How I achieve a +80% Savings Rate and is it the Key to Financial Independence?
Updated content: 09/01/2019
- Added my target net worth
- Improved writing
In an earlier post, I showed how I calculate my savings rate and how you can find out your own.
I explained the savings rate and used myself as an example for September.
In this post, I’m going into more detail on how I got such a high ratio for September and the two months before.
To reach a savings rate as high as 85.69% for the month, I had two things to keep me ahead of the game:
- Postpone/spread out expenses
- A job that offers ample career opportunities
While I say two, only point 1 is something you can repeat and be consistent in. We not only decide our career path by our future paycheck, but we also choose it by how we go through life and how we enjoy spending our (free) time. You can’t keep doing a shitty job with a good pay. you’ll only become more exhausted over time and looking the worse for wear.
You can immediately skip to my personal projections if you don’t really care about how I’m achieving such a high SR.
Postpone expenses
It’s a simple idea: I postpone certain expenses to buy them cheaper later.
I do my best not to buy something on impulse I will regret afterward. Instead, I wait longer and ponder long and hard about whether I really need to have it or if it’s something I want to have.
Most of the time I can wait to buy luxury goods such as:
- Video games
- A new computer
- A nice dress shirt or pants
- …
To clarify my statement, let’s take a new computer for instance:
My current one is +6 years and certain things are going slower, especially given I use a 4K screen that requires more GPU power to play video games.
Because of this, I have played with the idea to purchase a new PC from scratch. This would make playing newer games on their highest settings possible. However, I rarely play video games anymore and newer hardware would bring me limited merit.
On top of that, I realize that RAM, CPU, and GPU are more expensive in 2018 than in 2016/2017. If I were to buy a computer now, I would pay a premium for these components.
Why buy now what I don’t really need, i.e., a new computer, when I can wait for a tad longer and get it at a discount later?
It easier waiting to buy electronics because it depreciates fast. For other items, it seems less obvious how you can save by waiting.
Clothes for example. A quality white dress shirt is always useful. Shops know this so the price of a white shirt almost never dips lower.
How can I save then? I wait for our two yearly sales periods in Belgium.
I just buy my fancy white dress shirt during those sales. Every shirt gets some sort of discount then anyway.
If you break the postponing of expenses down to its most basic principle, you get a comparison between something you want to have vs something you need to have.
Want vs. Need
The difference between a want and a need is simple on the surface:
- Need: An object you have to have
- Want: An object you would like to have
That is until you come across that nice new T-shirt or delicious Ben&Jerry’s Chocolate Chip Cookie Dough.
In reality, you only need four things to survive:
- A roof over your head
- Food and water to maintain your health
- Basic hygiene and health care products
- Clothing (the minimum to remain comfortable and appropriately dressed)
What goes further, is a want: a bigger house, ice cream, branded (T-)shirts, etc.
Just remember: Take your time to reflect on what you plan to get. You will find that you don’t always need the latest T-shirt or another cup of your favorite ice cream.
Monitor, adjust, repeat
I apply this basic idea of wants vs. needs day in day out.
Whether I’m planning to get something for my race bike, or it’s a new dress shirt, I take a few moments, sometimes not more than 5 min., to consider the alternative to buying: not buying. Waiting.
By doing this for simple (clothing) and more important decisions such as buying a house I improve my SR by leaps and bounds.
Do I sometimes say: “screw it!” and just go out and get what I want? Of course! There is nothing wrong with a splurge. We have to enjoy life after all.
I get enjoyment out of seeing a fun movie at the theater every other weekend and what is going to the cinema without some snacks, right?
I go to the movies to have a good time, not worry about money. At that moment I don’t care I don’t need that Snickers or bag of “Colaakes“. I get them because for me those unhealthy snacks are part of the entertainment.
Get a job with enough career opportunities
I already mentioned that the first one is much easier applied than this one. The kind of jobs that meet the requirement of ample career opportunities are likely to be in STEM (Science, Technology, Engineering, and Math). This is not everyone’s cup of tea though.
I work in IT and due to a high demand and low supply of IT graduates, there are a multitude of opportunities available to me.
Even at my current employer, I can get enough new challenges to enjoy my job.
STEM
A career in a STEM field is an obvious choice, but also one that is difficult to change, depending on your personal situation.
