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Dollar Cost Averaging is the Best Way to Invest

Ask the average American or young professional what things SHOULD be doing with their finances.  You’ll get the usual answers like budgeting and saving.  They will also talk about how they need to spend less on things like eating out and clothes.

One other thing you’ll almost always hear about is the desire to invest.  Most people know they need to invest for things like retirement or a future house down payment.

The problem isn’t that we aren’t interested in investing.  Or that we don’t want to invest.

The main problem is that people don’t know HOW to invest their money.  They want to know which types of accounts to open and how to transfer money to keep investments growing.

This post will outline what I think is the most efficient and effective way to invest: Dollar Cost Averaging.

Dollar Cost Averaging: Slow and Steady Wins

There are essentially three ways to invest your hard earned money:

1.  Invest a lump sum all at once:  Mathematically, this is the most efficient way to invest.  Having a large amount of money invested in things like stocks or mutual funds will give your investment growth a turbo boost.

And studies have shown this.  Lump sum investing will give you the highest return over any other method of deploying your money.    And I would agree if you have a large sum of money, put it to work all at once if you intend to invest it.  No need having cash on the sidelines not working for you.

While this is the best way to invest, it’s only applicable a few times in life.  If you get a large sum from an inheritance, selling a business or a large bonus, then you should employ this strategy.

But most people get paid their salary in small intervals throughout the year.  So lump sum investing is not really in the discussion.

2.  Dollar Cost Average (DCA):  We live in a monthly payment kind of world.  Almost all of our bills including mortgage, auto loans and cell phones are debited once a month.  We’re used to being dinged monthly for the services we use.  Why not use that same mindset when it comes to investing our money?

This is why I love DCA and why it is my own preferred investing strategy.  Instead of investing haphazardly or when we hear a hot stock tip from a co-worker, DCA takes the emotion out of investing and lets you stick to your investing plan for the long term.

How does it work?  Let’s use a Roth IRA for example.  You know you need to save a little more for retirement beyond your company 401k, so you would like to set up a Roth IRA to be invested in the stock market.

Once you set up the account and select your investments (my favorite is VTSAX but that’s a story for another post), you will be asked to link your checking account.  Then you select how much you want taken out monthly and set your withdrawal date.  And that’s all there is to it!

You will be dinged monthly just like you would for any other bill.  But this is a good ding since that money will be invested for you retirement instead of being spent on the latest iPhone insurance.

3.  Don’t invest at all:  This is not recommended.  But it seems like it’s the American way since 1 in 3 Americans have no money at all saved for retirement.

Buy Low and Sell High

The best way to make money selling things is buying at a low price and selling at a high price.  That’s the logic behind dumpster diving and being a garage sale vulture.  And that’s also the logic behind making money as an investor.

Being invested in the stock market can literally be a roller coaster ride.  There are going to be ups and downs.  Sometimes really big ups and downs.  But as long as the price of your investments is more than what you paid for it initially, you will make more money.

Buying your investments at a low price and selling at a higher price is what makes investors money.  Many people get spooked and sell their investments when the stock market takes a sharp dive, like it did in 2008.  As a result, they lose a lot of money by buying high and selling low.  This is bad.

The beauty of investing via DCA is that it FORCES you to buy low.  If you decide to invest $100 a month into a mutual fund that costs $10 a share, that $100 investment will get you 10 shares.  If the mutual fund doubles to $20 a share next month, you will end up with only 5 shares.

While that is still more expensive than last month’s investment, DCA allows you to scoop up more investments while the shares are cheap.  Most people will actually do the opposite.  They will put a large amount of money into a “hot” stock or mutual fund while it is expensive.  This is not the way to invest.

DCA keeps the emotion out of investing.  By investing in regular intervals, you will keep your accounts growing while ensuring you are not buying too many shares at inflated prices.  This will set you up for nice investment gains when it comes time to sell.

Conclusion

DCA is the preferred way to invest for young professionals.  Early in your career, you will probably not have a lump sum to invest immediately in the stock market.  So investing as you get your paycheck is the most efficient way to deploy your capital.

DCA can come in many forms.  It can be an automatic deduction from your paycheck into your 401k account every 2 weeks.  Or a monthly withdrawal from your checking account into an IRA.

No matter what form it takes, DCA will keep your investment accounts growing steadily and will allow you to get the most shares at the lowest price.  No need for market timing since it doesn’t work anyway!

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Ways to Decrease Your Utility Bill

This is a guest post from Anum Yoon, who is a prolific and excellent writer in the personal finance sphere.  You can find out more about her at her blog Current on Currency.

Today’s post will feature ideas on how to keep your utility bills low.  With winter around the corner, these tips could save you a lot of money.  Enjoy!

