Dollar-cost averaging (DCA) is an investment technique that entails investing a fixed amount of money regularly over extended periods in the same fund or stock. The investor doesn’t consider the asset’s price at the time of purchase.
Dollar-cost averaging is not a buy-and-forget strategy. You still need to buy wonderful, strong companies. You have to do your research and identify companies that are worth investing in.
Unless you’re buying tens of thousands of shares you won’t notice a $10 price change in an asset’s price from one month to the next. Likewise, when you’re only buying one or two, you probably won’t notice a significant difference in a $50 price change.
Let’s say we have Mary who started a Roth IRA. She sets aside $100 a month to invest in a NASDAQ index fund. The average purchase price is lower in December because she bought shares in the other months. If you had kept the money in a savings account, you would have missed out on the compound interest from January through November.
First, you need a budget. You need to know how much money you have, how much you need to live, and how much you have left to save/invest. On average, it’s recommended that you save at least 10% of your before taxes earnings every month.