auto rebalance once a year, twice a year, every single quarter, every single month? And if you pick your preference, you can set it and forget it and know that once a year or twice a year or four times a year, you'll be buying low, selling high and using those strategies to make sure that not only you taking advantage of positive returns in the market, but you are also making sure the allocation of your account fits your long-term objectives.
So those are six foundational ways that you can use automation to your benefit when it comes to investments. I hope this was helpful to you. In future episodes, we're gonna bring in some friends of mine who are gonna talk to you about some more ways that you can start to build your own portfolios and how you can evaluate returns and [00:17:00] what should and should not be in your account based on your level of risk tolerance and education.
But for now, I hope you can use some of these things to your benefit, and I look forward to seeing you next week.
