Why you should consider an increase to your savings rate
Living on half of your income can seem painful. However, it doesn’t have to be, and it can be done. Your rate of savings is the most important factor in driving your overall wealth. It has the power to drastically reduce the amount of time it takes for you to retire. If you are a dual-income household, challenging yourself to live on one income will help you ensure that if one of you loses a job, you’ll sustain your expenses without depleting your savings. It also gives you the freedom to make choices, such as one of you devoting your time to raising children, starting a business, pursuing a passion, volunteering, etc. You don’t have to shoot to 50% overnight, but challenge yourself to shoot somewhere higher than what you might be doing today. Financial independence is freedom and savings is your ticket to freedom…freedom to choose your own path.
Where do you stand with your savings rate today?
The average savings rate in the United States today is 9.4%. This includes retirement savings, emergency fund and other savings. To see where you are, add up all of the money you save each month…retirement accounts, regular savings, monthly investments, college funds and so forth. Divide that by your take-home pay for the month for a general sense of your savings rate. How does it compare to the national average?
Increasing your savings rate takes some sacrifice
If you are not accustomed to saving at all, saving at this higher level will take much more sacrifice. If you’re already saving a decent amount today, it will be easier to make incremental tweaks here and there. Take a look at your take-home pay. How much do you bring home every month? Cut that in half, and see what you can fit within that amount monthly. What do your monthly housing expenses look like? Your car? Your groceries? Dining out? Utilities, including cell phone bills and cable? It all adds up. Do your current expenses fit into that halved amount? If not, move it to 40% savings and take a look and so forth.
Here are some tips to increase your savings rate now
- Pay yourself first. When you take away the money before you even see it, it does wonders to change your behavior with the remaining amount you’re left with. It will undoubtedly help you increase your savings rate. For years, I have auto-deducted and invested in accounts like 401k, IRA and HSA. Most employers and/or your banks give you the opportunity to direct where certain portions of your paycheck go and into which savings accounts. By funneling money to all of your saving vehicles before you even see it, you are increasing your odds of sustaining a higher savings rate.
- Invest, with low fees. Fees matter! If you have money invested in retirement and/or brokerage accounts, take a close look at the expenses you’re being charged. What are the advisor fees? What are the fees in the individual investments you have? These days, anything greater than 1% is too much. 1% may seem like nothing, but over years of investing, this can mean a few additional years of working to make up for those fees. I used to invest in individual stocks and mutual funds until I started doing the math on returns vs. fees I was paying. Now, virtually all of my portfolio is in low-cost index funds (those such as the Vanguard Total Stock Market Index, VTSAX). FYI, the fee on VTSAX is 0.04%! Index funds follow the broader stock market performance, which includes both winners and losers, but overall, historical returns on index funds have performed really well, and with much lower fees.
- Cut your daily, monthly and annual expenses. Shop your cell phone service. There are so many companies out there that compete with the big names like Verizon and AT&T, but are a fraction of the cost. Check out companies like Mint Mobile (uses T-mobile network) and Total Wireless (uses Verizon network). Shop your cable service. Get a digital antenna for your local networks. Get cheap internet for your streaming needs. Use their competitors against them! Evaluating and cutting each of your monthly expenses in some way will help you increase your savings rate.
- “Do the hustle,” the side hustle. There are so many gig opportunities out there now. If you have time, consider driving for Uber or Lyft, being a Shipt shopper, Doordash driver, or if you’re really good at a specific thing, such as writing, design and so forth get out on freelancer.com and sell your services. I often participate in market research studies and do some side consulting gigs/interviews to earn extra money.
- Cut your car costs. As a motor city native, it seems counter for me to say this, but new car purchases and leases are some of the worst budget busters. Get rid of car payments by buying used. If you’re looking for something new, is new-er good enough? With auto insurance, consider raising your deductibles to cut costs. If you live in Michigan and have health coverage that pays primary, make sure you closely evaluate the medical coverage portion on your auto insurance. You may be over-insuring and paying significantly more than you should.
- Shop your homeowners insurance annually. Make sure you take a look at what replacement value the company is placing on your property. One of my previous home insurers had my replacement value 30% higher than it should have been. Remember, the market value of your total property is the house plus the property on which it sits. Replacement value doesn’t equal the market value of your house. Replacement value is how much it takes to rebuild in the event of a total loss. Agents are incented to sell more expensive policies because commissions are based on premiums. Replacement value is a large driver in the rates.
- House hack. Does your house ever sit empty while you go away for extended periods of time, even just a week or a couple weeks? Have you considered AirBnB-ing it while you’re gone? Additionally, do you have any spaces that could be converted out for rental? Does a roomate make sense? I also know people who rent out garage space for storage, including car/boat storage.
- Learn some DIY skills. Home ownership can be expensive, especially when you need repairs left and right. YouTube is my best friend. Whenever we’ve needed home repairs, most of the time, I can tackle them myself. Recently, I fixed my HVAC unit which would have set us back several hundred dollars. My cost, a $12 part purchased online. When I first started out with DIY, it was pretty frightening, but once you’ve done something successfully, it starts to build your confidence. I once popped open my wife’s iPhone because her Wifi wasn’t working. Based on some searches online, it needed a new internal antenna. Apple suggested we replace the entire phone, saying it was cost prohibitive (obviously), but I watched a few YouTube videos on replacing the internal antenna. I ordered a $10 repair kit on Amazon, and about an hour and a half later, her phone was like new.
- Keep your things maintained vs. constantly cycling through new. When something breaks, my first reaction is to determine if it can be fixed with a part from the manufacturer vs. replacing the whole thing. We’ve had baby gates break, buttons fall off clothes, furniture issues and so forth. By maintaining and repairing things like this vs. cycling through new constantly, we help our pocketbook and the environment with less waste. We also help save money that can be used to increase your savings rate.
- Earn more money with bank and credit card bonuses. I recently earned $700 for 10 minutes worth of work a few weeks ago. How did I do this? I opened a bank account online and transferred some money from my current bank to this bank for a 90-day period. Account opening bonuses at banks and with credit cards can be lucrative if you play the cards right. Every year, I try to take advantage of at least a few of these things, but I ultimately stay with my tried and true online bank I’ve been with for years.
Start working to increase your savings rate
Maybe you won’t hit 50% savings, but there are definitely some things you can do to move the needle on your savings rate in the right direction, shaving off years until retirement (or maybe you have a different goal). Again, savings rate is one of your biggest levers to pull to achieve financial independence. No need to skimp on the things that bring you joy. My family takes at least one nice vacation every year, building memories with experiences vs. all of the “things.” I’m confident you can build a strong rate of savings to set you further down your path to financial independence.
Happy saving!