Savings Rate

Your Savings Rate is a number that you can use to determine/improve your saving and spending habits. The recommended formula to calculate savings rate is: 

Savings / Net Income = Savings Rate x 100%.

If you are spending money on things but getting equity out of it, this can be contributed to your savings rate as well. This could include things like the principle of your mortgage payment, but should not include heavily depreciating assets like a car.

piggy bank, money, finance

Decreasing your spending is one of the most important parts of Financial Independence. This is because it is not easy for most people to simply increase their income and also because for every 1 dollar you save, you would have to earn roughly 1.4. The reason for this is taxes – spent dollars are after tax, earned are before. So how do you decrease your spending? There are two main options: become more frugal and purchase less luxuries, or maximize efficiency where you can. The extent to which these strategies are utilized depends on the individual.

How do you become more frugal? The starting point for saving money is to analyze everything that you spend money on. After you have completed this analysis, there should be evident areas where cutting is possible. This will be different for each person depending on what they prioritize in life, but popular areas of overspending are: eating out, vacations and expensive items like cars and boats. Only you can decide what is not worth buying, but it is definitely worth it to do the activity, you might find you spend much more in certain areas than you realized!

Now for maximizing efficiency. Maximizing efficiency is where you try to get the same things you have already been paying for, but for cheaper. Recurring bills are where you are going to save the most money. Things like: insurance, cell phones, internet, TV, mortgages. How do you get the same thing for cheaper? Everything is negotiable, especially in the examples just mentioned. Look for deals for internet and TV. If you can bundle them to save money, do that. When you are buying insurance, shop around for the best rates. Same goes with mortgages – if you can shave a little bit off the interest rate you can save a ton in the long run. With my TV/internet bundle alone I save over $1000 a year because I was going to switch companies if they didn’t reduce the rates. These companies make the most money off the customers who sign up and pay whatever they ask without watching. Great, now you’ve maximized efficiency, what now? Keep maximizing efficiency. Especially for the examples previously mentioned, you have to stay on top of them. Every year or two (especially with phone/TV/internet that give you a discount contract for a year or two and then jack up the rate) shop around and ensure you aren’t over paying. This is the best way to decrease spending without even affecting your lifestyle.

There are many ways to increase income, the main 4 are: increasing your wage, working extra hours, starting a side job, and/or increasing investment efficiency. The correct choice depends on the individual. Let’s go into more depth.

Increasing your wage sounds obvious, but it is not always straight forward. Check if there is extra education you can complete or more responsibilities you can take on to increase your wage. Beyond this, patience or a job change are other options. If you are nowhere near where you want to be monetarily, a career change could also be required. 

Because wage increases are not that easy and often out of your hands, working extra hours or starting a side job are other viable options. Working extra hours is self-explanatory, work more hours and get paid more. This option is often restricted as well, with many companies refusing to pay overtime. 

Starting a side job is something everyone can do. If you are looking for a quick pay-off and need money quick, getting a second job might be the best option, but is not sustainable long term if you value a good work/life balance. If you have a special hobby, you could try to monetize that, or try starting a business you think there is a market for, preferably one with low startup costs. There are lots of options available, service jobs are common because the start-up costs are usually quite low. Examples could be: mechanic work (even focused on one job like brake changes), cleaning, painting, photography. There are lots of options available.

Finally, if you have investments, you can increase your income by maximizing your investment efficiency. I am not talking about choosing the high performing investment, if you could predict that you likely wouldn’t need any other advice. I’m talking about getting more out of the investments you already have. This involves using registered savings accounts whenever possible and picking the proper investment when you have many similar options to choose from. Example: when choosing a HISA, if you shop around instead of just buying what your bank has, there is a good chance you could increase your returns by over 1%+ per year. Or, if you have mutual funds purchased from a bank, look to see if there is an ETF with very similar holdings. Choosing an ETF over a banks mutual fund could save you over 2% in fees per year and you still get a very similar product.