What is an Automatic Investment Plan (AIP)?

An automatic investment plan (AIP) is a strategy whereby an investor can arrange for funds to transfer into an investment account automatically on a regular basis.

How Does an Automatic Investment Plan (AIP) Work?

Let's assume you want to save money for a down payment on a house. You could A) attempt to set aside whatever money you have left at the end of the month, or B) implement an automatic investment plan into a savings account.

Here's how it works:

Each month, on the same day of the month, the bank deducts a predetermined amount of money from your checking account and deposits it into a savings account. That money then compounds over time.

Dividend reinvestment plans -- where investors use dividends to purchase more shares of the stock paying the dividends -- are one common type of automatic investment plan. Employees who contribute to their 401(k)s are also taking part in an automatic investment plan, whereby their employers deduct a specific amount from every paycheck and automatically deposit it into a retirement account.

Why Does an Automatic Investment Plan (AIP) Matter?

Automatic investment plans can help investors maintain their discipline and accumulate thousands of dollars they otherwise may not have saved or invested. Through these plans, investors can save for retirement, fund college educations or a much-needed vacation.