What are your goals?
Do you like your job? What is your lifestyle? Do you want to retire early?
Begin with the end in mind.
If you want to retire early you need a higher savings rate. If you want to go on more vacations you need a lower savings rate.
The more money you earn the bigger your savings rate can be and the easier it is to save.
We have all heard the classic 50/30/20 rule.
This can be a good general rule to follow, but it is missing a lot.
What kind of retirement do you want to have? When do you want to retire? Will you have other income in retirement besides social security?
If you want to reach financial independence you may want to save up to 50% or more of your income.
To determine what is the best savings rate for you and your family I would consider a few things:
- How much money do you currently earn?
- Are you able to increase your earnings?
- How much money do you need each month in expenses generally?
- When do you want to retire?
Get granular with your income. How much do you currently earn and how much of that can you afford to save? If the answer is nothing, then I would find ways to cut back expenses or increase earnings. Make saving a bigger priority than Netflix or eating out.
If you do not make enough money: How can you increase earnings?
Side hustling is all the rage, because there really has never been a better time to find a side job. Uber, Grubhub, Taskrabbit. There are lots of little jobs you could do.
But I recommend working on leveling up your current profession. Become a master at one thing and then charge accordingly for your mastery.
The more money you make the more money you can save and higher you can increase your savings rate.
How much money do you need each month?
What are your monthly expenses: rent, insurance, student loans, food, clothing, gas
Are there ways you can decrease how much money you need each month?
- Less expensive rent
- Less insurance
- Pay off those debts – interest kills
- Shop at Costco for food
Start writing down ideas of ways to save money each month. The more ideas the more some of those ideas will work.
If you want to have higher expenses each month than you need to have a higher savings rate to compensate for that amount in retirement or plan on working a few more years to meet those needs.
When do you want to retire?
Most Americans do not love their job. They work because they must. They have bills and families to take care of. I get it.
But if you want to retire early than you need to decrease expenses and increase your savings rate.
If you are fine working till you are 65 or beyond than you can have a lower savings rate.
Social Security will be there for you. I am not one of those people that believes social security will run out of money and everyone will be shit-out-of-luck. The government will continue to fund Social Security forever. Why? Because old people go out and vote. Politicians cater to older folks because they know the value of voting. That being said do not rely on Social Security. Let it be icing on the cake.
Chose a savings rate that is going to give you enough income in retirement so that social security can used for any extras. Like charity or gifts.
Start low and increase
Time is your valuable asset. So you need to start saving as early as possible.
I started at $0. My parents paid for my education which is a huge blessing so I did not start negative, which is a lot more than most Americans. But I also did not start with any funding. I started at $0 and slowly added money, adding greater amounts each month over time.
The idea is that when you are right out of college you income is lower and as you get more experience your salary increases to reflect that experience. Your savings rate should increase in response. Hopefully as you make more you can keep your expenses the same and put that extra money away into savings and investments.
What is my savings rate?
Right now my rate is about 35%.
That number is probably higher than most, but I am using savings from my job to start my own business. I want to be my own boss. This goes back to goals.
Reverse engineer the goal
What is your FI Financial Independence number?
How much money would you need in the bank to quit work and live off your investments?
If you withdraw 4% per year from your FI number you can live off that money for the rest of your life. At least that is the idea.
$1,000,000 x 4% = $40,000
If you decrease your expenses each year your FI number will get smaller. Then you can determine how much you need to save and in what timeframe in order to reach your goal.
That is the theory. Life is messy, so your journey to FI may be long or it may zig zag between goals and children. That’s ok.
Your savings rate is not meant to be stressful. It is meant to be a guide toward your goals. And it may need to be adjusted over time due to family, health, education, marriage/divorce, life. Your goals will change and evolve. Mine definitely have.
Knowledge is power. It is better to know where you are now and where you are going in the future so you can create a roadmap to get there. And you knowledge gives you the power to change. When you know better you do better. You cannot change something you do not know is wrong.
Sit down and create a savings goal plan. What are your life goals and how is your savings rate going to get you there?