Investing consistently is a key building block of wealth building, but many people don’t understand why it is so powerful. Well, today we’re going to explain it to you! And once you understand it, you’ll be even more motivated to keep your investing consistent.
First, make sure you have your emergency fund in place, and focus on becoming debt-free. Because hey, knocking out a 10% interest rate is similar to gaining 10% on an investment – so do this first. Then take a look at your household budget to see how much monthly cash you can allocate toward investing.
Whatever this amount is, lock it in, put it on the budget, and invest that exact amount every single month. Do this regardless of what the market is doing or what the talking heads on TV are saying. Be like Nike and Just Do It.
Here’s how much do YOU need to invest, from any age, to become a millionaire. Even if you don’t have the exact amount you need monthly right now, get started. Start where you can right now and increase it over time. That’s absolutely fine and a great way to start your millionaire plan!
Again, set an amount and stick with it. Invest when the market is going strong, and when the market is tanking. Invest consistently.
Not familiar with how to invest? Reach out to an unbiased financial life planner who can help you understand how investing might fit into a plan for achieving your goals.
By the way, this principle has a name:
Dollar-cost averaging, or DCA, is the practice of investing a fixed dollar amount on consistent intervals (typically this is monthly) in spite of what is going on with the stock market.
While this is “simple”, it isn’t quite easy to implement in practice.
The reason is that investing, like most financial matters, is just as much about emotion and behavior as it is about math. Sending a check to your investment company when the market is in a free-fall is emotionally challenging. Our emotions tell us to hold back and wait until the “right time” to make the investment. Of course, study after study has confirmed that most people, including investment advisors, are horrible at timing the market and this costs investors millions of dollars in missed gains.
The trouble with trying to “time the market”
I talk to many people who think it just isn’t the right time to make an investment deposit right now – for any one of dozens of reasons. Oil prices, the value of the US dollar, the economy in China, wage levels, etc, etc. Since drama draws viewers, the people reporting the news are likely to focus on whichever unpredictable variable is most popular at the moment.
So what many people end up doing is holding on to the cash that should be invested (or worse-case they spend it instead of holding it) and they wait for the perfect opportunity to invest.
The problem is: when is that perfect opportunity?
If the market is in a downtrend right now, do you wait for it to start going back up again? If so, how much? Maybe wait for it to rise 5% before putting in your money, but who is to say it won’t trend back down again even further than the recent rise? Or what if it doesn’t trend back down, but since you waited you missed out on a 5% gain in this example.
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The point is there is no perfect time
Have you heard of Warren Buffett? I’m guessing you have. He made a $1 million dollar bet that a buy-and-hold strategy in an S&P 500 index fund would beat the returns on five actively managed funds (aka market timed and industry-shifted investm