How to Invest 20 Percent of Your Income

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The path to early retirement, financial independence, or whatever else you may want to call it is actually fairly simple. Save a ton (and I mean a ton) of your income and invest it wisely.

You certainly don’t have to make a bunch of money to obtain financial independence. However, you do need to be a disciplined saver (and investor) for the income that you do earn.

On a personal level, our family has never been one to live above our means. We pay our bills on time and invest a portion of our income every month.

Looking back at last year, we invested 15.5% of our income into the Money Sprout Index. This was actually the largest amount of money we had ever invested in a year into dividend stocks.

Well, even though we had a great year – I think we can do a lot better. I have been getting inspired reading stories of others seeking financial independence and early retirement investing as much as 50% of their income.

Now, I will admit that 50% for us would be a big stretch at this time in our lives. We have 3 young kids and live off of one income. We are certainly not hurting for money but going to 50% income savings would be tough.

So, instead of jumping to saving 50% – we are going to shoot for investing 20% of our income. Read up on our plan below.

Goal – Invest 20% of Our Income

I will let you do the math, but I estimate that saving 20% of our income (and investing it) would come out to about $20,000 per year. Certainly seems like a large number, but that is only $1,667 per month – which seems manageable.

Investment Goal – $20,000 per year

I checked our records last year and we invested 13,429.19, so we need to come up with a plan to hit our target.

Steps to Invest 20% of our Income

In order to hit our new goal to invest 20% of our income, we will need to take several steps. These include both earning more income as well as saving more of our current income. The details for our plan are highlighted below.

So far this year, we have averaged investing around $550 per month. These investments were probably on the conservative side as we were holding back some cash in order to cover extra holiday expenses and several repairs to my car.

I see no reason why we cannot continue to invest the current $550 monthly amount into dividend stocks.

In addition to keeping our current investments going, I received some good news recently at my job. I got a promotion and along with it additional income. Since we are budgeted to survive right now without this income – 100% of it will be invested into dividend stocks.

I am estimating that my promotion will allow us to invest an additional $350 per month. This additional income is awesome news and will allow us to invest more into the Money Sprout Index for years to come.

Another source for hitting our target will be through our tax refund. You may recall that last year we decided to build out a tax refund portfolio. Well, the plan is to continue that trend with this years tax refund.

We should be able to average out an additional $350 per month in tax return dollars that will be invested.

Outside of tax return dollars and income sources, the remainder of our investment dollars will need to come from cuts to our budget. For example, we recently announced that we are ditching cable. This cut should save us around $75 per month that will be invested automatically into the Money Sprout Index.

Here is a breakdown of where our monthly investment dollars will be coming from.

  • $550 – maintain current monthly investments
  • $350 – invest income increase
  • $350 – invest tax return
  • $75 – ditching cable

Total Investments per Month – $1,325

The additional income, tax return dollars, and cuts to our cable bill will allow us to invest $1,325 per month. That leaves us about $350 short.

Our goal now is to revisit the budget and see where else we can cut. Another option would be to create new income sources to allow us to hit our goal. OR we could combine the two and cut a few items from the budget while earning some extra money each month.

Conclusion

After getting inspired by several other bloggers saving as much as 50% of their income, we have decided to save (invest) at least 20 percent of ours. It will take some sacrifice but it is something that we certainly can obtain.

A perfect scenario for us would be to hit our target of 20% savings rate and then bump it up again. I prefer slow and sustainable changes, so hopefully we can increase this rate over time.

I would like to point out that since we are setting these goals during the calendar year – we will not hit $20,000 in savings this year. We have not been able to invest as much as we had like so far (around $550 a month) this year. However, next year we should see the full savings provided we stick to our plan.

Note – At the beginning of the year, we set a goal to invest $18,000 into stocks. That is close to our new goal, but recent changes in our lives has allowed us to bump this up to $20,000.

How much of your income do you save? Do you set goals to help reach your savings target?

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