Paying myself first for six years
On 1 July 2020, directly after starting my first full-time job, I set up a monthly standing order from my main bank account to my brokerage account. That is basically what "pay yourself first" means, and you can read it everywhere across the internet and in finance books. Instead of saving what remains at the end of the month, a fixed amount moves away automatically, and I can spend for life what remains after paying myself first. It is a bit like paying my rent, but the account belongs to my future self.
I was lucky that I got decent financial advice early. My flatmate at that time was very into finance and inspired me. Around that time I binge-watched Finanzfluss and Finanztip, read about ETFs, and started with a simple automated order plan almost immediately.
Looking back, this was a very good time to set up this automated process. For the first time in my life, I had more income than I needed for normal life. Before I was able to unintentionally increase my lifestyle costs, I did the necessary work to examine what was worth paying for and what really benefited my life and well-being. The remaining part went into the stock market, fully automated. I was living in a shared flat in Friedrichshafen, Germany. Rent is usually one of the biggest fixed monthly expenses, but because my rent was still student-style, I was able to start with a high savings rate from the beginning.
What I actually did
The standing order has been running since July 2020. Every month, money leaves my regular account and goes into my brokerage account. From there it is invested through a monthly savings plan.
During these six years, I changed the plan many times. I switched between funds and individual stocks. I adjusted the allocation. I learned more, changed my mind, and probably overthought many things. I already wrote about that investing path in my first 5 years in the stock market.
What I have not done: I never stopped paying myself first. I reduced the amount for a few months when life got more expensive, but most adjustments went in the other direction. In general, I tried to increase the standing order when my salary increased. It was not a clean straight line upward, but the principle behind it stayed. For me, automation is the important part. Some frugal people might be able to save the same amount by manually shifting it to their brokerage account at the end of the month, but even for them it costs mental capacity to actually do the work.
From July 2020 to the day I started writing this, that means 6 years in total: 72 monthly orders in a row. Even starting from zero, that is an extremely powerful number. The thought experiment I like: take an amount I can afford to save every month and multiply it by 72. I did all of this in my twenties. A moment to be proud of.
If we take average stock market returns of 7% per year, the portfolio built from these six years of saving would now have an expected monthly return close to half of my monthly savings amount.
That is only a theoretical average. Markets do not move smoothly, and they definitely do not hand out the same amount every month. But as a mental model, I find it motivating: after around 10 years of the same habit, a 7% average return would roughly match the same amount as my own saving. I had luck. In my first years in the stock market, returns were even much higher.
The second small loop: reinvesting dividends
The more concrete part for me is my dividend strategy. After doing this for several years, I was able to set up a second automated savings plan. Thanks to my depot tracker app, I know the average amount of dividends I receive each month. I used that information to create another savings plan that reinvests those dividends automatically because I do not need that cash flow. From time to time, I can increase the amount or change the companies and funds I want to buy.
The number I like tracking in this context is average dividends per month compared to my average monthly expenses:
For me, this is now getting close to 10%. That is still far away from covering life, but it is a reasonable amount. The numerator is slowly increasing automatically. I just need to take care of the denominator and think twice before increasing it. I definitely have lifestyle inflation as well, but at least I am aware of it and did the reasoning.
Final thoughts
This habit worked well for me because my context made it possible: stable income, no family to support, manageable fixed costs, and a personality that does not naturally spend a lot. I definitely remember months where I did not have much cash left at the end. Usually this happened when several weekend trips, vacations, or bigger expenses came together in a short time window. That's just part of the game.
What I want to keep:
- Saving plan always stays automated
- Increase the amount when income increases. Allow (temporary) reductions when life needs flexibility.
- Track and increase average dividends / expense ratio.
- Do not let saving reduce things that are actually worth spending money on.
- My personal minimum target is 10% of gross income, although I do not yet know whether this will be possible in every life phase, especially with family.