{"id":25,"date":"2020-12-16T12:00:00","date_gmt":"2020-12-16T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/a-new-way-to-think-about-your-save-rate\/"},"modified":"2025-09-03T20:25:13","modified_gmt":"2025-09-03T20:25:13","slug":"a-new-way-to-think-about-your-save-rate","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/a-new-way-to-think-about-your-save-rate\/","title":{"rendered":"A New Way to Think About Your \u201cSave Rate\u201d"},"content":{"rendered":"

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\n

As we all know, I\u2019m a reformed Math Critic. After having my self-esteem utterly wrecked in freshman year Honors Calculus I (I still don\u2019t know what a derivative is), it took a few years to build my confidence back up. Thankfully, personal finance math is mostly just addition, subtraction, multiplication, and division, and I can handle that.<\/p>\n

One of my favorite things to do on this site is use math to help us think about things differently. And when it comes to things like your \u201csave rate,\u201d math can be very<\/em> helpful. <\/p>\n

Before you dive into this one, if you\u2019re unfamiliar with the concept of financial independence and the math that backs it (basically, that you can retire when you save 25x your annual expenses), <\/em>check out this article first<\/em><\/a>. It\u2019ll provide a solid foundation on which to build.<\/em><\/p>\n

Your save rate is the percentage of your income that you\u2019re saving every month. For example, if you make $3,000 per month and save $500, your save rate is 16%. You\u2019re saving 16% of your income.<\/p>\n

Conventional wisdom in America (and I\u2019m not sure where this came from) is that you should save 10% of your income. That doesn\u2019t sound too bad, right?<\/p>\n

But if you know that you need to have at least 25x your annual expenses<\/strong> (in other words, 25x the amount of money you spend in a year) invested in order to retire, that means \u2013 if you\u2019re only saving 10% every year \u2013 it\u2019ll take you 9 years of work<\/strong> to save up 1 year of expenses<\/strong>. <\/p>\n

Now the math gets fun: If it takes you 9 years to save 1 year of expenses with your \u201crecommended\u201d 10% save rate, then imagine how long you\u2019ll have to save in order to get 25 years of your expenses.<\/p>\n

And that, my friends, is why your save rate is a crucial component of personal finance. No matter how much money you make, your save rate will be able to tell you how close you are to retiring. (Again, to retire, you need at least 25x your annual expenses in an investment account.)<\/p>\n

Let\u2019s extend the example and see what happens when we increase our save rate:<\/p>\n

Remember our $3,000 example? Let\u2019s say your save rate was 25% instead (saving $750 per month instead of $500). Now, it only takes 3 years <\/strong>to save 1 year of expenses, instead of 9. You\u2019ve just trimmed 6 years off your saving timeline by merely saving $250 more per month. <\/p>\n

And what if your save rate is 50%? Well, that\u2019s an easy one: If you spend $1,500 and invest $1,500, now it takes you 1 year<\/strong> to save 1 year<\/strong>.<\/p>\n

Why this works<\/h4>\n

The first time I heard about this (reformed Math Critic, remember?), I was like, But wait, someone who makes $100,000 per year and saves half their income is going to be saving WAY more than someone who makes $45,000 per year and saves half their income \u2013 how could this \u201crate\u201d thing be right?<\/em><\/p>\n

Do you see why I struggled with calculus? <\/p>\n

It works because it\u2019s all proportional \u2013 if you\u2019re saving half of $100,000, that means you\u2019re SPENDING half of $100,000, too. Save $50,000, spend $50,000. If you\u2019re spending $50,000 per year, that means you need 25x $50,000 to retire ($1.25M). Someone who makes $45,000 and only spends half of it ($22,500) only needs 25x $22,500 to retire ($562,500). It\u2019s all proportional.<\/p>\n

Now, the subtext here is obvious: While you might be able to save aggressively now on your $45,000\/year income, you probably don\u2019t want to be restricted to $22,500\/year budget for the rest of your life \u2013 and that\u2019s why this exercise isn\u2019t perfect. Side hustle income in early retirement will help, and so will the fact that your money is compounding in your investment accounts. <\/p>\n

The key thing to take away is that your save rate can tell you how many years of your life you have to work in order to buy one year of freedom. <\/strong>A 10% save rate doesn\u2019t sound that bad until you realize it means you have to work for 9 years to buy a single year of your life back.<\/p>\n

