Automatic Investments: How to “Automatically” Boost Your Wealth By 30%
by Mark Skousen, Chairman, Investment U
Friday, July 21, 2006: Issue #561
How would you like to build a money machine that will automatically boost your net worth by 30% or more? I’d like to tell you about the cleverest techniques I know to build long term wealth, all quite painlessly
The story begins with a University of Chicago financial economist named Richard Thaler.
Thaler heads a new investment concept called “behavioral economics” and helps people avoid investment mistakes, such as saving too little for retirement. Recently, he made a simple suggestion to several major corporations that boosted employee contributions to 401(k) plans. He found that only 30% of employees were investing in them, and urged the companies to tell all employees they were “automatically” invested in 401(k) plans UNLESS they opted out. This simple psychological change made all the difference. These corporations now report that 80% of their employees now have 401(k) plans, and the average saving rate has risen 30%.
Investing regularly in your 401(k) is what we call a “forced saving” plan. Employees have a certain percentage of their paycheck automatically invested in their retirement plans, just as the IRS has taxes withheld from paychecks. If you aren’t doing this, I urge you to start right now.
Four Types of “Automatic Investments”
1. American Express One, a new credit card, automatically invests 1% of your monthly expenditures in a high-yielding savings account at the American Express Bank. The current yield is 4.25%. If you spend $10,000 on your AMEX this month, you get a credit of $100 in your savings account, plus interest. The annual fee for the AMEX One is $35, but the first year is exempt. There is no limit to how much you can earn.
2. Your monthly mortgage serves as an automatic wealth-builder. Real estate guru Jack Miller once said, “Want to make a million dollars? Borrow a million dollars and pay it off.” He was referring to a mortgage on your home or rental property. And he’s absolutely right. You are likely to pay your mortgage no matter what, and if you run into trouble, your mortgage is probably the last thing you won’t pay. After 30 years (or 15 years if you want to build automatic wealth faster), you have a valuable asset that is most likely worth a lot more than you paid for it.
3. Switch to a variable whole life insurance policy. Unlike term insurance, whole life builds cash value like a saving account. But unlike whole life policies in the past, the variable life plans build cash much faster, and if you invest in some good growth mutual funds, the cash value may be worth much more. Whole life policies require you to continue making quarterly or annual payments, and thus serve as a forced saving plan.
4. Automatic Investment Plans (AIPs) from discount brokerage firms, such as Charles Schwab & Co. You instruct your brokerage firm to withdraw a set amount of funds automatically every month from your bank account or paycheck and invest them in one or more mutual funds. Choose between growth, foreign, income, precious metals and money market funds. Three forces are at work to guarantee you more wealth each year:
- You add to your account every month or quarter.
- If you pick funds that go up in value, each fund is worth more.
- Dividends and interest are reinvested automatically.
These are the same principles that guide investment clubs: invest regularly, invest in growth stocks and reinvest all dividends.
One popular method I don’t recommend is over-withholding on your tax return, and getting a refund the following year. You don’t earn any interest on your money, and you may be tempted to spend the money instead of investing it.
Use the five methods listed above (401(k) plans, American Express One Card, mortgages, variable whole life, and AIPs) and you will be set for life.
Good trading, AEIOU,
Today’s Investment U Crib Sheet
- Automatic Investment Plans are one of the best ways to accumulate wealth – and the simplest way to “pay yourself first.” Take a closer look at AIPs in Investment U Issue #467, Powerful Financial Planning Tools.
- If you’re setting up an AIP, consider the benefits of exchange-traded funds, especially their low fees, which can save you thousands of dollars over time. The Investment U Research Team has recently compiled a free report on ETFs – Exchange Traded Fund Investments: Profit from the World’s Hottest Markets. This research report examines including how ETFs work, why they’re popular, and how investors can profit with three recommendations from Dr. Mark Skousen.