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The Two Hidden Benefits of Using Dollar Cost Averaging To Invest


In my last article, I examined the advantages and risks of using Dollar Cost Averaging (DCA) as an investment strategy.


Many proponents of DCA champion this investment strategy for its convenience and ease (in comparison to other strategies) to multiply your wealth. It is not uncommon to hear something like this: “If you set aside $200 a month for 25 years, and get a return of 5% annually, you will receive $119,000 from investing just $60,000!” It sounds like a great strategy, especially since it has almost doubled your money.


There are two other benefits of using DCA that set you up for success in the long term. These benefits are far more tangible and lasting. If you are new to investing, you may want to consider starting with DCA for the following benefits!


1. Cultivating the Habit of Saving


Dollar Cost Averaging is a strategy that relies on your commitment to set aside an X amount of money every month to invest. The objective is to grow your assets, and in return, you get to reap the benefits of having more than what you put in. DCA relies on your steady commitment to put aside an X amount of money, and this actually trains you to cultivate a wonderful habit: saving for the future.


As you prioritise saving first, you inadvertently also reduce your spending, and feel less guilt when spending your hard-earned money! This sharpens your skill in managing your finances.


Cultivating the habit of saving is very valuable. As James Clear writes in his book, Atomic Habits, “habits are the compound interest of self-improvement”. Once you have cultivated a habit, your mind performs the action almost automatically, setting you up for success in the future. Saving just becomes a regular part of your daily life.



2. Investing in who you want to become


Apart from the external benefits you gain from saving, using DCA also trains you to believe and invest in who you want to become.


James Clear articulates this elegantly: “By taking an action (regularly saving and investing), you have put a vote for the person you wish to become.”


At the end of the day, saving and investing have a larger purpose and are not an end in itself. It is a tool that helps you to live a life that you want, and most importantly, enables you to become a person you are proud of. By setting aside money, you have voted to be a responsible person who looks out for future needs. You have taken action, and in acting, you confirm your opinion of yourself, and become a person who is aware of the need to balance both present-day and future needs.


Conclusion


Whether our goals look like having 1 million by 40 years of age, or being able to FIRE (be financially independent and retire early), we all have a common desire: we want to achieve success in life. What is success? It is the accumulation of proper actions over time. Cultivating good habits allows us to automate the process and improve our chances of success. The Dollar Cost Averaging strategy is just one approach to building wealth, and provides these two other hidden benefits. Even if you don’t believe in this strategy, focus on cultivating the habit of saving, and remember that at the end of the day, saving and investing is but a tool to enable you to become the person you want to be, and live it proudly.


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