Most of us think nothing of paying our Netflix, Neon or gym subscriptions each month, but what if you took a similar approach to investing: arranging for money to automatically be invested each month the same way you'd pay for a subscription?
There are many benefits to treating investing like subscribing to a service or membership. For one, it means that you add to your investments regularly, in small increments, rather than investing only when you have a large sum of spare cash.
And the set-and-forget nature of investing like a subscription also means that you don't have to spend a lot of time thinking about it.
Let's take a look at the benefits in more detail.
Compound interest
If you think of investing like your Netflix subscription, the improvement in your long-term wealth could be fantastic. First and foremost, it comes down to the simple math of compound interest.
Compound interest is essentially when you earn interest on top of any interest already earned on your savings.
If you consistently add to your investment – even if it's as little as $100 a month – you could significantly accelerate your returns.
Dollar cost averaging
Another advantage of regular investing is something called dollar cost averaging. When you invest a set amount in regular intervals – this might be monthly or quarterly – you end up buying more shares when prices are lower and fewer shares when prices are higher. This can bring down the average price you are paying.
If you buy 1000 shares at 90c each, and then another 1000 at $1 each, the average price is 95c per share.
If you consistently keep adding money to your investments, you don’t have to worry about short-term market gyrations. It can help smooth out the volatility of the market.
Lower pressure
Setting up automatic investments is an easy way to ensure you contribute regularly, while removing the pressure of deciding when to make each investment.
Not only do automatic investments simplify the process, they also discourage risky investment behaviour, such as market timing or following the crowd.
Psychological benefits
There's a lot we can learn from companies commercialising their offering through a subscription model, leveraging many of our decision-making biases that we can also take advantage of to improve our own financial status. There are four biases, in particular, that play a huge part in why subscriptions are so effective:
It's easier to keep to the status quo than opt out
The opt-out bias: after the initial decision to purchase, you find yourself in a situation where you have to opt out of the spending pattern. In this situation, people are more likely to stay with the status quo rather than change. The easiest decision is to keep going, and our brains love the easiest path.
The same applies to our investments. Once we make the decision to direct a percentage of our wage to investments, it's easier to keep the status quo than have to make the decision to opt out.
Increased satisfaction
Investing $100 per week over the course of a year that you can see growing over time feels more satisfying than a one-off investment of $5400.
It's like we are setting up a journey, a goal that we are striving to attain, a race that we know we can win – and we all love winning!
Mental accounting: it's all about the numbers
In mental accounting, we create subgroups of spending rather than simply looking at the bottom line. For instance, if we allocate $100 to groceries every week we might look to save $4 off a particular item, and then think nothing of spending $20-$30 on a few extra drinks if we've given ourselves a budget of $100 for a night out.
In the same way, if we put investments into a weekly spend cycle, our mental accounting bias will likely make sure we spend all of that money on investments and problem solve how we live off the balance.
Avoid the pain of loss
Subscriptions subvert our human instinct to avoid loss. Any form of loss is interpreted by our brains as painful – and our brains strive to avoid pain.
If you see $1000 in your account and decide to invest $400, that feels much more painful than if the $400 comes out automatically and you only see $600 in the first place. In this situation it feels more like your pay is actually $600. This is why we don't feel the pain of KiwiSaver or tax deductions.
How to get started
If you've decided you want to try treating your investment like a subscription, the first thing you'll need to work out is how much you can add towards investing each month – or from each pay cycle.
The next step is to decide how you will invest your money. There are a number of micro-investing platforms that can help you start investing with smaller sums.
Some of the providers in New Zealand include Sharesies, ASB Securities and Hatch. They all work differently so it's best to compare the options to decide which one is right for you.
An even simpler way to save regularly is to increase your KiwiSaver contributions. From April, the default contribution for employees will increase to 3.5% of their salaries. However, you could chose to invest more, either 4%, 6%, 8%, or 10%.