Many people believe that they need a large sum of money to start investing. Even if you don`t have that kind of money and looking for a disciplined saving strategy, perhaps dollar-cost averaging might be the right strategy for your retirement plans. Dollar-cost averaging happens when you invest at regular and smaller amounts of money rather than putting in a large lump sum all at once. As the asset price fluctuates, your regular contribution buys different amounts of the asset.
“Would you rather keep the cash in hands or invest your money in the markets smartly, so your money performs better?”
-Kevin Press
How Dollar-Cost Averaging Works?
Let’s assume an investor contributes $100 per month for two years. Take a look at the numbers to see how dollar-cost averaging evens out the highs and lows of investing in the market. In this hypothetical situation, the investor will make $411 on the contributions of $2,400 – a healthy 8.6 per cent annual return over two years*.
Average Unit Price:$ 17.25
Total Units Purchased: $ 140.55
Total Value of Units at the end of 2 years: $ 2,811
Total Dollar Amount Invested after 2 years: $ 2,400
Total Return to the Investor : $ 411
Important Tips on Dollar – Cost Averaging
Other Family Members
So perhaps you have specific goals in mind that you want to achieve. This would be the budgeting style for you. In this budget you have financial goals you want to accomplish, and you set aside money to help reach those goals. Usually, you choose one to two major goals and work with those. Examples of this could be:
- Save 15% of my income every month.
- Put 10% of my income into a retirement plan.
- Pay down 20% of a debt every month.
- Spend no more than $200 each week on groceries.
With this budget, you choose the goal(s) and then put money aside to achieve them.
The Pay Yourself First Budget
This method puts you and your financial goals front and centre. When you get your pay cheque, you literally pay yourself first by paying towards your financial goal before any other expenses. Whether that’s putting money in a high yield savings account, retirement plan or whatever savings goal you might have. This plan is especially good if you have a hard time making you and your savings a priority. After you pay yourself first the rest of the money goes towards expenses like rent, groceries, car, etc.
Spending Cap Budget
This budget says it all in the name: SPENDING CAP. In this budget you include all that you are willing to spend in a month to a maximum. This includes groceries, bills, debts, and savings all in one monthly limit and you can’t go over that amount. What ends up being left over you are free to do what you want with it, but we will always recommend you put it into savings.
Start Early
Starting early and making regular investments will help you save enough for a happy and free retirement. You will be able to start with small sums and have the financial security you need for your retirement.
Prepare for Market Ups and Downs
You will have a long enough time on the horizon before you need your money and nobody can call what`s going to happen in the market correctly. With dollar cost averaging the price of your selected funds will dictate whether you buy a lot (when prices are low) or a little (when prices are high). Just focus on your retirement goals and continue investing for your future.
No Need to
Time The Market
Reduces Risks
& Loses
Convenient &
Affordable
If you have limited resources or relying on paychecks for having funds available for investing, then dollar-cost averaging makes a lot of sense. It is better than waiting and trying to time the market.
It’s impossible to foresee the fluctuations in the market. Dollar-Cost Averaging helps you to minimize losses in bad markets and reduce the amount of risk you carry. With this strategy, you will simply smooth out the volatility of your investments and take the emotion out of investing.
You can easily set up your budget and start saving monthly, quarterly or semi-annually for your retirement. You will also create a new habit and become disciplined in your saving and investing routine [4].
The bottom line is, dollar-cost averaging is typically one of the easiest and most effective ways to build wealth over time because you can start with basic things like directing a portion of your paycheck to go to a CPP or a group plan. This way you will be investing a set amount on a regular basis. This is actually an excellent way to get started and save for your retirement.