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A Guide to Dollar Cost Averaging

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A Guide to Dollar Cost Averaging

There are several strategies towards investing. This post will serve as a guide to dollar cost averaging.

Welcome to the 9th FLA Guest Blog Post! Today, we explore how not only to dollar cost average but also understand what dollar cost averaging is. Thank you to Andrew from Gauss Money for sharing this helpful article.

Andrew helped develop a fintech app for paying off debt. He thought my readers might be interested to hear more about how to use Chat GPT for their personal finances. Recently, Gauss Money purchased the rights for their GPT tool that is 100% free to users, and has been created with the inputs needed to support even the most complex financial questions. They call it ChatPF (personal finance).

They’ve gained a lot interest from users dropping in all of their debts to create an optimized budget and payoff plan. They can answer which debts to pay off first and what strategies are the best for your specific budgets, goals, and debt amounts.

Gauss improves your credit score in most cases. Gauss prevents late payments and reduces the amount of debt on your cards, reducing their utilization, which has a great positive effect on your credit score. You can improve the score further by paying on time to Gauss. No fees are charged if you’re late with your repayments to Gauss, but your credit score will be negatively affected.

Dollar Cost Averaging (DCA) is an investment strategy that involves dividing one’s total amount to be invested across periodic purchases of a particular asset. This strategy seeks to reduce the impact of volatility on the overall purchase. It is typically used in buying shares of a mutual fund or an exchange-traded fund (ETF).

To put it simply, instead of buying all at once, an investor using DCA will spread out their total investment across many points in time. The goal is to reduce the risk of incurring a substantial loss resulting from investing an entire “lump sum” just before a market downturn. By spreading the purchases out, the investor also potentially reduces his or her exposure to price volatility.

Dollar Cost Averaging is especially beneficial for beginners and those who are not comfortable with investing a large amount of money at one time. It helps to instill discipline in investing by committing to a regular investment schedule, regardless of the asset’s price.

The Principle Behind Dollar Cost Averaging

The principle of Dollar Cost Averaging aims to avoid making the mistake of making one-off investments at the wrong time. By spreading the purchases, the investor can avoid buying high. This is because the purchases may occur at different price points and the average cost per share (or other asset) over time can be lower than the average price.

The principle of DCA is based on the notion that it’s impossible to time the market. By spreading out investments, you’re not as susceptible to short-term swings in price. If an investor purchases more when prices are low and less when prices are high, it can result in a lower average cost per share than if they were to buy a fixed number of shares at each period.

It’s important to note that Dollar Cost Averaging does not guarantee a profit or protect against a loss. However, it does provide a systematic way for investors to participate in the market, potentially reducing the impact of price volatility on their investments.

Benefits of Dollar Cost Averaging

One of the primary benefits of Dollar Cost Averaging is that it provides protection against market volatility. Because investments are spread out over time, investors are less likely to experience a significant impact from a sharp decline in asset prices.

Another benefit of Dollar Cost Averaging is that it removes the emotional aspect of investing. It can be stressful to decide when to buy into the market, especially when prices are volatile. With DCA, investors set up a regular schedule and stick to it, eliminating the need to constantly monitor market conditions and make decisions based on short-term price movements.

Lastly, Dollar Cost Averaging is an accessible strategy for beginners and those with limited funds. Because it involves making smaller, regular investments over time, it can be a more manageable and less intimidating way to start investing.

How to Implement Dollar Cost Averaging

Implementing Dollar Cost Averaging involves setting up a regular schedule for investing. This could be weekly, monthly, or quarterly, depending on the investor’s preference and financial situation. The key is consistency; the same amount is invested at each interval.

Once the schedule is set, the investor should stick to it. This means making investments regardless of what the market is doing. It may be tempting to skip a purchase when prices are high, but remember the principle behind Dollar Cost Averaging: it’s about reducing the impact of volatility, not trying to time the market.

It’s also important to review the plan regularly. Although the schedule should be adhered to, the amount invested can be adjusted as necessary. This could be in response to a change in financial circumstances or a shift in investment goals.

