A 3-Step Process to Saving 40 Percent of Your Income

What Do We Mean by “Long-Term Savings Rate,” and How Can You Calculate Your Savings Rate?

  • Employer-sponsored retirement accounts, like 401(k)s or 403(b)s — and yes, you can include your employer contribution in your total annual amount saved
  • Personal retirement accounts, like traditional, Roth, SEP, or SIMPLE IRAs
  • Taxable investment accounts (or brokerages)
  • HSAs — as long as you invest the cash and leave that money invested for the long-term; this doesn’t count if you use the money in the short-term instead!
  • You save $10,000 annually to your 401(k)
  • You put $1,000 into your HSA every year
  • You max out your Roth IRA at $6,000

Why Saving 40 Percent of Income Can Set You Up for Financial Success

  • Financial freedom (or, as we prefer to think of it, financial power)
  • Early retirement
  • Lots of choice and flexiblity in your lifestyle spending
  • Multiple major priorities that you don’t want to choose between (you want them all!), or a combination of big goals that all require a lot of funding to achieve

The Argument Against Saving More Than Your “Enough”

A 3-Step Process for Saving 40 Percent of Income

  • If you contribute $25,000 total to long-term investments per year and earn an annual gross salary of $75,000, your current savings rate is about 33%.
  • If you contribute $25,000 to investments and earn $150,000, your current savings rate is roughly 17%.
  • If you contribute $50,000 to investments and earn $150,000, your savings rate is 33%.
  • If you contribute $50,000 to investment accounts and earn $250,000 per year, that gives you a savings rate of 20%.
  • If you contribute $75,000 to investment accounts and earn $200,000 per year, that gives you a savings rate of 37.5%.
  • If you contribute $75,000 to investment accounts and earn $400,000 per year, your savings rate is just under 19%.

Step 1: Set Your Savings Rate Target

Step 2: Design Your Savings System

  • Avoid decision fatigue
  • Limit human error (which can be as simple as just forgetting to make your regular monthly contribution)
  • Cut down on distraction and temptation… because money that just hangs around in a bank account is money begging to be used for better or for worse!
  • Automated monthly contributions to investment vehicles
  • Periodic lump-sum contributions as big cash inflows occur throughout the year
  • Contributing the maximum amount to their employer-sponsored retirement plan (usually a 401(k), so $19,500 per year as of 2021)
  • Contributing a set amount to vehicles like IRAs, HSAs, or ESPPs
  • Evaluating cash inflows from bonuses, commissions, etc as they occur, and immediately setting aisde a certain portion of that money to go toward investments and hitting the annual savings rate goal (and then being able to spend or use the rest however they’d like)

Step 3: Focus on What You Can Control with Your Cash Flow

  • Get very clear on what actually matters to you. This is a process! It’s okay if it takes some time to gain clarity, and it’s also okay (and even expected) if your priorities and goals change over time.
  • Be confident in what you say yes to, and what you say no to — and you will have to say no. You will have to turn down things you want to do in the moment to prioritize what is most important to you over the long term.
  • Pay attention to the little stuff… but know you have to get the big stuff right even it only comes up every once in a while. Don’t overspend on things like your housing, cars, or let lifestyle creep get out of control over time.
  • How excited do you feel about this purchase, or this particular use of your money?
  • Are you going to feel like you missed out if you don’t have this experience or go to this event?
  • Is this truly something you feel good about spending money on? Or does it make you feel uncertain, maybe even bad?
  • Does this align with what you say is most important to you?

Saving Big Percentages of Your Income Is Never Easy — But It’s Possible If You Want to Pursue It

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Eric Roberge

Eric Roberge

#FinancialPlanner helping 30 & 40-somethings build #wealth & think differently about #money • Top #FinancialAdvisor in #Boston • www.BeyondYourHammock.com