In previous posts I have talked about how we currently strive to save 50% of our after tax income and how important your savings rate is in building wealth rapidly. But after listening to the Radical Personal Finance Podcast, it made me realize that this may have not been enough to sway you. What I mean, is that this may need to be translated. It is very easy to conceptualize and visualize what a 50% savings rate means to in terms of dollars. But what does it mean in terms of Time Freedom?
What may not be as intuitive is what it means for your ability to reach financial independence. I had already previously internalized the fact that a 50% savings rate effectively meant that for every year of work, I would be banking a years’ worth of living expenses. But I hadn’t really thought much about what a higher savings rate (or lower one) translated to until now.
If you want to reach Financial Independence consider the following:
If you save 5% of your income, you can take 1 year off every time you work 19 years. [That is a lot of time to put in to bank 1 year of freedom]
If you save 10% of your income, you can take 1 year off every time you work 9 years.
If you save 20% of your income, you can take 1 year off every time you work 4 years.
If you save 30% of your income, you can take 1 year off every time you work 2 years and 4 months.
If you save 40% of your income, you can take 1 year off every time you work 1 years and 6 months.
If you save 50% of your income, you can take 1 year off every time you work 1 year. [Where the GYFG house is currently at. I could see us between 50-60% long-term]
If you save 60% of your income, you can take 1 year and 6 months off every time you work 1 year.
If you save 70% of your income, you can take 2 years and 4 months off every time you work 1 year.
If you save 80% of your income, you can take 4 years off every time you work 1 year.
If you save 90% of your income, you can take 9 years off every time you work 1 year. [This seems pretty out of reach and extreme to me. I want to be able to have $200K/year of living/travel/fun expenses. This would imply a $2M after tax income and likely a $4M gross income assuming a 50% tax rate]
There are a few assumptions that we should probably list based on what you see above:
- This doesn’t assume any growth of your money (i.e dividends, interest, appreciation, etc.)
- It is based on after tax income
- It also assumes living expenses remaining static (i.e no inflation, no reduction in expenses as you pay off your house, etc.)
- It also does not take into account any income from social security or outside pensions.
Nonetheless it is a very powerful representation of what each notch on the savings rate belt represents in your current standard of living.
Based on the podcast episode I mentioned above, one of the listeners took that information and created this really cool chart that visually shows you based on your current age and savings rate when you can expect to hit Financial Independence. This chart looks to include an assumption for growth and is assuming a 4% withdrawal rate once you reach retirement (which is supposedly the safe rate for a 30 year retirement). Obviously you will need to adjust if you plan to have a retirement of longer than 30 years. This is not the end all be all, but it gives you a good starting point.
Where are you on this chart? Does this help you internalize what your savings rate really means in terms of Time and Financial Freedom? Any other thoughts?
-Gen Y Finance Guy
Financial Independence Heat Map: Starting Age vs. Savings Rate
I love that chart, I used it two months ago. Including what the rental properties are paying down, plus forced savings through my company – very low taxes, family is between 70 to 80 percent this year. This isn’t through lowering expenses but building assets and through income growth. This took nine years to build too..so not a get rich quick thing:)
14 years ago, it took more than three years to save 30k – to buy first rental property.
I love how you articulated how if you save a x percent, you can take x years off. Some great stuff here:)
Hey Tracy – that savings rate is very impressive and although 9 years seems like a long time, I am sure looking back if flew by.
I also love your focus on building assets and income and not being overly obsessive and oppressive to your lifestyle. Who says you can’t have your cake and eat it too?
Glad you enjoyed the piece.
That is a very good way to look at it. People need motivation, and what better motivation than the incentive of more time in FI. If I did my math right on the savings rate then it looks like we are in good shape. We are set to save 53% of our net income and are still relatively young (27).
It seems so simple but it is hard for some people to come to terms with: The more you save, the sooner you will reach FI.
Nice savings rate Matt!
I like to couple your statement of “the more you save, the sooner you will reach FI” with “and the more you earn the faster you can increase your savings.”
A nice number based article. It gives some perspective to the savings rate we try to maximize. It can help to set expectations.
We are for now saving 30 pct (excluding mortgage repayment) and are 39. This would put is in FIRE postion at age 70. Bummer. What seems to be missing is your starting position.
I did not yet look at my savings rate as a factor to define how much months I can take off from work after one year of work…
Hey AmberTree – 30% is a robust savings rate.
It is just another perspective for us all to consider in our FI pursuits.
If you’re trying to get out of debt, what % would you suggest to save?
Hi Carlton – That is a very vague question not knowing anything to put your financial position into context. Are we talking credit card debt? Mortgage debt? What is your income like? Expenses? What are your goals?
I don’t have credit card debt. I have credit cards, but I don’t carry a balance with them. Only debt I have ms my car and student loans. My gross income is about $75K. My biggest focus right now is paying off the car loan and the student loans. I feel if I pay those off, I’ll have more more money I can save. Eventually, I want to get a house. I don’t have many expenses. Just your basic utilities, rent, car note, student loan, car insurance, and then stuff for my house like groceries.
Carlton – I would suggest you build up savings to equal 3 months worth of living expenses and the rest should go to tackle your debt if you want to pay it off aggressively. I would prioritize the car loan first before you pay down the student loans. This is mostly because the student loan interest is tax deductible and likely at a lower interest rate?
Yes the student loan is at a lower interest rate
Is there a good resource or calculation for pre + post tax savings? My take home pay is after 401k is taken out (pre tax), and work has employee stock purchase plan which is post tax, and other savings (post tax). Thanks!
Hi Jacq – I am not sure I understand your question. Can you clarify what you are looking for?
Hi GYFG, saw your Feb #, awesome! pmfji, but the absolute best resource I have come across for evaluating pre/post savings, ESOP, Social Security, 401(k)/IRA drawdown, while incorporating tax rates/brackets, potential for changes to income (whether small and steady increments, or one-time slams like inheritance or asset sales) is ESPlanner. http://kotlikoff.net/my-personal-financial-planning-company Other resources I won’t mention that are free cannot distinguish pre/post savings, or potential tax implications.
It costs $149, and a license renewal each year if you want updated tax, S.S., data. Gotta say, I have recommended this to people who ask the exact question Jacq asked, and never once did they spend the money to get their answer. I understand the impulse, we live in a “culture of free!” Keep on saving, my PF Brother!
Hey JayCeezy – February was a great month! The detailed financial report goes live on 3/14/16, but sidebar and financial stats page are updated.
Thanks for sharing the resource to help answer the readers question. You are always filled with resources and for that I thank you for complimenting the posts with your wisdom and resources.
BTW, I had to look up what “pmfji” stood for in internet slang.
For those that live between a rock and a hard place like me it means: “Pardon Me For Jumping In”
Great post. I’m constantly striving to save at least 50% after tax and doing a poor job of it since I’ve started monitoring my expenses closely. I continue to try and pay attention to my spending, but I’m having a tough time finding real savings since I also prioritize eating healthy (expensive), exercise (expensive but I should reduce gym membership), social life (hard to cut costs here) and living in Bay Area (too expensive). I’m becoming more convinced the better option for me is to continue the pursuit of making more money to achieve financial freedom. But I’m not going to give up on my cost reduction efforts just yet! Also, hoping my blog will eventually generate some returns, since my investing abilities have yet to prove anything…