There are many metrics in finance that pundits tout as being important. The most important metric to secure your financial independence is your savings rate. This is because it is the leading metric in growing your wealth. So, what is your savings rate anyway? Your savings rate is the amount of currency you saving as a percentage of you’re overall (gross) income.
Total savings/Gross income = Savings rate.
Why is your savings rate the most important metric for your financial independence? Your savings rate is one of the best predictors of financial Independence and it increases your chances of success and more opportunities for your currency to grow.
What are some ways to increase your savings rate?
Cut expenses: Be intentional about your spending every month. There are 4 major types of expenses:
- Necessities – These are the things you need to survive.
- Wants – Conveniences that improve your standard of living.
- Destructive – Wasteful. A financial cost that could have been avoided.
- Luxury – Expenses that are for the purpose of increasing status.
Necessities should be considered carefully before purchasing as they typically have the largest impact on your life. For instance, the food you eat on a daily basis will have a profound impact on your health. Where you live has an impact on your social circles, the people you associate with, and ultimately your mindset. So choose, wisely.
Wants are expenses that are not needed but improve quality of life. For instance, you may need a way to get to work. You could buy an expensive SUV to get to work or you could have chosen to walk or ride your bike instead. The financial impact of your choice for this expense can have drastic implications for your financial future. The decision to walk to work is only possible if you live close enough to your work to make this a feasible option. A subscription to Amazon or Netflix is not a necessity however it increases the convenience and ease at which you can order products or watch entertainment.
Destructive expenses are a detriment to your financial future. These include taxes paid in excess of what was necessary by law. Subscriptions to services you don’t use and example might be a gym membership. Other examples of destructive expenses you be finance charges, late fees, tickets, or fines.
Luxury expenses are goods that are not necessarily of high quality but are expensive and can be used to project status or importance.
Strategic planning and budgeting: Proper planning can do wonders for your saving rate; however, avoid cutting your expenses so severely that you don’t enjoy your life along the way. One suggestion is to pick a few conveniences and one type of luxury to “increase” so that you enjoy life along the way toward your goal of financial independence. One example of a luxury good are name-brand shoes.
Increase income: This is the most important way to improve your savings rate and for most of us this is also the most difficult. Instead of cutting back on your expenses severely, focus on increasing your income. You can only cut spending so much before life becomes difficult. There is no limit to how much you can increase your income. Increasing your income can be done in a number of ways, You could negotiate a salary increase or raise. You could learn new skills that will allow you to bring more value to others and eventually start a side hustle. You could buy assets such as rental property, dividend-paying stocks, or crypto assets. Be careful not to increase your expenses as you begin to increase your income. If you don’t have a plan for your income it will most likely get spent on unintended expenses or liabilities.
Automate Savings: This is probably the easiest and often overlooked. Pay yourself first by setting up an automated deposit to a separate savings account. This will help you to create a wealth account that can be used to buy assets in the future.
Curious how long it will take you to reach Financial Independence or what your saving rate is? Use this calculator to find out now.
Disclaimer: I am not a registered investment, legal, tax, or financial advisor. All investment /financial opinions expressed in this post are from the personal research and experience of the owner of this account and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with or independently research and verify the information that you find in this post to rely upon, whether for the purpose of making investment decisions or otherwise.
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