What is an Automatic Investment Plan?

Many persons who choose to invest money in mutual funds and other types of investment strategies choose to use an automatic investment plan. Essentially, an automatic investment plan is a simply authorization to withdraw a fixed amount of money from a savings or checking account on a recurring basis. The withdrawn funds are then invested on the behalf of the shareholder or investor, either by purchasing additional shares of stocks that are already owned by the investor, or purchasing stocks for a brand new addition to the investment portfolio. Here is some background on how the automatic investment plan works, and why it can be such an easy way to build an investment portfolio.

Setting up an automatic investment plan is as simple as establishing automatic transfers for utility bills, insurance payments and other types of electronic withdrawals. After consulting with the entity that manages the investments, the investor determines an amount that can be debited from an existing checking or savings account. This amount should be funds that are not needed for usual monthly expenses, so that the investor does not find himself or herself short of available cash.

A good idea is to establish a withdrawal date that will be a few days after a typical pay date. The investor may elect to schedule more than one debit for the investment plan per month, depending on the frequency that funds are credited to the account. From there, it is a matter of supplying the investment firm with the routing number and account number for the account that will be used for the withdrawals.

Automatic investment plans work very well for many individuals. One obvious advantage is that the investor does not have to take the time to manually add funds to the investment portfolio. Since the fixed amount is deducted automatically, the value of the portfolio has the potential to increase each month. Also, since the funds are already earmarked for that purpose, the investor simply deducts the amount from the balance in the account, and focuses attention on other matters. The investment firm receives the funds and applies the additional funds to existing investment plans on behalf of the shareholder, without the need to spend a lot of time conferring with the investor about the need to buy additional shares.

With more businesses and individuals using investments as a means of building up resources for retirement plans, the concept of using an automatic investment plan has become very commonplace. As a means of creating a nice nest egg for later years, automatic investment plans help to take a lot of the guesswork out of the process, and also minimize the chance that the investor will waver on the commitment to add funds to the plan on a regular basis.