It might be impossible for you to change jobs (or function) because of various reasons. Your degree is in a field that just doesn’t offer many chances to improve yourself financially.
Maybe you do have a solid degree with ample chances but you enjoy what you do and do see any reason to change besides financially.
Enjoy what you do and make sure you get a decent financial reward for it that helps you achieve your goals.
Putting one and two together
In the end, it’s simple: by having point two and keeping point one in mind every month I’m able to reach a high savings rate.
I don’t always stick to the first point but I try. I don’t lose sight of my end goal: reaching FIRE and with that in mind I keep trying.
Looking ahead: will a lowered SR still get me to FIRE fast?
While these points have a big impact on a high SR, there is something that helps even more: the possibility to live with my parents at no costs.
I don’t have to worry about a rent or mortgage that I need to pay every month nor do I have to hand over anything at home.
Will this situation change in the future? That’s very probable. I don’t foresee to move out any time soon but the future cannot be predicted.
Knowing that things might change, I calculate my estimated FIRE age based on a somewhat arbitrary SR. This rate is calculated based on my current income and expenses but I include a rent/mortgage of about 700 EUR.
Some quick assumptions based on current income and expenses plus rent/mortgage:
- September income of ~2600 EUR net income/month x 12 = 31,200 EUR annual net income. In practice it’s actually more like 13.95 due to some extra-legal benefits I get but it’s more complex due to my cafeteria plan, so I keep it simple using times 12.
- September expenses + guestimated rent/mortgage for a total of ~1092 EUR expenses/month x 12 = 13,104 EUR annual net expenses.
- Gives an SR of 58%
Going from high 85.69% to a more “normal”, though still very good, 58% is a big change.
It seems a bit more realistic albeit more on the pessimistic side given I assume my income will never change.
Using the above numbers I can quickly get a nice overview of my possible FIRE age using the simple online tool of networthify.com.
If I fill in the numbers and assume an annual Return On Investment (ROI) of 6% with the golden rule of 4% withdrawal rate (see inset), I can find my time till early retirement.
This will vary due to the taxes in Belgium (or whichever country I will reside in) at the time of my FIRE. The problem is, that it’s very difficult to foresee what kind of taxes will exists and at which level in x years from now, so I keep it at an average 4%.
This gives me an estimation of 12.6 years till FIRE. This means that I should be able to realistically retire early at age 40 with a net worth of about € 345,000. I’d give myself some extra buffer and say a net worth of € 400,000 is my aim.
Things like an increase in income and an improved ROI are not taken into account so it’s possible it’s earlier.
I would thus put my realistic FIRE age somewhere between 35 and 40.
With my savings rate cleared and my methods clarified, I’m all set to make it happen in the next 8 – 12 years.
Will there be setbacks or unforeseen expenses? Most likely. I hope that I’m still writing so that you can follow it from the front row.
A penny for your thoughts?
Do you agree with how I view things or am I seeing things too simple and is there another reason why I am in the 80 percent Savings Rate?
Please leave a comment and let’s start a discussion.
Interesting calculation, but you have forgotten inflation and capital gain/dividend taxes…how does it turn out with 2% inflation and say 25% CG taxation?
Hey Massimiliano,
Belgium doesn’t have a capital gains tax, at least not in the strict sense of the term. And 6% is incl. inflation as long-term data from John C. Bogle’s book shows that the average is more towards 8% return per year. Greetings.
Hi FTF –
interesting read and some good tools you have cobbled together here, I like it. just wondering how you actually see the retirement piece panning out on the back of let’s say the 400k of net worth early 40’s. you feel that’s enough to get rest of lifespan adequately funded let’s say up to 80? or you throw some sort of income in the mix between 40-65 (after which you’ll get some small pension from our lovely government)
Hey Seb,
Thanks for your comment. The aim is ~650K by 40 – 45. So if it’s 400K by my 40’s I’ll already be pretty happy. The idea of FIRE for me is that I can say ‘bye’ to any job in the future because I have enough to not worry about an income.
It’s possible that by my 40’s I’ve found something that I not only immensely enjoy but also get paid for. I will keep working if that is the case. And even if I don’t find something like that, I do intend to keep myself busy that provides an income. It’s just that I might first take a year or so to just travel or do volunteering without caring about the money.
I don’t take the government pension into account as I assume it’ll be either too small, non-existing or I don’t have a right to it because of ‘reasons’.
Greetings