Week 6 Day 3: Automate It and Forget It

Willpower is a depletable resource. You cannot white-knuckle your way to consistent investing for 30 years. But you can set up one automatic transfer and it will invest for you every paycheck without any effort. Remove the decision from the process entirely.

Here is the exact setup. Step 1: Open a brokerage account (Fidelity, Vanguard, or Schwab -- all free, all excellent). Step 2: Set up automatic transfer from your checking account for the day after payday. Step 3: Set the transfer to purchase a target-date retirement fund or a total market index fund (like VTI or FXAIX). Step 4: Turn on dividend reinvestment (DRIP). Step 5: Delete the app from your phone. That last step is only half a joke. Checking your portfolio daily introduces anxiety and the temptation to tinker. The entire point of automation is that it runs without you. Richard Thaler, who won the Nobel Prize in economics for behavioral finance work, designed the Save More Tomorrow program around this principle: make the default action the smart action, and people will follow through. Manual investing requires monthly willpower. Automated investing requires one setup.

Thaler and Benartzi's Save More Tomorrow (SMarT) program demonstrated the power of automation and defaults in a landmark 1998 study. Employees who enrolled in SMarT agreed to automatically increase their savings rate by a small percentage each time they received a raise. The result: savings rates increased from an average of 3.5% to 13.6% within four years, with 80% of participants remaining in the program. Nearly zero participants would have reached 13.6% through manual decision-making. The mechanism exploits three behavioral principles: (1) loss aversion (increases come from future raises, not current income), (2) status quo bias (the default is to continue, and people rarely opt out), and (3) present bias (the commitment is for the future, not today). If your employer offers automatic escalation, enroll immediately. If not, set a calendar reminder every January to increase your automated investment by $25 or $50/month.