The majority of people aren’t born as mathematicians. Luckily, it doesn’t take a genius to understand how important it is to save your money and calculating your savings rate can be just as easy.
Why should you know your savings rate?
If you’re reading this article, you already know the answer to this question, but for the folks who may have been forced onto this page by some unknown power, I will explain it simply.
The more you save, the earlier you can retire.
Duh. Pretty obvious right?
However, financial advisors and big firms these days recommend saving at least 15% of your earnings towards your retirement fund starting in your 20’s.
The idea is that with each pay raise, you should adjust your savings to maintain that 15% contribution rate.
The problem with a 15% savings rate is that it puts you on track for retiring in 35.3 years.
You heard me right, 35.3 YEARS!
That is assuming you invested your savings in a retirement fund that you anticipate will provide a 7% average annualized return and plan to go with a 4% withdrawal rate while in retirement.
If you only save 15% of your income toward retirement and spend the rest, you will either retire broke or work until you’re an old wrinkle sack of bones.
Some rare species of people don’t mind decades of mandatory work, but many others would rather cut down or start a business of their own.
Now, what happens if you can increase your savings rate from 15% to 25%?
You will be able to retire in 27.1 years with the same assumptions as above.
Want more numbers?
- Save 50%, retire 15.0 years
- Save 75%, retire 6.8 years
Want to play around with your own values? Check out this early retirement calculator at Networthify.
Time For Some Math
Effective Savings Rate = (Net Income + Tax-Deferred Contributions) – Expenses / Gross Income)
Net income: What you take home from each paycheck
Tax-deferred Contributions: These are typically your traditional 401k, 403b, 457s, Thrift-savings plan, Traditional IRAs and Health Savings Plan.
Expenses: All the cash and credit that comes out of your pocket
Everything can be found on your paystubs except for expenses.
The easiest way to track your expenses is through an app.
I use personal capital which does everything for you. It is also a tool for budgeting, tracking your asset allocation, net worth, and so much more.
If you sign up through this link will give both me and you $20.
Step 1: Sign-up
Step 2: Link your investment/bank accounts with a balance of $1000 or more (No worries, they use the same security as your bank)
Step 3: Wait up to 6 weeks for a $20 Amazon gift-card to arrive in your email inbox.