When we began this Financial Independence journey back in May of 2017 – our savings rate was abysmal. It was so abysmal that I really had no idea what a “savings rate” was.
I first heard the term years ago when I stumbled across my very first Financial Independence blog trying to find a way to quit my job and live a “laptop lifestyle.” On one site in particular it was discussing people who were saving 40% and 50% of their incomes. Which, frankly, I thought was insane. But at that time, I wasn’t looking at increasing our savings rate so it didn’t register what it meant. I dismissed it as something unattainable for us. I was still stuck in the Dave Ramsey train of thought that I couldn’t save because I still had debt. It is one area where I have come to disagree with Dave. There are certain circumstances, late savers and extremely high debt balances – like ours, that I now believe it is OK to do both. If we didn’t make this adjustment in thinking we would be in our fifties before we could start saving and early retirement would not be an option. Now we can pay off our debt AND take advantage of pre-tax savings AND benefit from compound interest while doing it.
In March of last year I found the FIRE community (Financial Independence/Retire Early) community and I went down a rabbit hole, never to return. It triggered a change in my thinking. If these people could save that much on ordinary incomes, certainly, my husband and I could find a way to do it to on our incomes. And if we could figure this savings thing out – we could possible retire early and have the dream life we wanted. Now that was motivating!
First, I had to figure out how to calculate our savings rate. The calculator that several people in the Financial Independence community kept referring others to was put together by Big Ern….I had no idea who a “Big Ern” was. Originally, I thought he was just some big guy named Ern.
Well, I was totally wrong about that and it actually stood for a blog, EarlyRetirementNow. (You can find the calculator using the link below.) Clever, right? Using the calculator, I found that we were at an 8% savings rate and that was only because my husband works in public schools and the state mandates it. With our newfound excitement to retire early, we made a goal to get to 20% savings rate. We were still in a ton of debt and we felt that after we reduced a big chunk of our discretionary expenses 20% was GREAT and it would still give us enough income to pay down our debt with a fury.
Fast forward to today. We are ten months in. We have increased our net worth by $86,000.00. Paid off a bunch of stuff! And have increased the contributions in our retirement accounts. Initially, we were a bit worried that we were being too aggressive and that once we put in the amounts we decided upon, that there would not be enough left over to pay all of our bills and still pay extra on our debt. We were wrong. As it turns out, when you decrease the amount of your taxable income, you pay less in taxes. And so, our paychecks were not decreased dollar for dollar. There was still enough left in our net paychecks to go around.
If you would like to increase your savings rate, I suggest you follow the steps below:
- First determine your current rate of savings using the calculator listed below. (There are other calculators out there – you can use any one you choose.)
- Then look at your overall spending. If needed, track your last three months of expenses to see where you can make DRASTIC cuts. I have several suggestions. Reducing your expenses will free up income you can then put into retirement.
- Then set a goal of how much you want to save. What is your overall goal for your savings?
- Do you want to retire early?
- Do you want to want to have extra in your retirement account to pad what your current retirement and /or social security is expected to provide?
- Do you have a large purchase you are trying to save up for?
- Remember when putting savings into a retirement account you cannot draw upon these funds without a penalty before 59 ½ (unless you are doing a ROTH IRA), so make sure you are setting up accounts that are appropriate for your goals. Not sure what investment accounts to use, I have found this post very helpful.
- Do you simply want options for your future?
- Perhaps you have always wanted to work in a particular field that does not pay as much as you need. Would reaching Financial Independence alleviate your concerns about doing so?
- Once you have your goal in mind, then figure out what vehicle to place the funds in.
- Does your employer offer a 401K and you simply need to fill out paperwork to have the funds deducted from your paycheck?
- Do you need to open up a retirement account from an investment provider?
- As a self-employed individual, I decided to open an individual 401k via Vanguard. If you want to know why we opted for Vanguard and Index Funds, then I would hop on over jlcollinsnh.com and work your way through his stock series. Or buy his book Simple Path to Wealth on Amazon. Game changer for us.
- Maybe an IRA (Individual Retirement Account) is right for you.
- If all of the above just totally freaks you out, then start small.
- Start with just $100.00 a month. Surely, you can find $100.00 that you have wasted in a month? (And remember, when doing it via a pre-tax retirement account, it is not a dollar for dollar reduction.) Then, keep increasing that amount by $100.00 , or whatever amount you feel comfortable, until you get to an amount that will get you to your goals.
My husband and I have been diligently saving since the late last year. I cannot begin to describe the satisfaction it has brought to see our balances increase every single month. After consulting with our tax professional, we followed each of the above steps and opened an individual 401k for me, since I am self-employed, through Vanguard. (These vehicles are AWESOME because they have higher limits for what you can contribute each year.) We chose Vanguard because their fees are typically much lower than the traditional brokerage firms and lower fees mean we get to keep more of our money. Second, we contacted my husband’s employer and filled out paperwork to max out my husband’s 403(b) and his 457 plan. (These are both vehicles to save for retirement, similar to a 401(k), typically for non-profits and public service entities.) Both of these processes are pretty much automatic, which makes it extremely simple for us to save.
After following these steps and comparing our contributions from when we started to present, we are now saving 38% of our income! We blew our 20% goal out of the water! That’s a 30% increase in less than a year. Crazy-ridiculous, right?
We will likely remain here for a while. Our next focus, now that we are saving at a phenomenal rate, is to continue attacking our debt.
Our student loan balances are a heavy burden and I would like to pay them off before we reach Financial Independence, which if we continue at this rate, should be in about eight years – at age 55.
Doesn’t that sound amazing!
Love and Prosperity,
*** Nothing in this article is to be construed as financial advice. I am not a financial planner, nor do I pretend to be. You should always consult your own professional when seeking advice.
Links to Articles of Interest:
How we Increased Our Net-Worth by $86,000.00
Six Ways to Save $1200.00 this Month
2017 A Year In Review
What Type of Retirement Account Should You Choose