Money 101: Escape the Paycheck Trap with Systematic Investing


Too many days in the month?

More and more Americans are living paycheck to paycheck, and many think that it will take years to get out of their financial straits.

This reality was confirmed in a recent study from Highland Solutions, where more than a quarter of respondents described lacking a stable income and a whopping 63 percent lived paycheck-to-paycheck.

And the National Institute on Retirement Security reported that 66 percent of Millennials have nothing saved for retirement. More disturbingly, it estimates that “Millennials who rent with no savings are an average of 114 days away from homelessness.”

Money and Emotional Health

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Personal security and well-being have a lot to do with finances, and money is often cited as a major cause for substance abuse, divorce and even suicide.

In 2010, the Clinical Psychology Review published a massive study spanning 70 years, which revealed Americans born in the early 20th century reported only one to two percent of any type of major depressive disorder. Those born after the middle of the century reported 15 to 20 percent.

The study made a direct connection between increased depression and personal finances.

“Some authors have suggested that economic hardship is the modern equivalent of physical (and sometimes emotional) threat. In the modern world, economic difficulties are detrimental to optimal survival and reproduction and thus, produce anxiety.”

Do you live paycheck to paycheck?

We Don’t Have to Live This Way

The obvious culprit is that too many Americans are living beyond their means. And, while cutting down expenses seems like a simple fix, the best way for many to escape the payday trap is to simply pay themselves first.

That is where a Systematic Investment Plan can come in.

An SIP is simply a decision to make regular, often small, investments on a consistent basis. For the individual investor, the concept can be thought of as payroll investing. Every single payday, an amount is invested into an individual, taxable account that is allowed to grow over time.

Many Americans already do this with their 401(k) contributions, but an SIP is designed to allow investors to build wealth that is accessible. So, when the car breaks down or a child needs braces, it is not a financial emergency. The investor simply withdraws the cash from the investment account to pay the expense. And because it is a taxable account, there are no penalties.

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The most important aspect of a SIP is that contributions are made consistently. It matters less whether investors put in five, fifty or five-hundred dollars per paycheck. Every single payday, they just need to put something into their brokerage account. As the account grows, it can breed excitement, causing them to invest even more, turning quickly into a positive feedback loop that feeds upon itself.

Walk Me Through It

In today’s era of zero-fee brokerage accounts and commission-free trades, anyone with a dollar can get access to the stock market. A quick Internet search of “discount brokerage firms” will return a dozen respected, well-known firms where you can open an account online for free.

First, you probably want access to this account before you retire, so select a taxable, non-retirement account. It should take less than ten minutes. Just keep in mind that when you sell in this account, it’s a taxable event, so you may receive a 1099 tax form at the end of the year for any capital gains.

Next, get your bank’s routing and transit numbers — along with your checking account number — to link to your new brokerage account. Then, you can either set up automatic transfers to your brokerage account or manually transfer the cash every time you get paid. Essentially, before paying any bills, you pay yourself first.

Be sure to initiate the transfer from your brokerage account. It is generally faster to pull money from your brokerage firm than to push it from your bank.

Cash Hit my Brokerage Account. Now What?

The $64,000 question: What do I invest in?

The simplest answer is to buy a mutual fund. A mutual fund is like owning a basket of stocks from companies in a particular industry or index, and many allow you to invest as little as a dollar. The benefit of a mutual fund is that you are automatically diversified. If any single company goes bankrupt, the loss is spread over hundreds or thousands of companies.

In looking at mutual funds, the debate of index funds versus actively managed funds soon arises. An actively managed mutual fund is run by a fund manager. A person picks the individual companies to put into the fund and charges a management fee. An index fund is passively managed in that it tries to mimic a specific stock market index, like the S&P 500 or Nasdaq.

Since an actively managed fund is run by a fund manager who picks stocks on a daily — or even hourly — basis, it tends to be more expensive than an index fund. “The average ongoing management expense of an actively-managed fund costs 1% more than its passively managed cousin,” according to The Balance.

You Get What You Pay For, Right?

There is an old adage that no one outperforms the market over time. While there is considerable debate over active versus passive funds, according to S&P Global, the S&P 500 stock market outperformed more than three-quarters of all actively managed large-cap mutual funds for the past five years.

And The Balance points out that the lower expense costs of an index fund “is one reason why actively-managed funds underperform their index.”

So for a novice investor, one could do a lot worse than invest in a plain, vanilla S&P 500 index fund. You would be buying a piece of each of the 500 largest companies in America.

Disclosure: Neither Eric Nanneman nor The Western Journal offer any recommendations on specific investment securities or give tax advice.

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Eric Nanneman is a business and technology writer with more than 20 years of investment and banking experience, including stints at Bank of America, Charles Schwab, and Goldwater Bank. He was previously securities registered, holding the Series 7, 63, 9 and 10 FINRA licenses.
Eric Nanneman is a business and technology writer with more than 20 years of investment and banking experience, including stints at Bank of America, Charles Schwab, and Goldwater Bank. He was previously securities registered, holding the Series 7, 63, 9 and 10 FINRA licenses.

He graduated from Arizona State and the Pontifical College Josephinum with degrees in English and philosophy. He has one adult son and resides in Phoenix.