Charles Schwab's New Guide to Financial Independence Completely Revised and Updated by Charles Schwab

Author:Charles Schwab
Language: eng
Format: epub
Tags: Business
ISBN: 9780307420411
Publisher: The Crown Publishing Group
Published: 2007-12-17T16:00:00+00:00

Step 5. Making It Automatic and Systematic

Once you decide on the amount you can invest every month, there are several ways to make investing easy by setting up a system for regular investments. I encourage you to authorize a payroll deduction, so that a portion of your paycheck is deducted and automatically transferred to your brokerage account, to be used toward additional investments. Or you can authorize an electronic funds transfer (EFT), in which the money is automatically deducted from your checking or savings account. In either case, the amount of the deduction depends on you.

There are a couple of very good reasons for investing systematically. One of them is something that a lot of us were taught as we grew up: the idea of a self-tithe, or paying yourself first, meaning that you save some portion of each paycheck or income you receive, and you do it first, before the whole thing gets eaten up.

A second good reason has the complicated-sounding name dollar cost averaging, which simply means investing the same amount of money at regular intervals—for example, $100 a month or $500 a quarter. By regularly investing the same dollar amount, rather than buying a specified number of shares, you automatically buy more shares when the stock price is low, and fewer when the price is up. As a result, you average out the highs and lows of the price.

FIGURING IN INFLATION

As you think about the cost of your goals, remember to include inflation. Ignoring it is a big mistake, one that can be a nasty surprise later on. You can’t stop inflation, but you can do two things: First, you can invest with the goal of achieving a rate of return greater than the inflation rate; and second, you can be aware of the toll inflation takes, so that you’re not caught off guard.

Suppose that your first child will be attending college in ten years, and you want to have $80,000 set aside for that education. But that’s today’s dollars; how much might it cost ten years from now? You can estimate that by doing the following:

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