Investment Definition: Automatic Investment Plans

As we continue our investment definitions series, we come to Automatic Investment Plans (AIP). Just like it sounds, this type of investment plan works on the basis of using automatic withdrawals to invest in a retirement account, mutual funds or stocks. One of the more common places that an AIP occurs is through the workplace, where contributing to a 401(k) offered by your employer can be easily accomplished through a paycheck deduction. Automatic Investment Plans can also occur in other situations, though, so let's look a little more closely at this new investment term.

AIP in the Workplace

As mentioned in the introduction, it is quite common for your workplace to offer an AIP in conduction with a 401(k). Through this option, employers often offer their employees the option of investing by automatic paycheck deduction. In this case, the money that you tell your employer to deduct from your paycheck, whether it be a percentage or a flat amount, will be automatically placed in your 401(k) fund.

One of the perks to this workplace AIP is that you basically don't "see" the money. The cash used to fund your 401(k) never makes it into your checking account. This can often make it easier for employees to adjust to a reduced paycheck or to establish a paycheck amount from the very beginning. Additionally, this can make it much easier to save for retirement; when investors don't feel like money is missing from their paychecks, they may find it easier to save.

AIPs Through a Financial Institution

Automatic Investment Plans are also available through banking institutions. Whether you're setting up an IRA or another investment, banks can assist you with setting up an AIP. In this case, the bank will not deduct the amount from your paycheck. The amount will automatically be deducted from your checking or savings account.

Of course, this AIP can be a little more noticeable. Investors who choose this option must either schedule a reminder or remember on their own that the bank will be deducting a certain amount from the account each month. However, the options for investment may be much more open, including the timing of the deduction and the options for where the funds will be invested.

Even though it may seem more difficult to master an AIP on your own, it's really not that difficult. If you already have automatic deductions for bills that you must remember to deduct from your checking balance, simply adding the new "bill" (the AIP) to your existing system can be pretty seamless. On the other hand, if you like to use computer programs or applications as reminders, those can be helpful as well.

The Automatic Investment Plan is actually a somewhat simple definition, all things considered. And now knowing that investing is possible through automatic deduction may be just the push you need to set up an AIP for your investment goals.

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