How to automate your investing? A comprehensive guide

Automated investing offers a streamlined approach to wealth accumulation. By automating your investments, funds are deducted directly from your paycheck and deposited into your 401(k) or investment account, reducing the likelihood of missed contributions. Whether you're new to investing or an experienced trader, automating investments is essential for maximizing growth. This guide is crafted to explore various methods of automating your investments, ranging from reinvesting dividends to setting up regular transfers through robo-advisors.

How to automate your investing?

Automating your investing process is typically straightforward. Before you begin, check the platform's FAQs for account minimums and any necessary approvals. Each platform has its own setup process. Prepare your personal information, including your bank details and Social Security number. The platform will guide you through these steps:

1. Create an investment account: Choose a user ID and password, and select the type of account (e.g., taxable or IRA).
2. Choose your assets: Robo-advisors and micro-investing apps will ask about your goals, risk tolerance, and time horizon to select assets. Workplace retirement accounts provide a list of investments, while self-directed accounts offer a wide range of stocks, bonds, ETFs, and mutual funds. Educational resources on the platform can assist in making these choices.
3. Link your funding account: Select your checking or savings account for transfers. You'll need your bank's name, routing number, and account number. For employer-sponsored retirement accounts like 401(k), 403(b), or 457 plans, funds are automatically deducted from your paycheck.
4. Set your funding schedule: Choose how often and how much money to transfer from your bank account to your investment account. Ensure adequate transfers for employer matches in workplace retirement accounts and understand the contribution limits for 401(k) plans.

Best automated investing platforms

Exploring key automated investment options

You can establish an automated investment plan through various methods. From robo-advisors to employer-sponsored 401(k)s, we'll guide you through each option. Choose one or more automated investment types to ensure that today's earnings contribute to future wealth.

• Robo-advisors: Platforms like Wealthfront, Betterment, Fidelity Go, and Schwab Intelligent Portfolios offer cost-effective investment solutions. Simply outline your goals and timeline, and these digital managers will craft a portfolio tailored to your needs. Set up automatic transfers into taxable or retirement accounts, and the robo-advisor will maintain your investments based on your preferences. Some also provide access to human financial advisors.
• Employer-sponsored retirement accounts: Many employers offer 401(k), 403(b), or 457 plans for retirement savings. You decide how much of your paycheck goes into these accounts. Some employers match contributions up to a certain percentage. Funds are typically invested in stocks, bonds, or balanced funds of your choosing, growing tax-deferred.
• Dividend Reinvestment Plans (DRIPs): DRIPs automatically reinvest all dividends and capital gains back into the same asset within your investment account. This compounding strategy accelerates your account's growth over time.
• Recurring transfers: Set up recurring transfers from your checking or savings account into your investment account. Choose daily, weekly, monthly, or other schedules to automate contributions to taxable or retirement accounts, ensuring careful account management to avoid overdrafts.
• Round-ups: Apps like Acorns round up your purchases linked to a debit or credit card and transfer the spare change into your investment account. This micro-saving approach incrementally boosts your investments with each transaction.

Requirements for opening an automated investing account

Initially, discover the necessary information needed to open an automated investing account.

Personal information

The information and documents typically needed for the onboarding process include:

• Full name
• Social Security number or taxpayer identification number
• Address
• Phone number
• Email address
• Date of birth
• Driver's license, passport, or other government-issued ID details
• Employment status and occupation
• If employed by a brokerage firm
• Annual income
• Net worth
• Investment goals and risk tolerance

Minimum deposits

Fortunately for investors, there are numerous automated investment accounts offering low minimum deposit requirements. Minimum deposits vary widely, starting from zero at many well-known brokerage firms and going up to $100,000 for comprehensive services like the Empower robo-advisor, which includes access to certified financial planners.

For beginners in investing, a good option might be opening an automated investing account at a major brokerage firm that has no minimum investment requirement, such as Fidelity Go. Alternatively, if you prefer a robo-advisor with low minimums, platforms like SoFi Automated Investing, M1 Finance, Betterment, Ally, and Ellevest all require $100 or less to start.