Real-World Examples of Dollar Cost Averaging

Consider this example: an investor decides to invest $12,000 in a particular fund. Instead of investing the entire amount at once, they use a Dollar Cost Averaging strategy and invest $1,000 each month for 12 months.

In another scenario, suppose the same investor decides to invest the same $12,000, but this time in a volatile market. If they invest all at once, they run the risk of buying at the market peak. However, by using DCA, the investor reduces this risk by spreading out their purchases and buying at different price points over the year.

These real-world examples show how Dollar Cost Averaging can help investors reduce risk and potentially improve their investment outcomes.

Dollar Cost Average Investment Strategy
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Tips for Successful Dollar Cost Averaging

For successful DCA, consistency is key. It’s important to stick to the schedule and invest the same amount at each interval. This could be difficult in volatile markets, but remember the principle behind DCA: it’s about reducing the impact of volatility, not trying to time the market.

Another tip is to review the plan regularly. Although the schedule should be adhered to, the amount invested can be adjusted as necessary. This could be in response to a change in financial circumstances or a shift in investment goals.

Finally, patience is crucial. Remember that this is a long-term strategy, and it can take time to see results. However, the end result can be worth it, as DCA can help reduce risk and potentially improve investment outcomes.

Risks and Considerations in Dollar Cost Averaging

While Dollar Cost Averaging has its benefits, it’s not without risks. For one, it’s not guaranteed to result in a profit or protect against a loss. The market could continue to decline long after you’ve started your DCA strategy, leading to potential losses.

Another risk is that if the market rises rapidly, a DCA strategy may result in a higher average purchase price than a lump-sum investment. That’s because the lump-sum investment would have been made at a lower price.

Finally, a DCA strategy doesn’t work if you don’t stick to it. It requires discipline to continue making the investments, even when the market is down.

Dollar Cost Averaging vs. Lump Sum Investing

Dollar Cost Averaging and lump sum investing are two different strategies, each with its pros and cons. With lump sum investing, you invest the entire amount at once. The advantage is that if the market rises shortly after you invest, you’ll benefit from the upswing. However, the downside is that if the market falls shortly after you invest, you could suffer losses.

On the other hand, DCA reduces the risk of investing a large amount in a down market. It also removes the stress of trying to time the market. However, if the market rises rapidly, a DCA strategy could result in a higher average purchase price than a lump-sum investment.

Expert Advice on Dollar Cost Averaging

Experts generally agree that Dollar Cost Averaging is a sound strategy, especially for new investors. It’s a good way to get started with investing, as it doesn’t require a large initial outlay and it reduces the risk of market volatility.

However, experts also caution that DCA isn’t foolproof. It requires discipline and patience, and it’s not guaranteed to result in a profit. As with any investment strategy, it’s important to review your plan regularly and adjust as necessary.

Conclusion: Is Dollar Cost Averaging Right for You?

In conclusion, Dollar Cost Averaging can be a helpful strategy for beginners or those who are not comfortable with investing a large amount of money at once. It’s a way to mitigate risk and reduce the emotional stress of investing. However, it’s not right for everyone.

For those who have a large sum that they wish to invest, and are confident in their ability to time the market, lump-sum investing may be a better option. Similarly, for those who prefer to actively manage their investments, DCA may be too passive a strategy.

In the end, whether Dollar Cost Averaging is right for you depends on your personal situation, your risk tolerance, and your investment goals. As always, it’s best to consult with a financial advisor before making any major investment decisions.

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Additionally, use tools like the credit card payoff calculator to visualize your progress overtime, and get insights into how much you should put towards your debt to achieve your debt free date. Gauss’ debt payoff calculator and debt tracker is 100% free to use via Gauss’ website or mobile app.

Disclosure: Fresh Life Advice is an opinion-based website. I am not a financial advisor, and the opinions on this site should not be considered financial advice.

Personal Capital: The Ultimate Tool to track your Net Worth, Budget and more.

What are your thoughts on building a good credit score? Let me know in the comments below.

What Is a Good Credit Score?

