Nothing Matters More Than Your Savings Rate

Nothing Matters More than your Savings rate. Now that I’ve been in deep on the journey to financial freedom, one learns quite a bit. From investing, making every dollar and hour count, to maximizing your investments to the highest level with tax efficient accounts.  Additionally, I’ve learned the utmost importance of having an extremely high savings rate.  One cannot do any of the items above if you spend all of your money!

A few years ago, we came out with striving to save 60% of your money and the immense benefits of doing so. We have also worked to reduce expenses, whether that’s battling the internet provider or paying off the auto loan.  Doing those things can greatly reduce your expenses, leaving the opportunity to achieve a higher savings rate.  I say opportunity, as one can easily spend that new unlocked cash flow on material items.

So why now am I writing about why nothing matters more than your ability to achieve a higher savings rate?  The topic actually falls in line with dividend investing allowing you to take back control of your time and life.  Having a high savings rate actually is the idea behind it all, allowing one to do something such as that.  What can having a high savings rate allow one to accomplish?

  • Taking a poll on how much you actually need to live on a monthly/annual basis
  • Allows one to discover that you don’t need to add stress to your life working for a company, if you can take less but have more time in return
  • Allows one to invest into many different opportunities, such as stocks, real estate, businesses etc..
  • May allow additional charitable contributions
  • Can help loved ones in a time of need with time, monetary potential and other means
  • Could allow more time to be spent on actually projects and side hustles that one enjoys
  • Allows more time to be spent with loved ones
  • Ultimately – CAN ALLOW ONE TO ACHIEVE FINANCIAL INDEPENDENCE!

There it is. That last one truly hits it. Being able to save more, allows you to be free or a better opportunity to be free.

How do you increase your savings rate?  What’s the actual mechanism behind this?  I will list out a few:

  • Reduce your expenses:
    • Housing costs
    • All forms of insurance
    • Auto and transportation costs (see ya auto loan!)
    • Eating out/food costs (hello Aldi and more enjoyable dining experiences)
    • Negotiate everything, every time
    • Taxes! (Part 1, Part 2, Part 3)
  • Increase your income:
    • Negotiate your salary at work
      • Interview elsewhere ; ) and have a free agency in a way
      • Ask for more benefits
    • Side Hustle your way to more income
    • Invest into dividend stocks
    • Rental income

Even doing a little bit of each one, goes a tremendously long way.  I want to provide examples, as the proof is always in the pudding, to show that this is for real!  I used to only bring in less than $1,000 in dividend income for the year, for example, around 4 years ago. Now, because I continued to save and invest those dollars, I am now well over a projected $9,000!  This was primarily due to saving as much as I could, in the right manner. How about having a side hustle?  Bert and I have added almost $150 from last month alone from side hustles and we may be breaking that amount here in the current month. Also, I am about to pay off my car, luckily and angrily, which is going to open up $284 a month going forward for additional savings. I then can use this unlocked cash flow for further items or this simply reduced the amount that I need every month in the way of expenses. This all allows one to be financially independent as early as possible.

The question now comes down to this.  What can you do to be decreasing your expenses or increasing your income?  Are you ready to do more or do things differently, in order to achieve better results?  There’s only one thing left to do and that’s the continued march onward to financial independence everyone!  Thank you for stopping by and feedback, comments and suggestions would be appreciated.

-Lanny

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29 thoughts on “Nothing Matters More Than Your Savings Rate

  1. Think you covered this really well. There’s a lot of things that can chip away your paycheque before you even know it. One big one among people I know, as you mentioned, is eating out, have a buddy who makes $150k a year and some months comes out with nothing. Has no kids, no mortgage, and in a rent-controlled unit from 10+ years ago. Craziness.

    • MrSLM –

      Man… what I could do with $150K is insane! I think that would cut down my years to independence by half almost, so crazy. As long as your friend is happy… right? I know it’s insane/hard to watch it happen, but keep doing you, as I say, and be concerned for your friend and obviously – help out/teach that person if they want some guidance. Appreciate the comment, as always.

      -Lanny

    • DGeek –

      Exactly, easy equation right? Make more, spend less if you can. Side hustles help out a ton in a “behind the scenes” kind of way, no doubt. Have to love knowing there’s other cash coming in!

