To build wealth painlessly, arrange to pay yourself first

Your Funds

Dollars & Sense

November 28, 1999|By Charles A. Jaffe

MOST PEOPLE invest one way in their retirement plan, and another with the rest of their money.

Retirement plans such as a 401(k) or 403(b) typically require regular withdrawals from paychecks, an amount chosen by the employee that goes directly into his or her investment account. The idea is automatic, pain-free investing that allows for purchases at regular intervals, regardless of market conditions, and lets a nest egg grow nicely over the years.

Yet when it comes to saving outside of retirement plans, most investors do not make regular, automatic investments.

"It's the easiest way to take a little money and have it grow into something," says Robert Powell, managing director at DALBAR Inc., a Boston financial research firm.

A recent study showed that of investors who own funds solely outside of retirement plans, 24 percent are enrolled in automatic investment programs to move deposits from a bank account or paycheck to their funds.

There is no industrywide statistic for use of automatic investment and direct-deposit programs by all investors, but the major fund companies and transfer agencies report that anywhere from 10 percent to 25 percent of the retail (nonretirement) accounts take advantage of automatic savings plans.

As Powell noted, that could be because investors are maxing out contributions to retirement savings plans. Still, it would seem that any program that endeavors to make investing relatively pain-free would be embraced by the investing public.

"It is one of the most widely available features for mutual funds, but one of the most underused," says Investment Company Institute spokesman John Collins. "For most people, this should be a no-brainer, but apparently it isn't."

Automatic investment plans have several pluses.

For starters, they represent a low entry price to a fund. The era is gone when most funds allowed investors to open accounts for under $500. Today, the average minimum initial investment is well over $1,000.

But virtually every fund firm waives its minimum requirements for investors who have some amount (typically from $25 to $100) deposited automatically, usually on a monthly basis.

More importantly, automatic investment plans allow an investor to follow one of the key rules of savings, namely "pay yourself first."

In fact, many fund companies accept direct deposits, so that a portion of your paycheck (or Social Security check) can go directly into a fund the same, easy way it flows into a tax-advantaged retirement account.

Automatic saving builds discipline. People who put investing on auto-pilot are less likely to swerve when the market moves. They not only save regularly, they also get the long-term benefits of dollar-cost averaging.

Some industry observers speculate that investors don't move their money electronically because their only exposure to a fund's automatic investment options came when they opened an account.

Just a few years ago, most automatic investment programs required monthly deposits, and many didn't allow the investor to pick when the money was moved. Today, most fund companies offer options for moving money, including biweekly, quarterly or annual contributions.

If you aren't familiar with what your fund companies offer, call and learn the rules. Listen carefully to what is said about stopping the program, and to the dates when money can be moved.

Some fund firms impose low-balance fees if you stop an automatic investment program before reaching a certain dollar limit in your account. And, because automatic investment plans come from bank or money market accounts, you need to be sure that you have cash on hand when the transfer day arrives, or you might face a variety of fees.

You might also want to time your money moves so they don't coincide with the time of the month when big bills come due.

"If you're not investing automatically, you are losing out on a great opportunity," says Michelle A. Smith, managing director of the Mutual Fund Education Alliance in Kansas City. "For regular people, the single best way to invest is in a continuous, ongoing manner. Most regular people don't plunk down $1,000 here and there because they can't save that kind of money. Saving big chunks of money is hard, but investing a little bit each month isn't."

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.

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