Your savings rate is the the key factor if you want to shape your finances, gain financial flexibility in your life, being able to invest and build up an ever growing passive income stream in order to reach Financial Independence in a reasonable time frame.
FOCUSING ON YOUR SAVINGS RATE
Track you spendings, slash your fixed cost block, avoid discretionary consumption, work hard to increase your income, invest wisely et voilà:
there will be a definite time frame you have to work.
And no! You don’t have to be a millionaire to become financially independent!
The relationship between the savings rate and the number of years one has to work before reaching Financial Independence and being able to stop working has been brilliantly described by Mister Money Mustache in his blogpost The shockingly simple math behind early retirement . That article was a real eye-opener for me. There are two key information you get from your savings rate:
- what percentage of your income do you take home? and
- how much can you live on (how many years required to reach Financial Independence)?
Let’s assume a household with a savings rate of 50 %. For every dollar earned, 50cts are consumed and 50cts will be saved. It’s a high rate showing
- increased resource efficiency
- conscious spending habits
- strong wealth accumulation process and
- enhanced financial flexibility
of that household.
And the other aspect of a 50% savings rate?
Well, one could (theoretically) take every second year off (e.g. to make a sabbattical) or let’s put it that way: for each work year, one buys one “freedom year”.
Why aiming for a savings rate of 60%
The key driver in any wealth accumulation process is a systematic approach to consistently keep spendings under control. This is the lever that one can directly have an influence on.
The savings rate shows you, how much freedom one work year can “buy”.
As you can see on the graph above, we have been tracking our savings rate since 2006 and consistently increased that rate over time. In 2011 our savings rate reached 50 % for the first and we managed to go even further. Today (February 2017), our savings rate is well above 60%.
Why is an increase from 50% to 60% such a big deal? After all, we are talking about “just ten percentage points” resp. only about some few thousand dollars in additional savings per year.
With a savings rate of 60 %, each work year “buys” one and a half years of freedom! Whereas a savings rate of 50 % enables you to become financially independent in around 17 years, a savings rate of 60 % requires less than 12 years.
That’s a huge difference.
It’s not often in life that a relatively small change has such great benefits in the short run and such positive life changing effects in the long term.
My savings rate is 50% before tax, I have tried to increase it to 55%, almost impossible, wonder how you do that? I have already optimized spending of course.
Great blog!
Hi Maximiliane
Congrats on a very strong savings rate, you are well on track!
Increasing our savings rate from 50 % to 60 % happened gradually over a few years. Systematically tackling the fixed cost positions such as insurances (always trying to compare/negotiate/substitute/slash) has been extremeley rewarding and brought our cost structure to a much more flexible and sustainable level, but it took some time. Each dollar in additional savings is invested to generate passive income which helps to gradually increase the savings rate as well (over the last few years, our active income has been more or less stable).
Being conscious regarding resources and spending habits is very sensible and can be a lot of fun, but of course there is a certain savings level where it does not make any sense to decrease spendings even further.
Appreciate your commentary and keep up your achievements!
Cheers
Congrats on saving 60% of your income. That is a lot. I find my biggest thing holding me from saving a higher percentage is debt. Luckily, no credit card debt. I could knock the debt out quicker, but I like investing so much. One day I will get there.
Hi DM
Thanks!
Putting your money to work for you and building a powerful passive income machine consisting of great dividend paying stocks is extremely clever. I view debts that help to generate income and increase net worth as good debts.
Thank you for stopping by and commenting!
That’s awesome! A 60% rate is incredible.
I’m currently on 15-20% but everything else is going on the mortgage. As I increase my income I hope to increase my savings rate.
Hi Kati
Thanks! There is some nice momentum as several measures to improve our cost basis are now really paying off.
Increasing income is great and will give your savings rate a nice boost especially when costs can be held more or less stable.
Appreciate your commentary!
Cheers
CONGRATULATIONS – a 60% saving rate is great.
As some other commentators have mentioned struggles to get into such high savings rate, I would recommend to use the following approach:
1) Start with your current savings rate
2) Increase your savings rate with every raise, take out 50, 60, 70, 80, 90 or 100% of the raise – that makes the increase in savings rate automatic!
3) You could additionally increase your savings rate by achieving sustainable savings, e.g., moving to a cheaper apartment.
Many thanks for your kind word, yeah, 60 % savings rate has been an important Milestone for me and my family. I like your helpful tips to gradually increase the savings rate. Appreciate your commentary and thanks for stopping by!