Financial Automation

Eric • 28th Aug 2007 • Finance

Automation is a beautiful thing, and in finance, it works wonders. When I think of automating finances, I think of a book I read years ago, The Automatic Millionaire. I read this when I really had no idea what I was doing with my finances, but I still use some of the tactics I read even today.

If you haven’t noticed, the stock market lately hasn’t been doing so hot. But with my savings plan in place, I automatically buy low. See, I put aside $x per month for retirement savings. That $x does not change month to month, but the price of my investment does change (ideally, it goes up, but lately, it’s been down). So let’s see what happens:

Let’s say I invest $3,000 in a fund, and this month, the price per share is $60. I buy 50 shares. Next month, I still invest $3,000, but the price has gone up to $63 (yeah – I made money!). I only buy 47.62 shares. The amount I invest hasn’t changed, but because of the higher price, I buy fewer shares.

Then the market corrects itself, and the fund drops to $56 / share. Booh! I’m losing money, but because of the automatic savings, when I buy my $3,000 worth, I buy more shares! I pick up 53.57 shares this month, still costing me $3,000.

When the price per share is down, I buy more; when the price per share is up, I buy fewer shares. However, the amount of money I invest never changes. Automatically, the system takes care of the “buy low” concept.

Automation is great… in fact, this post will automatically be published tonight, while I’m at a Cub Scout meeting