Capital gains also shouldn't get reinvested automatically. I forgot about these because VTSMX rarely if ever distributes capital gains.
A money market account works if that's where your money is before it gets invested. The way I set mine up is I have a savings account with Capital One 360 where I keep a few grand in cash (5% of my portfolio as a semi-"emergency fund"). My taxable dividends all go in there, and I periodically rebalance to keep the allocation at 5%. A simpler way to do it if you don't want to keep a fixed allocation of cash is to just have those dividends go into your main checking account. Whenever you take all the excess out of that account to buy more shares, the dividends will get swept out and you don't have to think about it. The key is not to create extra tax lots, and instead just make tax lots you need to create anyway a bit bigger.
Illustrating the second example to make sure it's clear:
- You set a rule that your checking account always has at least $500 in it. You also set a rule that you want to invest monthly.
- At the end of the month, after accounting for all of your bills you notice your projected account balance is $900. So you invest the extra $400 by buying VTSMX with it.
- Next month all of your income and spending is identical, except your mutual funds threw off a $40 dividend. It got deposited into your checking account. So at the end of next month your projected account balance is $940. So you invest the $440 in VTSMX, effectively reinvesting the dividend but without requiring an extra purchase beyond what you'd have done anyway.
After you buy shares, the setting for SpecID is called "cost basis method" under "bank and money management." This is a setting that won't do anything until you sell, and since I assume that won't be for a while you don't have to worry about it right now. Getting it set up sooner rather than later is good so you don't forget about it.
