#031: Why Your Savings Rate > Amount You Are Saving

When it comes to building wealth, many people focus on the amount of money they save each month. While the dollar amount is important, your savings rate—the percentage of your income that you save—plays a more critical role in your financial success. This newsletter will explain why your savings rate matters more and how you can optimize it to achieve your long-term financial goals.

By the end of this read, you’ll understand the significance of your savings rate and how to maximize it for better financial health.

Let’s dive in.

Reason 1: Savings Rate > Amount of Money

Let's just say we have two average 30 year olds. They both run some retirement analysis & figure they should start saving 10% of their income at the time, which equates to $500 a month for them.

Person A goes ahead and automates his investments for 10% of his paycheck each month.

Person B goes ahead and does the calculation and sets his automation at $500 per month.

As time goes on, and as both continue to advance in their careers, they continue to get 3% raises each year. Person A has automatically already increased his contributions; as his income increases, that 10% automatically increases. Person B remains at that $500 per month number. Everything seems to be going fine, so why change things right?

Here’s how vast of a difference this small difference can make over time. Assuming both individuals are getting 3% raises each year, and we assume market returns of 7% on average:

Person A’s Portfolio:   

• 5 Years - $39,046.07
• 10 Years - $100,029.21
• 20 Years - $331,203.50
• 30 Years - $832,191.31

Person B’s Portfolio:

• 5 Years - $36,919.74
• 10 Years - $88,701.60
• 20 Years - $263,191.06
• 30 Years - $606,438.25

While it seems like an extremely small difference in the beginning of one’s career, obviously you see the vast difference it can make over a 20-30 year period. Now - naturally we would hope as individuals continue to make more money, they begin to want to save more as well. However, its very easy to fall victim to lifestyle inflation & we want to automate as much as possible to not allow this to happen

• Key Point: A higher savings rate indicates strong financial habits. As you all know from us harping on the 50-20-30 principle, if we can save 20% of our income - we have an extremely high level of success at achieving financial independence.
• Actionable Advice: Track your spending and look for areas where you can cut back to increase your savings rate.

Reason 2: Savings Rate is Independent of Income

Regardless of how much you earn, your savings rate remains relevant. We have seen countless examples of individuals making $500,000 a year - but have nothing to show for it. Meanwhile we’ve seen individuals who have never made over $100,000 in their entire career with over $1 million dollars in their investment accounts due to discipline, consistency, & smart decision making.

Additionally - Lets say these two individuals are both saving $10,000 per year. For the individual making $100,000 - their savings rate is significantly higher than that of the individual making $500,000 and hence their likelihood of achieving financial independence is certainly more likely given their assumed spending rate.

• Key Point: It’s not about how much you make - it’s about how much you keep
• Actionable Advice: Aim to save at least 20% of your income, adjusting as necessary to fit your lifestyle and goals.

The benefit? Financial stability and resilience, regardless of income fluctuations.

Reason 3: Higher Savings Rate Accelerates Financial Freedom

The higher your savings rate, the faster you can achieve financial independence. It reduces the time needed to build a sufficient nest egg. For some individuals - their goal is to be financially independent by age 55, meaning they don't need to work if they don't want to. This requires us to have our savings rate dialed in early on in our careers if we want this to be a reality. For others - they may not wish to “retire” until age 67 - so a lower savings rate may suffice. It's all about your individual financial goals!

• Key Point: Aiming for a higher savings rate can significantly shorten your journey to financial freedom.
• Actionable Advice: Calculate your current savings rate and determine whether that rate is in line with what your financial goals call for.

The benefit? Reaching your financial goals sooner and enjoying the freedom to make life choices without financial constraints.

Reason 4: Savings Rate Provides a Buffer Against Uncertainty

A strong savings rate creates a financial cushion that can protect you during economic downturns or personal emergencies. In the event something ever went wrong in your life and you were unable to work for over the 3-6 months of emergency expenses that we recommend keeping in cash on hand, it's always good to know that if you have a great savings rate, you will be able to access these funds if needed. Obviously this isn’t something anyone wants to happen, but to not have to go into credit card debt if something really goes wrong is a nice sigh of relief because you did a great job setting yourself up.

• Key Point: A solid savings rate offers peace of mind and financial security. 

Conclusion:

Your savings rate is a crucial indicator of your financial health. By focusing on increasing your savings rate rather than just the dollar amount saved each month, you can achieve greater financial discipline, independence, and security.

As your life evolves & your lifestyle changes, what you were once saving may not still align with your current financial goals. It's important to be constantly revisiting your plan to ensure you are on track for whatever those personal goals may be.

Ready to improve your savings rate?

Start by reviewing your current expenses and setting realistic savings goals. If you need guidance, our Digital Course "Opulus Method" can help streamline your approach.

If you ever have any additional questions - feel free to reach out & we are more than happy to assist in any way.