Healthy habits like exercising, eating well, and saving are hard for a reason. They take effort, and the results aren’t always immediate.
Except in the case of saving, there’s a simple hack that lowers the amount of willpower needed: setting up recurring deposits.
So kick off those running shoes, because you barely have to lift a finger to start regularly putting money into the market. $2, $200, it doesn’t matter. This one deposit setting, along with a little help from something called dollar cost averaging, can lead to better returns. Our own data shows it:
Over the last decade, customers who used recurring deposits earned 6% higher annual returns than those who didn’t.
*Based on Betterment’s internal calculations for the Core portfolio. Users in the “auto-deposit on” groups earned an additional 1% annualized over 5 years and 6% over the last year. See more in disclosures.
Three big reasons they fared better than those who rarely used recurring deposits include:
- When you set something to happen automatically, it usually happens. It’s relatively easy to skip a workout or language lesson. All you need to do is … nothing. But the beauty of recurring deposits is it takes more energy to stop your saving streak than sustain it.
- When you regularly invest a fixed amount of money, you’re doing something called dollar cost averaging, or DCA. DCA is a sneaky smart investment strategy, because you end up buying more shares when prices are low and fewer shares when prices are high.
- A steady drip of deposits helps keep your portfolio balanced more cost-effectively. Instead of selling overweighted assets and triggering capital gains taxes, we use recurring deposits to regularly buy the assets needed to bring your portfolio back into balance.
Now it’s time for an important caveat: The benefits of dollar cost averaging don’t apply if you have a chunk of money lying around that’s ripe for investing. In this scenario, slowly depositing those dollars can actually cost you, and making a lump sum deposit may very well be in your best interest.
But here’s the good news: While DCA and lump sum investing are often presented in either/or terms, you can do both! In fact, many super savers do.
You can budget recurring deposits into your week-to-week finances—try scheduling them a day after your paycheck arrives so you’re less likely to spend the money. Then when you find yourself with more cash than you need on hand, be it a bonus or otherwise, you can invest that lump sum.
Do both, and you may like what you see when you look at your returns down the road.
