When people hear “savings rate” they immediately think I’m talking about that measly 1.2% interest in their high-yield savings account (HYSA). Well, I’m not. Here at the Wealthy Idiots, we believe your savings rate is the % of gross income which goes toward savings versus being spent. Let’s break it down!
Why savings rate is important
In short, savings rate is important because it gives you a chance to grow more money for a longer period of time. The longer you can sustain a high savings rate, the better chance you have to gain considerable wealth. My wife and I target a savings rate above 40% of our gross income. This year, we are pacing for 55% due to a home sale which infused some cash into our brokerage account. Not a bad year.
As an example, let’s say you make $50,000. You have a new car loan, a credit card payment, and an installment loan from last years Black Friday purchases. Because of this, you can only save $2.5k per year (5% savings rate), which is not good. Over 30 years at 10%, this $2.5k per year will net you about $411k. Not too shabby, but remember, that’s over 30 years.
Now let’s say you avoid the allure of a new car and Black Friday. Because of this, you save 15% of your pay consistently for 30 years. At the same 10% interest, you would amass $1.23M. Big difference. Imagine if you got married 5 years in, and combined with your spouse who has the same income, you save the same 15%? You would now have about $2M combined savings at the 30-year mark.
Concentrate on savings above all
You’ll hear a lot of theories around personal finance. Some of these revolve around savings % derived from your income, others give milestones on how much you should have saved by a certain age, and others propose putting all of your money in pyramid schemes (joking, I think). Either way, no one really agrees 100% on personal finance theory. For this reason, I’m not going to give you a bunch of cherry-picked statistics to influence your thinking.
I’m a huge proponent of identifying the highest savings rate you can achieve, and never backing down from it. At the beginning of each year, my wife and I review our year end totals from the previous year, and begin game planning for the year ahead. This includes reviewing our savings rate and making sure it is still achievable, or if it should be adjusted up or down (preferably up). Like I said earlier, we pretty much aim for 40%. If our income goes up, we are naturally saving more as a result.
If you asked me to throw out a common goal for the average person, I would layout the following:
|Company Provided 401(k)||$20,500 + match|
|Taxable Savings||Whatever is leftover|
Yes, that’s it. Three things. No complicated “strategies”, you don’t have to sit down with a financial advisor that will absorb 2% of your investment gains, and you don’t need to get advice from friends at work. If you can find a way to consistently save $26,500 per year over 30 years, you’ll be staring at $4.3M. Granted, if you make $500k a year your savings goals should look a little different in the taxable savings category, and this also applies to those who can’t yet afford to save $26,500 a year. But remember, these are goals and they’ll help you get one step closer to making financial success a reality.
Stick to your plan
I love the psychology my wife and I use when it comes to personal finance: We don’t care about much else, as long as we are meeting our pre-determined savings goals. You read that right, we just don’t care. Maybe we feel like we wasted a bit of money on Amazon purchases throughout the year, or ate at restaurants too often, but we still exceeded our savings goals by $5k. Who cares! When you have a set goal that is achievable and repeatable, it brings a certain sense of financial peace. This can also help you with that positive attitude thing we talked about last week.
“We don’t care about much else, as long as we are meeting our pre-determined savings goals.“D.C. Poc
Imagine waking up every morning knowing your retirement plan is on cruise control. We don’t need to check our investments daily, or sell “bad stocks” (because we only buy total stock market ETFs). But instead, we just continue to do the same thing we’ve been doing. My wife and I have 20 and 22 years of work left, respectively. For the remainder of that time, I don’t think we’ll see our plan change much.
Where to start, today!
If this is the first article you’re reading here at Wealthy Idiots, you couldn’t have picked a better one! If you’ve never saved before and have no clue where to start, take a look through our past articles and YouTube videos. You’re sure to find some motivation and inspiration within. Good luck on your investing journey!