Mitch Townsend

Like most people, I find it easier to spend money than to save it. Pulling out a charge card is so convenient; filling out a deposit slip and a check just seems too difficult. If you know you need to get a savings plan going, and at the same time you doubt your willpower, one answer would be an automatic investment plan. With one of these plans, you set up an automatic withdrawal from your checking account. The money is invested in a mutual fund as you go. A side benefit to automatic investment is that you are also automatically using dollar cost averaging, a popular risk-reduction strategy.

Most fund management companies make their money by imposing fees based on a percentage of the net value of each account. Small accounts may be less profitable for the management company, since some costs (printing and mailing account statements and a fund prospectus, for example) are the same regardless of the size of the account. For this reason, many fund management companies have rather high initial investment requirement ($3,000 for most Vanguard funds and $2,500 for most Fidelity funds, for example). Some also impose a fee for accounts that fall below a certain level.

The initial investment requirement is often waived for accounts with automatic investment plans in place. Without too much digging, I was able to find two no-load fund families that permit you to open new accounts with as little as $50 per month automatic investment: TIAA-CREF and T. Rowe Price. (Full disclosure: I or a member of my family hold shares in T. Rowe Price Small-Cap Value and Equity Index 500.) Both feature low expenses, so you get to keep more of your investment.

There are a couple of other things to bear in mind. First, IRA accounts usually carry lower initial or automatic investment minimums, so you can pretty much take your pick from a wider number of funds. Second, there are expenses such as account maintenance fees that do not figure into the expense ratio, since they are imposed on a per-account basis.

For more ideas, here is a screener for mutual funds by the Mutual Fund Education Alliance. You can search by Morningstar ratings, initial investment requirements, asset class, and expenses. For a guide to fund expenses and why I place so much emphasis on them try this article in The Motley Fool. For general information on mutual funds, here is the Wikipedia article, originally written by yours truly.

The US Treasury has announced that it will once again issue 30-year bonds. Dropping them in 2001 was probably a mistake, since it was based on the premise that the US would be running budget surpluses indefinitely. This improves Treasury’s ability to tailor its offerings to the shape of the yield curve.

And once again, this provides me a chance to shill for one of the most under-utilized tools available to the individual investor: buying Treasury bills, notes, and bonds under the Treasury Direct program. Under this program, you buy Treasury debt for $1,000 minimum, in increments of $1,000. Redemptions and interest payments are done through electronic funds transfer to your checking account. You get the same price as the big boys, and there are no commissions or fees.

Here’s a suggestion: subscribe to Treasury Direct, and buy equal amounts of 1-year, 3-year, and 5-year notes. Next year, when your 1-year note matures, buy 1-year, 3-year, and 5-year notes again. At that point, you own debt securities maturing in 1, 2, 3, 4, and 5 years and have constructed a bond ladder. This is a great strategy for your fixed income investments, since it minimizes your risk of interest rate changes. All you need to do is keep reinvesting the maturing notes in new 5-year notes. Your total investment could have been as low as $3,000 the first year and $2,000 the second.

Update: My face is red. Treasury doesn’t offer a 1-yr. note, as Uncle Jack points out in the comments. Substitute two consecutive 26-week T-bills and it works. Thanks, Uncle Jack!