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What Is A Good Credit Score

Your credit score is a vital indicator of your financial health. A good credit score opens doors to countless opportunities, such as securing low-interest loans, qualifying for favorable insurance rates, and even enhancing your employment prospects.

Welcome to the 8th FLA Guest Blog Post! Today, we explore how not only get a good credit score but also understand what a good credit score is. Thank you to Andrew from Gauss Money for sharing this helpful article.

Andrew helped develop a fintech app for paying off debt. He thought my readers might be interested to hear more about how to use Chat GPT for their personal finances. Just this past week, Gauss Money purchased the rights for their GPT tool that is 100% free to users, and has been created with the inputs needed to support even the most complex financial questions. They call it ChatPF (personal finance).

They’ve gained a lot interest from users dropping in all of their debts to create an optimized budget and payoff plan. They can answer which debts to pay off first and what strategies are the best for your specific budgets, goals, and debt amounts.

Gauss improves your credit score in most cases. Gauss prevents late payments and reduces the amount of debt on your cards, reducing their utilization, which has a great positive effect on your credit score. You can improve the score further by paying on time to Gauss. No fees are charged if you’re late with your repayments to Gauss, but your credit score will be negatively affected.

While building and maintaining a strong credit score requires consistent effort and responsible financial behavior, the rewards are well worth it. In this blog post, we will delve into actionable steps you can take to improve and maintain a good credit score.

What would be considered a satisfactory credit rating according to the FICO scoring system?

The FICO website states that a good score is between 670 and 739.

Scores ranging from 580 to 669 are considered fair, and scores between 740 and 799 are labeled as “very good”.

Any score above 800 is considered “exceptional”.

The average credit score in the United States, according to FICO, was 716 in August 2022, which is in the “good” category.

FICO is the name of the company that created the first credit scoring system, which utilizes information from TransUnion, Equifax and Experian, the three major credit bureaus.

What is considered to be a favorable VantageScore?

An alternative to FICO, VantageScore, uses the same data from the three credit bureaus to generate its score.

NerdWallet gives individuals the opportunity to obtain a free credit score through VantageScore coupled with the TransUnion credit report.

Scores ranging from 661 to 780 are considered ‘prime’, while those between 780 and 850 are known as ‘superprime’.

‘Near prime’ is indicated by scores ranging from 601 to 660 and anything below 600 is classified as ‘subprime’. According to the second quarter of 2021, the average VantageScore 3.0 was 695.

The advantages of having an excellent credit rating

Having a good credit record is significant because it decides if you can obtain a loan and the amount you will need to pay in interest. A good credit rating can help you get: an unsecured credit card with a reasonable interest rate, a suitable car loan or lease, a mortgage with a reasonable interest rate, the capability to open fresh credit for costs in a crisis if you do not have an emergency fund or it is used up.

A good credit score also can be advantageous in other ways: in numerous states, people with higher credit scores pay less for automobile insurance. Furthermore, some landlords use credit scores to screen out tenants. Therefore, having a good credit score is advantageous even if you do not plan to apply for credit.

Some frequently asked questions include:

What is a good credit score to buy a car?

If your credit score is under about 700, you should be prepared for questions about negative items on your credit file when purchasing a car. Individuals with major stains on their credit are routinely approved for car loans, but you may not qualify for a low rate.

What is a good credit score to buy a house?

You don’t have to have perfect credit to get a mortgage. In some cases, credit scores can be in the 500s. However, credit scores estimate the risk that you won’t pay as agreed, so lenders do offer lower rates for higher scores.

What is a good credit score for renting an apartment?

Landlords or property managers generally aren’t looking for perfect scores. They are more interested in your credit record.

What figure do loan providers consider to be an acceptable credit score?

Financial institutions like credit card companies and lenders of mortgages may each establish their own criteria for what makes someone a good credit risk. In the end, however, a “good credit score” is one that gets you access to credit when you need it, or qualifies you for the most favorable interest rate on a mortgage.

What elements have an impact on your credit rating?

