How much of the money that you earn each money do you spend and how much do you save?
Did you know that the average UK savings rate is 6% and the average US savings rate is 7.9%?
Do you save any money every month? Do you know how much money you save each month?
You may be asking yourself: why do I have to save? Why do I need to know my savings rate?
Your savings rate is one of the key indicators that can tell you when you can actually retire.
By calculating this number, you can predict how long you have to work in paid employment.
Based on your savings rate, you can determine your retirement date based on this number.
In this post, I discuss the benefits of why you should take time to calculate your savings rate.
I also talk about the relationship between the maths behind savings rate and early retirement.
Finally, I discuss how to calculate your savings rate and where you can find more information.
Why Calculate my Savings Rate?
If you save half of your income each month, then you can roughly retire in about 17 years!
How do I know this? Check out the paragraph below for an explanation of the simple maths.
It’s not actually about the money you earn. Your retirement depends on how much you save!
Let’s look at an example: Let’s say that there is a well-paid lawyer that earns £100,000 a year.
They have a fancy yet expensive lifestyle: house, cars, holidays, etc. They save £10,000 a year.
On the other hand, let’s say that we also have a restaurant worker who earns £30,000 a year.
They also have a great lifestyle, but live within their means. They save around £3000 a year.
So the question is: who do you think can retire sooner – the lawyer or the restaurant worker?
The answer: they have the same retirement date because they both have a 10% savings rate!
Therefore retirement depends less on how much you earn and more on how much you save.
Maths behind Early Retirement
The above graph depicts the relationship between your working years and your savings rate.
As you can see, the bigger your savings rate, the less years you have to work until you retire.
You may be wondering – I don’t get it; What do I do with all this money that I’m saving?
The answer is you ‘invest’ it. We call it ‘savings rate’ but it should be called ‘investment rate’.
When we say save we don’t mean put it in a bank, we mean use this money to invest in assets.
So let’s say that you ‘save’ around 50% of your take-home pay, and live off the remaining 50%.
This is easier if you’re in a couple: you live off of one salary (50%) and invest the other (50%).
According to the graph, this means that both of you could retire in around 16.6 (or 17) years.
How does it work? This is how long it’d take your investments to reach your ‘liveable’ income.
This is why the lower your lifestyle, the less time the investments need to match your lifestyle.
How to Calculate my Savings Rate?
Each month you earn a certain some money after tax. Unfortunately most people spend it all.
However if you keep some of that money and put it into investments, you have a savings rate!
Let’s say for example that every month you get paid £2000 (after tax) and save £200 a month.
If you were to put that £200 into savings/investments, you would have a savings rate of 10%.
If you were to put £1000 into savings/investments, you would have a savings rate of 50%!
Therefore the two figures that you need to work out your savings rate are:
- How much you earn per month (after tax/take home pay)
- How much you spend per month
The difference between these two figures (that is available for investing) is your savings rate.
Alan Donegan has a handy template you can download to help calculate your savings rate.
What do I Invest in?
That is the question isn’t it – where am I supposed to invest all this money that I am saving?!
What’ll give me the returns to one day replace my work income with my investment income?
There are many investment paths you can take: property, stock market, business, crypto, etc.
I can’t tell you which is better, but I can tell you which one I do: stock market investing. I invest in it because that’s what all the FIRE (Financial Independence Retire Early) community does.
However, I don’t mean buying ‘individual stocks’; I mean investing in ‘global index funds’.
Index funds are collections of 1000s of companies, that aren’t managed by fund managers.
What this means is that these funds charge low fees, as well as have a higher performance.
If you want to find out more on Index Fund investing, then check out the Rebel Finance School.
They have a whole 10 week online free course on how to get started in Index Fund investing.
I’ll Never be able to Retire Early
You have run the numbers and found that your savings is quite low – this can be disappointing.
You compare your savings rate to the graph and find that you are nowhere near to retirement.
All I can say is that don’t let that discourage you. You now have a starting point. Start thinking about what you can do to increase income, decrease spending, and increase your savings rate.
Soon you will find that your savings rate has increased and retirement is closer than you think!
If you want to read more on savings rate/early retirement, check out Quit Like a Millionaire.
It’s a great, short, and simple book written by the youngest people to ever retire in Canada!
What’s your savings rate? Do you know when you can retire? Share in the comments below!
If you enjoyed this article, check out a similar article on tracking your savings rate every month.
If you have any suggestions for future blog post topics, please share in the comments below!
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