The Importance of a Savings Rate

Steve Cummings

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Before I started my journey into finance I was not budget savvy as so many people around me. People used budgets to figure out how much they were to save. I started to do the same, and at the end of the month see how much was left over after spending. What I didn’t realize was that the Savings Rate was one of the most important things I should have been looking at.

What is a savings rate?

I used a nice budget app called YNAB (You Need a Budget) to help me put money aside for future expenses. The simple concept of the 50/30/20 budget was not something I had known. I knew I needed to save money for a rainy day and to break the paycheck to paycheck cycle.

Soon enough, the finance blogs started speaking about savings rate. What is a savings rate anyway?

Your savings rate is a percentage of your take-home pay that is used for savings.

For example: You take home $50,000 annually, and save $5,000. Your savings rate would be 10%. 

On average, Americans are saving close to 7% of their take home pay. In economic downturns that savings rate goes up due to uncertainty. Most people enjoy spending that money once it hits the bank account.

A Facebook post that sparked my interest.

Going through my Facebook feed, I came across a post that asked “Who here puts 15% towards their retirement accounts? We try, but it is an ideal and goal.” 

This comment got me to thinking about how I once lived and how many people live today.

It is not a bad thing, but we need to think differently and to save differently.

The Simple Math for a Savings Rate

Mr. Money Mustache wrote a post that has geared many to saving more. It is “The Shockingly Simple Math Behind Early Retirement”

He broke down the numbers to show how much of a savings rate you will need to stop working. 

There were a couple assumptions that would go along with the numbers that we need to consider.

  • 5% investment returns after inflation. You’ll live off of this money.
  • 4% safe withdrawal rate.

Here is the chart of how these numbers work:

Looking at this chart, the Average American that is saving around 7% of their income will have to work close to 66 years in order to retire and stop working. That is a ton of years to continue to work. 

The person that posted that saving 15% was quite hard will be working 43 years before they can fully stop working. That would end your work life around 65 years old. Not so bad. 

If you would rather stop working earlier you just need to save more money. 

“Cutting your spending rate is much more powerful than increasing your income.” Mr. Money Mustache

Pay Yourself First

The old way of budgeting would be to spend all of your money, then look at your budget at the end of the month to see what is left, and put that extra cash into retirement or savings. 

I know people that do this, and it is a common mistake many people make with their finances. It continues that paycheck to paycheck cycle instead of helping you build a passive income stream that will help sustain for the rest of your life.

It is time to think about paying yourself first and trying to automate your savings to achieve your goals. You want to set how much you want to save first and have it put aside, and then pay off other bills with the rest of your money. 

 The Fioneers mentioned in their blog post “Savings Rate: Why it matters” about the Anti-budget. They break down the Anti-Budget the same way as Pay Yourself First:

  • Decide how much you want to save
  • Pull this off the top
  • Relax about the rest

Both approaches are basically the same; they just have different ways of saying it. I like Pay Yourself First because I know I am going to pay myself first. 

The way this works is you determine how much you want to save, automate it into a savings account or retirement account before it hits your bank account, and then you can spend the rest. 

If I am taking home $4,000 every month, and I want to save 25%, I can automatically have $1000 sent to my 401K or IRA leaving $3000 for the other bills. 

The more you save the quicker towards financial independence you will be.

How we save money:

People may say “How can you save more than 15% of your pay?” It is time to cut expenses. Here are some expenses you can cut down on.

  • Going out to eat often
  • Work closer to home
  • Stop paying for cable
  • Get rid of debt

These are just a few of the ways you can save money. 

Mrs. FE and I try to save close to 60% of our take home pay every year. Here is what we do:

  • We bike everywhere and use cheap public transportation
  • We cook at home and shop at the local market to make better deals
  • We have no debt
  • We do not have cable
  • We strive to conserve electricity whenever we can.

How We Plan to Increase our Savings:

There are several ways you can increase your saving rates through income. Here are some of those options:

  • Side Hustles
  • Work on skills for a better paying job
  • Create a business

Mrs. FE and myself are working through side hustles and this blog to help increase our income to help us increase our savings rate. 

With these tips, I am hopeful that you can walk away learn a bit, and do more saving. The more money you save the shorter time you have to work.

Time is money, and Money buys time.

My time is quite valuable and instead of being at work, I would rather be adventuring in nature or even traveling the world. I love my job because it is fun, but who knows what the future will hold. So for now, saving is very important. 

We save our money so we do not have to work until we are like 70 years old. Life is quite short, and it is time to make the most of my time spending it with family, friends, and enjoying the beautiful nature as well.

With money as a tool, you will be able to buy more time for yourself. People say that they live to work, I am one of those people that enjoys working to live.

Your Savings Rate is important

If you want to work all of your life that is fine. Those that would like to retire with enough money need to think about how much they are saving. Your savings rate is important. It is time to make a change and save more money.

” Spend less than you make, stay out of debt, and invest the rest”

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