What is Dollar Cost Averaging? Drip Your Way to Millions

Brent Pittman —  11/07/2012 — 13 Comments
faucet dripping

Drip your way to millions with dollar cost averaging. Credit r. nial bradshaw

If you have destroyed debt and saved up an emergency fund, then it’s time to start investing for the future. Learning how to invest money isn’t hard, yet like swimming takes practice.

I advise consulting an investment professional before you delve into the world of investing. [How to Choose an Investment Professional]

One basic investing technique is called dollar cost averaging.

What is Dollar Cost Averaging?

This is a very basic investing principal. I’ll admit it’s not sexy, nor will dollar cost averaging earn instant rewards. It can however provide a basic blueprint for investing over the course of your investing career.

Dollar cost averaging is basically investing a certain amount from your paycheck each month year after year. The cost of your investment will thus be averaged out over time.

drip. drip. drip. drip. That’s the sound of dollar cost averaging (or pound cost averaging for my U.K. readers).

If you invest $50 a month that is $600 a year. Up that amount to $416.66 a month and you’ve just fully funded your ROTH IRA for the year!

Why Use Dollar Cost Averaging?

So why use this method of dollar cost averaging (DCA)? I’m glad you asked. Here are a few common advantages.

  • You can’t time the market. This basically means you don’t know when the market will be high or low. If you invest a little each month, you’re investing at both high and low share prices–despite the wild swings of the market.
  • It automates and takes the emotion out of investing. If you invest only when prices are low, you’re not likely to invest.
  • You’ll buy more shares when prices are low since your dollar (pound) amount is set.
  • Dollar cost averaging ensures a good nights sleep. Since your investing plan is set despite changes in the economy, political elections, or zombie attacks you’ll sleep better. I can’t imagine trying to decide each paycheck if I’d invest or not.

*Note if you have a large lump sum and want to invest, dollar cost averaging may or may not not be best way to go. Consult a fee based advisor to determine what route is best for your lump sum.


More Dollar Cost Averaging Articles Across the Web

If you are ready to invest for 5+ years, consider including dollar cost averaging (DCA) into your financial plan. You’ll be turning on the faucet and begin dripping your way to millions.

Be sure to read the next article(s) in my investing series: Why Boring Index Fund Can Make You Rich, and My $500 Dollar Cost Averaging Experiment.

Have you used dollar cost averaging for your investments? 

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Brent Pittman

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Brent is a financial coach and writer looking for the perfect donut. He believes personal finance should be both fun and accessible to anyone willing to learn.
  • AverageJoe

    Great advice. We have two portfolios: our “real money” and the “sandbox.” Of course, the sandbox money is where we’re going to get rich, right? In that one, we DON’T dollar cost average because the goal is to maximize gains (and therefore we have to accept the downside). BUT….if that doesn’t work out, the vast majority of our money is in the “real money” portfolio, where we ONLY dollar cost average for the reasons you’ve eloquently listed above.

    • http://www.ontargetcoach.com/ Brent Pittman

      I like your sadbox idea. I have one too, but it only has $10 in it now. I hope to grow it with fun money once I get some :-)

  • Emily @ evolvingPF

    Yes, we dollar cost average our retirement savings. It’s basically the only option because we just do it monthly with our paychecks – no lump sums. We bought some investments last year without DCAing in and it made us quite nervous! We don’t want to try to time the market.

    • http://www.ontargetcoach.com/ Brent Pittman

      Emily,
      Most ‘regular folk’ engage in dollar cost averaging naturally since that is how most are paid. For those on irregular income DCA should be considered instead of large lump sum investments a few times a year.

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    I dollar cost average all of my investments. I buy every paycheck!

    • http://www.ontargetcoach.com/ Brent Pittman

      That is awesome! drip drip drip.

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  • Chris Middleton Leeds

    very well explained.

    • http://www.ontargetcoach.com/ Brent Pittman

      Thanks Chris! I hope it helps get you and other investing more.

  • http://www.ontargetcoach.com/ Brent Pittman

    Laura, interesting. I’m doing a mini Dollar Cost Averaging experiment myself. Sorry, but your link didn’t work.

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