And what happens if you can get your income high and keep your expenses low?<\/p>\n

Let\u2019s say you make $100,000 and you save $75,000 of it (meaning you spend $25,000 per year).<\/p>\n

Now, your save rate is 75% \u2013 which means it only takes four months of work to save 1 year of your life. You work for 1 year<\/strong> to buy 3 years of freedom<\/strong>. Now that\u2019s a pretty good deal!<\/p>\n

Will there be sacrifices? Yes. Obviously. But you\u2019re saying \u201cno\u201d now so you can say \u201chell yes\u201d in early retirement \u2013 if your save rate is 75%, that means you could effectively hit early retirement in a little under 9 years \u2013 the same 9 years that your colleague will have spent buying back 1 measly year of freedom.<\/p>\n

How do you decide what to cut?<\/h4>\n

While the \u201cearn\u201d side of the equation is arguably more valuable (because you can only cut back so much), a lot of times the first thing we can affect is how much we\u2019re spending. <\/p>\n

When you\u2019re deciding what to cut and what to keep in your habitual spending, you can use an easy equation to figure out how much you\u2019ll have to invest now to support that habit forever.<\/strong><\/p>\n

Since your \u201cretirement number\u201d is 25x your annual expenses, an easy way to determine how much certain habits impact your number is to multiply the monthly cost by 12 (to get the annual cost) then by 25 to get the \u201cretirement cost.\u201d<\/p>\n

For example, if I get my nails done once per month and it costs $45, then annually, it costs $540.<\/p>\n

$540 * 25 = $13,500. <\/p>\n

This means you\u2019d need $13,500 more in your \u201cretirement number\u201d to support this habit in perpetuity (because $13,500 is the additional amount of money you\u2019ll need invested in order to \u201cuse\u201d $45\/mo. of the interest on your manicures).<\/p>\n

The decision is up to you, and how much you value manicures. I don\u2019t think $13,500 sounds that bad in order to sustain a manicure habit until I die, but I also don\u2019t really care about manicures, so I wouldn\u2019t go for it.<\/p>\n

Fancy coffee, however, is another story \u2013 I love buying a $5 coffee on Mondays and Fridays to bookend my week. That\u2019s $10 per week, or $40 per month.<\/p>\n

I\u2019d need $12,000 invested in order to support my $40 monthly coffee habit for the rest of my life. And you know what? That feels like a pretty good deal to me, because I get a lot of joy and productivity out of those coffees. Bitch, it stays!<\/p>\n

These are small examples, but it gets more intense when you think about things like cars.<\/p>\n

If you have a nice car with a $400\/mo. car payment, that\u2019s $4,800 per year. $4,800 * 25 = $120,000.<\/p>\n

You\u2019d need an additional $120,000 invested in order to withdraw your $400 monthly car payment forever. Now things start to get a little dicey \u2013 it takes awhile to invest $120,000. For example, if you\u2019re making $50,000 per year and have a 50% save rate (a really good one!), you\u2019re saving $25,000\/year. It would take about 5 additional years of work to support this \u201cfancy car\u201d habit forever. When you\u2019re talking about the difference between retiring in 10 years and retiring in 5, you might start to think about that car a little differently. <\/p>\n

Ultimately, it comes down to the \u201ctrue\u201d cost<\/h4>\n

And I\u2019ve found that the more I learn about how my save rate impacts my future, the less I feel tempted to spend my money now. It gives a tangible alternate option: if I can either retire at 35 or 45 based on one recurring decision, my choice becomes pretty obvious.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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Thankfully, personal finance math is mostly just addition, subtraction, multiplication, and division, and I can […]<\/p>\n","protected":false},"author":178814,"featured_media":2441,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-everyday-spending-and-budgeting.php","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[45],"class_list":["post-25","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-spending-and-saving","tag-everyday-spending-and-budgeting"],"yoast_head":"\nA New Way to Think About Your \u201cSave Rate\u201d - Money with Katie<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/moneywithkatie.com\/a-new-way-to-think-about-your-save-rate\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"A New Way to Think About Your \u201cSave Rate\u201d - Money with Katie\" \/>\n<meta property=\"og:description\" content=\"As we all know, I\u2019m a reformed Math Critic. 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