Temperatures are starting to drop. We are closing our windows now and thinking about turning on the heat. Whether you love winter or hate it, you are going to pay more to keep warm when the snow starts to fall and the temperatures drop.

The same is true for those in warm-weather climates. When the heat rises, so do the air conditioning bills. We have no choice but to heat and cool our homes to maintain our comfort, but there are a few things you can do to keep your utility bills from burdening your budget.

Check Your Settings

Are you scalding your hands when you wash them? Are your vegetables freezing in the refrigerator drawer? Check the settings of your appliances to make sure you aren’t overworking them and wasting energy, which results in higher bills.

Your hot water tank doesn’t need to be set any higher than 120 degrees. This is hot enough for dishes and laundry and certainly hot enough to wash your hands. Manufacturers and installers typical set them higher, and you may not have looked at or paid attention to the settings. Consult your manuals for more information.

Your refrigerator should be set around 37 to 40 degrees and your freezer at 5 degrees. Anything colder than that is unnecessary, and you will be wasting energy and potentially freezing your food in the refrigerator. Some refrigerators have known cold spots, but many people just set them too low.

Replace Incandescent Lightbulbs

Old lightbulbs use a lot more energy than new halogen, CFLs and LEDs. Depending on the specific type, these bulbs use anywhere from 25-80 percent less energy. These bulbs are more expensive than their predecessors, but last many years longer and will save you money over the long term.

Purchase Energy-Efficient Appliances

When it is time to get a new refrigerator, freezer, washer or dishwasher, look for those marked Energy Star compliant. These appliances can use up to 75 percent less energy than older models, which can add up to hundreds of dollars in annual savings. Even if your old refrigerator still works well, it might not be a bad idea to consider replacing it for overall savings.

(Note from TBP: Check with your local utility company to see if they provide credits for upgrading your old appliances to Energy Star models.  Many will also haul away the old appliance for you.)

When you use your appliances, make sure they are full before you run them. They will use just as much electricity washing a few items as they will a full load. Be wise and economical with your energy use and save money doing so.

Use Your Garbage Disposal Properly

The garbage disposal is a modern convenience that many take for granted. It’s not a magic hole through which anything can pass. The garbage disposal uses a lot of electricity to grind up wasted food items into tiny bits small enough to pass through the drain. Sometimes they clog, and through misuse, break. You can save money on electric bills and expensive repairs by observing some of these do’s and don’ts

Do

  • Turn on a heavy flow of water before flicking the switch. The garbage disposal needs water to do its work and will overheat without it. Continue to run the water after the grinding stops in order to thoroughly clean out the drain.

 

  • Every few months, put ice cubes down the drain and grind those up. This will help clean out the inner workings of the disposal. You can also add a lemon peel to help freshen the scent. Disposals often smell bad because they have rotting food stuck inside them.

 

  • Have your kitchen drain snaked out every few years. This will prevent clogs and possible repairs.

 

Don’t

 

  • Put grease down the drain. The grease will harden in the water and create clogs throughout the drain. Just save grease and fat and discard it in the trash can.

 

  • Grind up big food items that can be thrown in the trash. It’s a waste of energy and it puts unneeded stress on your disposal.

 

  • Put rinds, potato peels, rice or pasta in your disposal. These items should be thrown in the garbage and never put into your drain. The garbage disposal doesn’t do well with these items and will usually clog from them.

Add or Replace Insulation

Is the air you are heating or cooling escaping outside through cracks and gaps in your windows or attic? Proper insulation will keep that air inside and prevent your home from feeling drafty. This will save you money, as your furnace or air conditioner won’t have to work as hard to maintain your desired temperature.

Add weather stripping to doors and windows. Caulk up holes and cracks you can reach. If you are comfortable doing so, add another layer of insulation in your attic, or hire a professional to inspect and assess what your house needs.

Check for Leaks

Leaky pipes, toilets which run nonstop and sinks that drip constantly all waste water and cost you money. Fix these leaks yourself or hire a professional if you are uncomfortable doing so. If you aren’t sure you have a leak, you can check your water meter. If all the water is off, there should be no change in the meter after two hours or so. But if there is, you may a have a leak somewhere in the house.

Invest in a Smart Thermostat

If you are going to be gone all day, don’t waste money keeping your home at an ideal temperature when you can’t enjoy it. You can program a smart thermostat to have your home at the temperature you desire by the time you get home and give the furnace a break when you aren’t there. Some can be programmed and accessed online, in case your plans change.

There are lots of little things we can do to save on our energy costs. They don’t have to be major projects like replacing all the windows or installing a new roof — although these will help, too. You just have to properly maintain your appliances and be conscious of the energy you are using. Even making a minimal effort will lower your bills during extreme weather months and keep more of your money in your pocket.

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