A 50% Savings Rate is Impossible...Isn't it?
I may never achieve a 50% savings rate (as Mr. Money Mustache encourages). But it’s such a compelling ideal that I’ve resolved to start generally wandering in that direction. How’s that for commitment?
Here’s the thing: I realize people typically seek a high savings rate because they want to leave the employed world. That’s great; I support it wholeheartedly.
But what if your working life isn’t awful? If you have low-cost income that improves your happiness, there’s no need to hurry up and retire.
So if my current (and future) employment contribute to my happiness without imposing excess costs on my life, why would I think about accelerating my savings rate? Why not just continue earning while setting aside the traditional 15% of gross income* for my eventual traditional retirement?
Two words come to mind: intentional and optimal.
By setting a target savings rate of 50%, I know I’ll have to adjust my life. I’ll have to spend less and earn more. Both carry costs and benefits. Somewhere in the exploration I hope to find a highly-optimized, perfectly intentional life.
Let’s get “optimal and intentional” out of the abstract. Below is a table showing my six-month average expenditures in descending order. Next to the averages, I’ve guessed at what could be “possible” for that category, and shown the corresponding savings.
Interesting side note: compare my six-month average to the amounts from my shiny new budget (from three months back). See how my average expenditures exceed my budget? Looks like I still have some head-in-sandness to resolve in my life, but things are heading in the right direction. Several of these categories are already moving toward my “possible” number.
It’s a little tough to calculate my current savings rate because my side income is variable. I know I’m no longer spending more than I earn, so for the sake of setting a baseline, I”ll use my average expenditures as my take-home income.
Factoring 401k contributions and principle paid on property loans, my current savings rate is 13.25%.
Savings Rate = (Retirement Account Contributions + Principle Paid on Loans with Underlying Assets) / Take-home Income. In a previous post on calculating savings rate I included principle paid on unsecured loans, and was set straight by commenters. Principle paid on property loans is fair game because those dollars can recruit more dollars as the asset appreciates.
Adding in the “possible” $523 from expense reduction would give me a savings rate of 22.3%.
That’s pretty solid, but Mr. Money Mustache would tell me I’m still a slacker (I believe he sets 30% as the minimum savings rate for those who hope to be financially free in any reasonable time frame).
Assuming my expenses (with the $523 in new savings built in) are as optimized as they can reasonably be, it’s time to make more money if I want to jack up the savings rate.
It turns out I’d need around $4,300 in extra monthly income (allowing for Taxes and Tithing) to crack the 50% savings barrier. $4,300 represents a 60% increase over my current income.
This is the part where people shake their fists in outrage and say “Well, sure – but YOU CAN’T JUST RAISE YOUR INCOME BY 60% OVERNIGHT!!”
Right. But you can raise your income 60% in five years by increasing 12% per year. Or you could spend the next two years developing marketable skills, then increase your income 20% per year for the following three years.
We greatly overestimate what we can accomplish in one year. But we greatly underestimate what we can accomplish in five years.
I can’t jump from 13.25% to 50% savings rate in a day or a month. But I wonder if I could do it in two years. Three? Who knows – and really, who cares? Remember – the savings rate is just a metric that steers me toward a more optimal, intentional life.
Here’s how: I’ll start at the top of my list of expenses, then do a “deep dive” on every category. A deep dive looks at a category’s costs, benefits and alternatives at a level that goes beyond the numbers.
This is the beauty of pursuing a 50% savings rate. It’s a standard so high that it requires me to go deep on my assumptions of what adds value to my life – deeper than I’ve gone in the past examinations of my basic financial structures and expenses. It’s intimidating, but only good can come of it.
Our first “deep dive” will be on the costs and benefits of your job, and we’ll lean heavily on Your Money or Your Life to guide the discussion. Stay tuned.