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Definition: Automatic Investment Plan (AIP)
Automatic investment plan means an investment program that gives investors an opportunity to contribute some amounts of money in regular intervals. Money is automatically deducted from their account or taken by check and invested in other accounts such as a mutual fund account or a retirement account. It is a strategy where an investor arranges the funds for transferring into an investment account automatically on a regular basis.
This is the best way to save the money. More is invested in the long-run. This investment becomes a part of their monthly budget. Automatically, a person is forced to pay for the investments, which prevents him from spending all the income. It helps investors in maintaining their discipline and accumulating thousands of dollars they otherwise would not have saved. Through these plans, investors can save for retirement, funds or college educations of children or a vacation.
Example: Dividend reinvestment plans – Here, investors use dividends they get for purchasing of more number of shares. Paying the dividends is one common type of the AIP.
Let's assume one wants to save money for the down-payment of a house. Then he has 2 options. Either he could set aside the leftover money at the end of the month or he can implement an AIP into his savings account. It works like each month, on the same date of the month; the bank will deduct a predetermined amount from his checking account to deposit it to the savings account. That money then compounds over time. Then he can use this money at the time of down-payment for his home.
Advantages: It removes emotions from the decision to invest. One has to invest since it is compulsory. Also it is a wealth building tool in the long run.
Disadvantages: The time value of money in the future is lower since interest rate is lower in those accounts.
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