The Importance of a Savings Rate
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.
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.
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.
The Simple Math for a Savings Rate
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.
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
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