← Financial Freedom · lesson 1 of 10
By the end of this one you'll know exactly what dollar cost averaging means, how the math actually shakes out, and why the fancy term is really just a feed store habit.
Dollar cost averaging sounds like something in a suit, but it just means putting in the same amount of money on a regular schedule, no matter what the price is doing. Think about chicken feed. I buy feed every Saturday, some weeks a bag runs high and some weeks it runs low, and I never try to outguess the feed store, I just show up. Over a whole year my cost per bag lands right around the average, which is where the name comes from. People who do this with investing put in the same dollars every week or month, so their money buys more shares, the little pieces of an investment, when the price is low and fewer when the price is high. Nobody has to guess the perfect day, and guessing the perfect day is the part most people are terrible at, me included. That's the whole term: same amount, same schedule, let the average do the work.
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example, someone puts 100 dollars into the same fund, a big shared basket of investments, on the first of the month, three months in a row, with no buying fee.
Month one a share costs 10 dollars, so 100 buys 10 shares, month two the price drops to 5 dollars, so 100 buys 20 shares, and month three it's back to 10 dollars for 10 more shares.
They spent 300 dollars and own 40 shares, which works out to 7 dollars and 50 cents a share, even though the price was 10 dollars two of the three months.
That's the averaging part doing its thing, and some apps do charge a fee per purchase, which would nibble at those numbers.
It's payday Friday and, like the first of every month, you've got 50 dollars set aside for the fund you've been slowly buying into. Except this morning the news says prices dropped hard this week, and a little voice asks if you should mess with the routine.
Pick your move. Then peek at the other roads if you're curious.
Dollar cost averaging is just the same amount on the same schedule, so the average does the guessing you'd otherwise lose sleep over.