Nobody knows whether next month will be a good time to buy. A savings plan stops you from having to guess: you invest the same amount on the same day every month, whatever the price — and let arithmetic do the rest.
How it works
Because the amount is fixed, the number of units you buy changes with the price. When the price is high, your $100 buys fewer units. When it is low, the same $100 buys more. Over time you collect more units at low prices than at high ones.
This is called cost averaging. It doesn’t make prices go up, and it doesn’t protect you from losses — but it takes the timing decision off your hands.
A worked example
Say you invest $100 a month in a fund whose price moves like this over six months. The prices are made up to show the effect.
| Month | Price per unit | Units bought |
|---|---|---|
| January | $100 | 1.00 |
| February | $80 | 1.25 |
| March | $64 | 1.56 |
| April | $80 | 1.25 |
| May | $90 | 1.11 |
| June | $100 | 1.00 |
| Total | $600 invested | 7.17 units |
In June the price is back exactly where it started, at $100. But your 7.17 units are now worth $717 — for $600 paid in. The cheap months in the middle bought most of them: your average cost per unit is $83.64, while the average price over the six months was $85.67.
It works the other way, too. If the price rises first and then falls back to where it began, the same plan ends below the amount you paid in. Cost averaging smooths your entry; it doesn’t decide the result.
A savings plan doesn’t make prices go up. It makes the timing decision for you.
Making it work for you
- Pick something you would hold for years. A broad index fund is a common choice — see our ETF page.
- Choose an amount you can keep up. Stopping in a downturn means missing the cheap months.
- Set the day just after payday. The money is invested before it gets spent.
- Look at it twice a year, not twice a day.
Ready to start? See how savings plans work at FlatAI.
