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The path to financial independence (FI) is a long road that takes sacrifice. A good formula to put you on that path is to save a big percentage of your income while also working to increase your income.
Building side hustles, investing in real estate and/or stocks, or getting a raise at work are all opportunities to increase your income. I recently got a raise at my work which helped to increase our income. My wife and I have also been building our dividend income stream by investing in the stock market and are constantly exploring new side hustles to earn more money.
On the flip side, looking for opportunities to save more of the income you already have is an important part of financial independence too. For example, our family recently made the jump and ditched our cable. By cancelling a service that we rarely used, we will end up saving over $800 next year.
Here at The Money Sprout, we believe that the best opportunity to reach FI is to save and earn as much as possible. Then all of the extra money (from saving and earning more) should be invested into income producing assets like real estate or stocks.
Today I would like to discuss our plan to save 20% of our income by automating as much as we can. These eventual savings will be invested into dividend stocks. By investing in dividend stocks, our future income will increase by receiving dividends – that will eventually be used to buy more dividend stocks.
If you read the last paragraph closely, you can start to see a pattern forming. The more money you have available by saving and earning – the more income producing assets you can buy. The more income producing assets you have – the more your income will grow. It is an awesome cycle once you get it going.
Save 20% of Our Income
A few weeks ago, I posted that we have a new goal to save 20% of our income and invest it into dividend stocks. Following this plan, we would be able to invest $20,000 per year – which will help accelerate us towards financial independence.
Our plan is to stay aggressive (but smart) with our investments. Putting $20K into top dividend paying stocks would increase our annual income by well over $600! And that is just in the first year and using a conservative 3.0% yield.
That extra $600 invested back into the market, along with investing 20% of our income again next year would continue to build the momentum and compound our future earnings.
Based on a recent raise at my work, saving 20% of our income would require an average investment of $1,667 per month.
At this point, it will be a little difficult to invest that much of our income each month – but we need to start somewhere. With my new raise and steps we are taking to cut back spending (i.e. ditching our cable) – we will be better off this year than last.
The first step we are taking to make all this happen is to – pay yourself first. But instead of paying ourselves in a savings account, we will be investing these funds.
In order to make all of this simpler, we have decided to automate as much of the saving and investment process as possible.
Paying Yourself First
I am usually very passionate about the world of personal finance and investing in the stock market. However, there are times when I get a little busy and even lazy and don’t follow up on our investments and savings like I should.
For example, despite getting my raise over a month ago, I still have not put this extra income to work in the stock market. I should have immediately increased our monthly investments without a second thought. That wasn’t the case and instead I let a month go by letting our extra income sit idle. A lot of that extra money has now been invested but I don’t want to make the same lazy mistake again.
I get paid bi-monthly at my job – usually around the 15th and 30th of the month. These earnings are direct deposited into a checking account. We also have an online savings account that is used to accumulate money that will be invested.
So our first step is to make sure we pay ourselves soon after my paycheck hits our account. That way, it is like we didn’t even know the money was ever available and it removes any temptations to spend it on something else.
In order to make sure our paycheck funds are available, I have setup the following automated transactions between our bank accounts. Funds will be moved from our normal checking account to our online savings account used for investments.
- 3rd of the Month – Transfer $400
- 17th of the Month – Transfer $400
For the time being, we will be moving $800 a month into our investment account. That is about half of our goal of $1,667 in investments. However, it is still more than our current average of $550 we are investing each month now.
I like to take small, sustainable steps which is why we are starting with $800 per month. I certainly don’t want to come up short each month by investing too much and having to pay late fee’s, etc.
The next step after transferring our savings each month is to automate the investment process – as much as possible.
Investing in Dividend Stocks
We have now setup monthly investment plans through LOYAL3 to purchase shares of 3 different dividend paying stocks. I like using LOYAL3 for our automated investments as they allow you to buy partial shares and don’t charge any commission. The downside is that this online broker only offers a subset of quality dividend stocks to pick from.
Fortunately, we found 3 quality dividend paying stocks offered through LOYAL3 that we plan to invest in each month. Here are the investment amounts that we plan to start making (automatically) through LOYAL3 next month –
- 23rd of the Month – Microsoft (MSFT) – $150
- 23rd of the Month – Walmart (WMT) – $250
- 23rd of the Month – Target (TGT) – $350
In addition to the $750 in combined investments listed above, we will send the remaining $50 balance (of the $800 moved into the savings account) to our Robinhood account.
Since Robinhood does not offer partial shares or automated investments, we will let the funds build our balance in the account. When we are ready to make a purchase, then we will use the balance in the account. Despite no automated investments, Robinhood does offer commission free trades on all U.S. securities. This gives us another opportunity to invest in quality dividend stocks that are not available through LOYAL3.
Note – We often change our monthly investments of stocks through LOYAL3 and Computershare. For now we are sticking with the investments noted above. However, these could change at any time in the future.
We strongly believe in the concept of paying yourself first. However, we are not just paying ourselves back. We are taking it a step further and investing the money to continue to build our wealth.
Another tool that we plan to take advantage of is automating our cash flow (within reason) to ensure we eventually invest 20% of our income. As you can tell from above, we are now transferring $800 every month in 2 different installments – just days after I get paid.
So on the 3rd and 17th of each month, we will now be moving $400 from our checking account to an online savings account used for investing.
Once the balance has been moved into the savings account, we will be automatically purchasing $750 of dividend stock on the 23rd of each month. Another $50 will be moved to our Robinhood account for future stock purchases.
By setting up these automated transfers and stock purchases, we will be investing about 10% of our income each month without lifting a finger. Once we are comfortable with these improvements, we will work towards investing 20% of our income by paying ourselves first.
Do you pay yourself first after earning a paycheck? If so, what do you do with the funds? Invest? Save? Do you use any automation to help you stay on top of investing?