- 1.Budgeting my way towards Financial Independence
- 2.The most important ratio in FIRE: Savings Rate
- 3.How I achieve a plus 80% Savings Rate and is it the key to FI?
- 4.The cafeteria plan: improving wants and needs as well as take-home salary through self-chosen benefits
Savings Rate (SR), probably one if not the most important concept you must understand when you try to reach Financial Independence and Retire Early or are wondering where to start your financial independence journey.
Maybe you are a FIRE-veteran and a reminder is all you need, or maybe this is your first time reading about this weird beast called “Savings Rate” and you stumbled upon my blog while Googling it.
Either way, a summary is always welcome, no?
Instead what I am going to do is, provide a Belgian view on it.
If you read some of the American blogs like the ones mentioned earlier, you will notice a clear difference in taxation between the USA and Belgium or even Europe In general.
As such, some of the things explained on the aforementioned blogs might not align with how we see or do things in Europe.
How to calculate your monthly Savings Rate (SR)
In essence, the calculation of my (monthly) SR boils down to the following:
SR = ((Total Income - All Expenses) / Total Income) * 100
There really are only two variables to this equation: Total Income and All Expenses. This gives me two questions to answer:
- What is my total income?
- What are my monthly expenses?
I will do just that in the following paragraphs.
Taxation has a big impact on total income
To answer the first question, when it comes to American income, I like the breakdown of EarlyRetirementNow. Although not applicable to me, he does have a good post and gives a nice six category overview of his annual compensation.
If you take a quick look at the image on the side, you can understand why I can’t just take his explanation at face-value.
Here in Belgium we just don’t have things like 401K, HSA, Roth, IRA etc.
We do have an extensive social security system (Dutch: RSZ, Rijksdienst voor Sociale Zekerheid; English: NSSO, National Social Security Office) that funds things like:
- Health Care
- Unemployment insurance
- Child support
This gets deducted from my gross salary immediately so I never receive this gross amount. As such, I don’t have to think about different categories.
My take-home income, which also contains certain monetary fringe benefits, is my total income and thus the denominator in our SR equation.
My monthly expenses
With the total income part of the equation solved, the only other one left is the monthly expenses. It’s rather obvious that this is different for everyone and can vary month to month.
Some live with their parents, others have a significant other and maybe even a child. These different lifestyles bring different expenses with them.
There is one thing that connects them when it comes to FIRE and I believe the FAQ of the FI subreddit says it best:
If you can realize contentment with significantly lower expenses, your ability to reach financial independence is greatly improved.”
That is a crucial part of FIRE. Being content. Having the possibility to do what you want without a financial worry, within reason.
When thinking about expenses you have to keep that in mind. The goal is not only to become Financial Independent but also Retire Early so that you are not bound by a strict or long work day.
Thus, when it comes to expenses, you have to look under which conditions you want to achieve FIRE.
My expenses today are definitely not the ones of my future self. There is really one main reason for this: I still live with my parents.
Thanks to my current arrangement I’m able to keep my expenses to a minimum and be content with how I live my life.
Let’s take September 2018 as an example:
|1||Food (groceries, snacks, restaurants)||242.52|
|2||Online business (this site)||43.86|
|3||(Additional coverage) health insurance||3|
|4||Transportation (public transport, fuel for a shared car)||34.76|
|5||Luxury (anything not required to get around on a daily basis, i.e., cinema, earphones, subscriptions, etc.)||49.56|
It’s evident the above expense total of September is not achievable when I rent/buy a place of my own.
I realize that, so I take that into account when I think about my FIRE age.
This doesn’t impact my current SR but it does determine when I’m willing to consider myself FIRE’d.
Putting all together: my most recent savings rate (September 2018)
With the two most important elements of the SR equation cleared. It’s time to put it together. I’ll take myself as an example using my most recent month.
I’m a single 28 y/o with a gross salary in September of 4,284.62 EUR. This can be considered above average, and even above the mean.
Thanks to the wonderful, excruciating tax pressure that exists in Belgium, a whopping 40.5% for a single, my 28-self is left with 2598.34 EUR in disposable income. Note, the actual net can vary slightly month to month.
At the moment I don’t have anything that resembles a tax-free side-hustle. I do help others from time to time and get something small in return. In September, this resulted in an additional income of 14.06 EUR.
With my earlier disclosed expenses of 373.70 EUR my SR for September 2018 is:
SR = ((2612.40 - 373.70) / 2612.40) * 100 = 85.69%
That’s it. 85.69% SR for September 2018.
For completeness, I’ll share the savings rates of the other two months of last quarter (so July and August):
|Month||Total net Income (EUR)||Total Expenses (EUR)||Savings Rate (%)|
What is your Personal Savings Rate?
Now that you know how it’s calculated you can find out your own. Please fill in the poll and share your exact result in the comment section below.
Is the number you come up with confrontational? How do you feel about this number?