Your Savings Rate and Your Net Worth

Your savings rate, or how much of your income goes into savings and investing, is an incredibly powerful barometer for how well you are doing at growing your net worth and achieving your early retirement goals. In The Basic Equation that Governs Your Financial Life, I wrote out the formula I use to assess how I am doing on my journey towards financial independence and early retirement. In this article, I am going to look at the savings portion of the formula, and evaluate my own performance.

The first part of the equation is known as your savings rate, and it can have a HUGE impact on your journey towards financial independence. To find your savings rate, subtract your taxes and expenses from your income, and divide that by your pre-tax income.

The table below shows how long it will take you to reach FIRE status based on your savings rate.

Many financial professionals recommend the 10% savings rate as a good target to be at. But 10% is a surefire way to spend the rest of your adult life working for a paycheck. At that rate, it will take nearly 40 years for you to save enough to be able to retire! This is the path of the “traditional” retirement, where you spend your life working until you are 65.

My favorite part about this graph is how quickly the Years to FIRE decrease as your savings rate goes up, particularly in the lower savings rates. Raising your savings rate from 10% to 20% means 10 fewer years you need to work to be able to retire comfortably. Would you cut just 10% out of your daily/monthly/yearly spending to get 10 YEARS of your life back?

One deficiency with this graph is that it assumes you have no savings when you’re calculating how much time you have until you can retire. In the below table, I included columns based on how many years of savings you’ve accumulated so far. For example, if you have $25,000 saved so far and you save $5,000 per year, your “Years of Savings” is 5 (25,000 / 5,000).

How are Mrs. NFF and I doing? Our savings rate this year is about 40% (while certainly higher than the 10% recommendation we hear from financial “professionals”, we are going to try to get this higher through higher incomes and better spending habits) and our Years of Savings is about 3. Based on the table above, that means we have about 15 years until we reach our FIRE goal. This is right in line with the goals we set out for ourselves of reaching a Net Worth of $2.5M in 15 years.

Where do you fall on your retirement journey? What have you done recently to boost your savings rate?

 

Related Articles:

The Basic Equation that Governs Your Financial Life

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