When it comes to what impacts your credit score, two points stand out: whether you pay on time (payment history), and the amount of your credit limits you are using (credit utilization). The other elements play a part, but are not as significant: the duration of time you have had credit, the diversity of credit types you have, and how often and recently you have applied for credit.

Good Credit Score
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Ways to attain a strong credit ranking

Establishing good credit habits on a consistent basis will help increase your credit score. To do this, you should pay your bills on time as this is the most influential factor in your score. A skipped or late payment can damage your score and stay on your credit report for as many as seven years.

Try to keep your credit card balances below the limit, with utilization at around 30% or lower. High utilization will lower your score, but the damage can be reduced by reducing your balance and showing lower utilization on your credit reports. Whenever possible, keep credit accounts open, as this will raise your average age of accounts, which has a minor effect on your score.

Additionally, closing an account will reduce your overall credit limit, raising your utilization. Be careful not to make too many credit applications in a short period of time, as this can cause a short-lived dip in your score.

Make sure to check your credit reports and dispute information that you think is incorrect or too old (most negative information drops off after seven years). If you want to know what is powering your credit, sign up for a free credit score and get personalized insights with weekly updates to track your progress.

For instance, pay off high interest debt to lower your utilization. Utilize tools like credit card payoff calculators to make a plan you can stick to. Also consider using other financial tools to lower the APR on your credit card debt for faster payoffs like balance transfer cards or low interest credit lines designed for credit card debt. 

Can a credit score of 700 be considered satisfactory?

Above all, a credit score of 700 is viewed positively. If you have a good credit score, you’re more likely to be approved for additional credit (although lenders may take into account other things besides your score). It is also more likely that you’ll get more desirable terms such as a lower rate of interest.

What is considered a high credit rating?

Credit ratings between 720 and 850 are deemed to be excellent. If your rating is above 800, you can receive the most favorable borrowing conditions.

What is the ideal credit rating, and how many individuals possess it?

The most popular credit scoring system is the FICO score, which ranges from 300 to 850. Based on a study completed by Experian, a credit bureau, 1.3% of the FICO scores in the third quarter of 2021 were the highest score of 850. Unfortunately, credit scores are variable and maintaining an 850 is not likely to happen continuously.

What is the acceptable level of creditworthiness?

An acceptable credit score is estimated between 630 and 689. In other words, it may be more challenging to qualify for financing or obtain the terms you are after.

A bad credit score is a numerical representation of an individual’s creditworthiness, which reflects their financial history, and is used to assess the risk of lending money to them.

Credit scores less than 630 are considered to be bad. Utilize the advice provided above to support your credit profile.

Sources of information used by the NerdWallet writers include peer-reviewed studies, government websites, academic research, and discussions with specialists in the field. Content is carefully examined for truthfulness, timeliness, and pertinence.

If you would like to learn more about the high standards of journalism followed by NerdWallet, you can refer to the editorial guidelines. Bev O’Shea, a former credit writer for NerdWallet, has written for the New York Times, Washington Post, MarketWatch, and other publications.

Comprehending one’s credit rating

The most general credit score is between 300 and 850, with a score of 690 being considered good. Moving the dot to your present score can help you to understand more, like how you can raise it.

In fact, if you don’t know what level your rating is at, you can get a free credit score from NerdWallet.

The upper limit of good credit is 719. Pick the score that is most similar to yours to learn what your credit score can do for you, such as: 690, 695, 700, 705, 710, 715, or if you reach 720 you have achieved excellent credit.

Conclusion

A good credit score opens doors to financial opportunities and empowers you to achieve your goals. By understanding the key factors that influence your credit score and adopting responsible financial behaviors, you can steadily improve your creditworthiness. Remember, building a good credit score requires patience, consistency, and discipline, but the long-term benefits are well worth the effort. Start today, and pave the way for a brighter financial future.

Disclosure: Fresh Life Advice is an opinion-based website. I am not a financial advisor, and the opinions on this site should not be considered financial advice.

Personal Capital: The Ultimate Tool to track your Net Worth, Budget and more.

What are your thoughts on building a good credit score? Let me know in the comments below.