Key considerations when setting up an automated investment account

With numerous options available for automating investments, selecting the right one can be overwhelming. To simplify your decision-making process, consider these factors:

• Customer service: Responsive phone customer service can be crucial for both novice and experienced investors. Some platforms may not offer live customer support, so if this is important to you, check availability and contact hours.
• Fees and commissions: Lower fees have been linked to better investment performance, as noted in research from Vanguard and other institutions. Before committing to any platform, understand the fees involved, including management fees and fund expense ratios. Assess whether the services provided justify the fees charged.
• Account minimum: Determine the initial deposit required to open and maintain the account. Check if there's a minimum balance requirement and ensure it aligns with your financial situation.
• Research tools: For self-directed investment accounts, examine the available screeners, calculators, trading platforms, and research reports. Ensure these tools meet your needs before opening an account, especially if you prefer managing your investments independently.

What is automated investing?

Automated investing is a strategy that ensures consistent savings and investment for the future. It addresses our tendency to forget our best intentions, much like how New Year's resolutions often fade by February. By automating investing, we prioritize saving for the future.

This approach benefits anyone aiming to convert current earnings into future prosperity, whether saving for retirement, a child's education, wealth accumulation, or any long-term goal. 

Implementing automated investing involves a few straightforward steps. Start by selecting a source—such as a paycheck, personal checking, or savings account—from which funds will be invested. Next, decide where to invest, whether it's a workplace retirement plan, a self-directed investment account, a micro-investing app, or a robo-advisor. Reinvesting dividends and capital gains within your brokerage account also falls under automated investing. Choose specific investments, then set up regular transfers from your cash account to your investment account.

Lastly, determine the amount and frequency of your automated investment strategy. Once set up, funds will automatically transfer to designated accounts and investments. This automated process helps resist the urge to halt investments during market downturns, aligning with the investment principle of buying low to potentially benefit from market fluctuations.

How does automated investing work?

Think of automated investing like setting up automatic bill payments. You establish parameters such as the amount to invest, the investment vehicles, and the funding method. Once set up, regular transfers from your bank account or paycheck are directed straight to your investment accounts, automating your contributions.

If you have a self-directed account, you may need to take an additional step to allocate those funds into investments. However, many brokerages offer pre-built portfolios that eliminate this step. Alternatively, you can opt for a robo-advisor to automate your investment portfolio. Contributions are automatically invested according to predetermined allocations and rules set up during your account setup process.

Is automated investing a beneficial strategy?

Automated investing is advantageous for almost everyone. Behavioral finance studies indicate that humans aren't always rational in their financial decisions. By mitigating less optimal behaviors like irregular investing or avoidance, automated investing can enhance your long-term financial outcomes. It systematically moves funds from your account before spending temptations arise, directing them into long-term financial assets, thereby fostering wealth accumulation.

Does automated investing pose risks?

Investing in financial markets carries inherent risks, as the value of your initial investment can decrease. However, automated investing may be seen as less risky compared to managing investments independently. Through regular contributions to the financial markets regardless of market conditions, you practice dollar-cost averaging. This strategy involves buying more shares when prices are lower and fewer shares when prices are higher, effectively implementing the "buy low" principle.

Are micro-investing apps a wise option?

Micro-investing apps come with their advantages and drawbacks. These round-up investment platforms allow you to start investing easily and maintain regular contributions. However, the downside is that if you rely solely on rounding up spare change without setting up larger automated deposits, it may take a considerable amount of time to accumulate a substantial balance in your account.

For instance, suppose you invest $50 monthly in spare change into your investment account, earning an average annual return of 7%. After 10 years, your account would grow to approximately $8,704. Now, if you add a $350 monthly automated deposit to the initial $50 spare change investment, totaling $400 per month, and continue with the same 7% return, your account could potentially grow to around $69,637 over the same period.

Is using an automated investing platform a recommended choice?

Certainly, there are several compelling reasons to opt for an automated investing platform:

• Automated investing mitigates the risk of under-investing for future financial goals.
• It saves valuable time by automating investment processes.
• Robo-advisors offer convenient, ready-made investment portfolios that require minimal ongoing management.
• Workplace retirement accounts automate investments across diverse assets, often with additional benefits like employer matching contributions.
• Dividend reinvestment provides a straightforward solution for handling capital gains and income distributions.

For anyone prioritizing long-term financial planning, setting up automated investment strategies is highly advisable.