Saving Me From Myself With DCA

Are you down with DCA?

Yeah! You know, Dollar Cost Averaging.

DCA is taking a set amount of money each day, week or month and automatically investing that money into some type of investment asset, be it stocks, bonds, or (hold on for this) bitcoin. No, I don’t invest in bitcoin.

These frequent periodic investments are made regardless of market condition and without trying to time an entry into the stock market. I get paid and the money flows to my investments.

There really is no trick here, other than making the investment automatic, thus relieving you of the mental anguish of trying to find an entry point into an investment.

The other day I fired off this tweet.

Making investing automatic is a sure fire way to pave the road to FI and quite possibly a multi-million dollar net worth. All without the mental despair of trying to win the lotto or pick a home run stock.

The tale of my two investing personalities

Let me preface this paragraph by saying, I feel like my mental health is very well. But when it comes to investing, I definitely have split personalities.

Rational Me

One side of me is calm, rational and deliberate. Every paycheck I divert money into my employers 403(b), my Roth IRA, and also a taxable investment account. This is the automatic side of me. Some would even call it boring. If the stock market is up, down, or sideways it doesn’t matter. Once that paycheck is cut from my employer, about 20% is automatically invested.

The Gambler

The other side of me is a risk taker, a thrill seeker, and a gambler. After the bills are paid and money allotted for groceries I skim about 5% of my paycheck from my checking account and I’m ready to invest, into, wait for it……. individual stocks.

I have had a couple home runs over the years. Apple and Microsoft, which represent the lions share of my individual stock portfolio have had tremendous returns on investment.  As the bull market has raged over the last couple of years, I have been sitting on more and more cash waiting for an opportunistic entry point into more Microsoft and Apple that just doesn’t materialize. This is market timing and I know it is a bad idea.

I kick myself for not starting a new stock position that takes a quick dip, only to have a strong bounce. In those situations, I experience the highs an lows of an individual stock picker.  Not all that different than the emotions of a gambler. Am I right?

The Clear Winner

When all is said and done, if I were to add up my winners and losers from my individual stock portfolio, I think the clear winner would be the calm deliberate me. Dollar cost averaging over the last two decades has been my best investment.

How To Take Advantage Of The “Right Way”

So now that we got that out of the way, we now know that dollar cost averaging into a low-cost total stock market index fund is nearly unbeatable.

Let me tell you what I have been doing in 2018

I started 2018 with a small, $50 per paycheck contribution to the Vanguard Total Stock Market Index (VTSAX) every 2 weeks on payday.* The cost (commission) to purchase every two weeks is free. You can’t beat that.

*I automatically purchase VTSAX with my Vanguard Brokerage Account to avoid any transactional trading fees.

Since the start of 2018, I have increased my automatic contribution from $50 to $150 per payday. In April my wife and I both received pay raises. Without delay, I increased our automatic contribution from $50 to $125 to capture the raises and prevent lifestyle inflation. In June, I negotiated a 50% reduction in the cost of our cable package and I banked that savings to get us to the current contribution of $150 per paycheck.

 

This graphic illustrates the value of a bi-weekly, $150 contribution to a low-cost total stock market index fund over 10 years. At an assumed 8% rate of return, this account would grow to a whopping $60,000 dollars over 10 years. As you can see in the graph, the 10-year mark is when this account really starts picking up steam. The blue portion is money you have contributed and the green is dividends and appreciation. Planting small investment seeds now that will grow into large investment trees in the future is how you become an automatic investing guru.

Why Invest In A Taxable Account?

At this point, you may wonder why I am contributing to a taxable brokerage account and not my retirement accounts. It is because I am on pace to max out my 403(b) and Roth IRA in 2018. Don’t miss my post on my 2018 Financial Goals. The next bucket to fill on my path to Financial Independence, after my tax-advantaged accounts, is my taxable brokerage account.

Don’t miss my recent post on how I maxed out my 403b in 6 months by clicking here.

The Smart FI Steps To Investing

  1. Pay off all consumer debt except for low-interest auto loans and mortgage.
  2. Save one months worth of expenses into a high yield savings account.
  3. Contribute enough to your employer 401k to get the match.
  4. Max out Roth IRA at Vanguard or Charles Schwab.
  5. Max out the remainder of your 401k.
  6. Contribute taxable account or pay off mortgage or auto loan.

I am currently at step 6 and I have no auto loan because I drive an 18-year-old Toyota Tacoma. My mortgage is on a 15-year amortization schedule that I am comfortable paying off over the remaining 12 years of the contract. Sometimes, when our family expenses come in lower than expected, I will throw a little extra money at the mortgage.  But the math really leans towards investing my money in the stock market instead of paying down the mortgage, so I do both.

Wait, what! Do both?

In spite of what the math says, I like the security of knowing I will have a paid off house even though this may not be the best use of my cash flow. Of all the money I save each month, the lions share of my savings goes to investments, but the small portion(5-10%) that goes to the mortgage as a principal payment, gives me peace of mind.

Conclusion

There is no secret formula, just saving more, spending less and investing the difference. Follow my 7 steps to find out where you should be investing your savings and above all else make it automatic.

If you think I’ve got it all wrong, leave a comment and tell me why I am crazy. If this post helped you get off the fence and start investing your savings, I would love to hear from you.

Don’t give up, Financial Independence is a marathon, not a sprint.

11 thoughts on “Saving Me From Myself With DCA

  1. So let me get this straight…

    We both seem to like running a lot.

    We both love investing in low-cost index funds.

    We both love investing with Vanguard.

    Now we both do the same DCA into VTSAX (VTSMX for me for now) in our taxable brokerage accounts!?!?

    Are you sure we are not the same person???

  2. For the long haul, DCA is the way to go. I did it for well over a decade and when I finally “woke up” and paid attention to where our portfolio was, we had hit financial independence. it’s great to be able to max out retirement accounts and still contribute to taxable accounts.

    1. I say start with a small dollar amount that would be easily manageable and then start increasing DCA when you have raises or budget decreases. Charles Schwab has no minimums to start an account and I think you can automatically invest as little as $25 per month, but don’t quote me on that amount.

  3. Nice post. Sounds like you are definitely on a good track. We do the same in contributing some extra cash to investments and some to extra mortgage payments. Perhaps not the optimized solution with only a 3.5% rate on the mortgage, but for now it works for us.

  4. What are you doing for your kids college fund? I know society seems to make everyone think us parents have to pay for it. I’m ahead of you with the kids age. I have one that just joined the navy and my daughter graduates next year. I’m just curious on your thoughts. Thanks

    1. Honestly, I have intentionally underfunded college for my two children. I have always prioritized my own retirement savings over college savings because of the uncontrollable variables with college savings such as the future cost of tuition, or if my children will go to college. On the other hand, I know I will retire. I have a backup plan though, I will have a paid off house by the time my children are in college and I can cash flow tuition payments.

    1. I allocate about 5% of our take-home pay to make extra principal payments on our mortgage. With our family savings rate near 40%, most of our savings are used to maximize our tax-deferred accounts (IRA and 401(k)). I like to play both sides and pay down debt while I simultaneously invest in my future. Thank you for your comment.

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