Calculate Your Savings Rate
Your savings rate is one of the most important numbers in your road to financial independence.
It’s a great picture of how early you can retire. The more you save, the bigger your nest egg, but you also spend less, which means you can retire on less.
Based on the conventional 4% withdrawal rate (we’ll get into that in the next step) to spend an extra $10,000 per year in retirement you have to have an additional $250,000 in assets. But taken the other way, if you cut $10,000 in expenses you need $250,000 less to retire!
How to Calculate Your Savings Rate
Add up what actually goes into your bank account from your job in a month. Then add your employer 401(k) (or RRSP) matching because it’s still money you receive, just pre-tax. This is your “pay.”
Savings rate = (pay - spending)/pay x 100 to get a percentage.
It should be at least 10%, ideally over 15% and if you want to retire extremely early you have to get it above 50%.
Say Susan receives $3,500 per month, her employer match is $300 and she spends $3,200 per month.
Pay = $3,500 + $300 = $3,800 per month.
Susan’s savings = $3,800 - $3,200 = $600 per month
Susan’s savings rate = $600 / $3,800 x 100 = 15.7%
Save More Tomorrow Pledge
A great way to save more is to take the save more tomorrow pledge. You promise that every single time you get a future raise a portion of that raise will be automatically set up to go into savings. If you get a 2% raise, 1% goes into savings and the other 1% heads to your bank account. Check with your employer, some have automatic ways to set this up.