      -Lanny

  2. All good reasons to continually strive for a higher savings rate. The more you save the more you can invest the more passive income you can earn over time. Cutting expenses is easier than increasing income. Something to consider.

  3. Fantastic post! A good savings rate is extremely important and opens up numerous great financial opportunities! I am happy to say that last month I did manage to save a little over half my monthly salary. My monthly expenses were fully covered under one paycheck. The other paycheck is cash in my bank account waiting to be deployed. Again, execellent post Lanny! 🙂

    • MDD –

      Thank you for the post. It all starts with your ability to not spend as much as you earn and can exponentially get better. Saving over half of your salary is.. AWESOME. Cash in the bank and growing for you, when you make more money, make sure that expense side doesn’t pop up as well for no value-adding reason!

      -Lanny

  4. I completely agree. Having a high savings rate is important. So is making sure that any new cash that gets unlocked is not wasted, but put to good use. It’s so easy to want to just spend new found money on buying depreciating assets, or on frivolous things. But, the sooner we can increase our savings and put money to work for us, the sooner we can get to the point where we no longer have to work for money. Good post Lanny.

    • DP –

      Appreciate the stop by. Once you get rid of a bill/debt, use it to add value – and that may be an investment (haha my preference at least), or it can be an experience you’ve been wanting to do and now can. Money opens up doors to this, freedom, time, ah, getting pumped talking about it. Time does amazing things, need to do as much as we can and it’s incredible watching the compounding effect happen! Cheers!

      -Lanny

  5. Hey Lanny,
    i couldn’t agree more. The savings rate is what makes the difference for me. First of all, the savings rate is one thing i can control (no excuses) and therefore i want it as high as possible. The last two years i managed to save between 40-60% of my income every month. Cutting costs at all corners got me there and having a decent amount to invest on a regurlar basis motivates me even more… My income is pretty reliable and i’m grateful for that.

    Cheers
    DividendSolutions

    • DS –

      Thank you for stopping by. That’s a solid range, no fricken doubt, much better than the average American at this point. We definitely need to be fortunate when the income is steady and predictable, but as long as you are happy doing what you’re doing to receive that income! Keep saving and investing!

      -Lanny

  6. Lanny,

    Nice post. The savings rate is key. Everything we do affects it, whether we lower bills, increase income, or just spend our money on junk! My savings rate will increase in October by getting a roommate and, for the most part, halving my housing and food expenses. I’m excited to recalculate it next month.

    Brian

    • SDM –

      Honestly, I hope everyone starts tracking their income/expense on a monthly basis after reading this, to understand where you are at with your savings rate. I’m pumped for your roommate, some utilities may go up – but hopefully they are paying for their fair share of that, as well. True method of using your house as an asset, no doubt!

      -Lanny

  7. Preach brother! It’s as simple as that. Widening the gap between income and expenses is the first tier of wealth creation. What you do with the proceeds is the next. I’m constantly looking for ways to trim off the excess “fat” out of the budget. We control our own destiny. Take care!

    • MDS –

      I’ll continue to preach if that’s what it takes! I want and hope everyone is able to improve their financial literacy, as well as financial position, regardless. WE are in control, you said it brother. Keep it up!

      -Lanny

  8. Another argument for a high savings rate:

    The easiest way to achieve it is not to spend too much.

    Once you’re acclimated to that level of lifestyle, financial independence is that much easier, because it takes less passive income to cover your typical spending patterns.

    • CFW –

      What’s funny, is that YOU DON’T NEED TO SPEND A TON OF MONEY TO BE HAPPY! For the most part, we want to be around people we love and to have experiences/moments. I find it very funny lately. I am very excited for FI and am doing whatever it takes, a fun article to come on an example of that!

      -Lanny

  9. Lanny,
    I have been following the blog for the past two years or so and I had a question that may not exactly fit this post other than relating to FI and savings rates. With the data you have from the past couple years of when you guys made stock purchases and the price of the stocks when you purchased them, have you ever looked back on how this investing strategy has paced against a similarly executed passive S&P 500 or total index fund from someone like Vanguard? I would be cool to know the effort payoff of going pure dividend stock/research vs the same cash executed in a passive low fee index platform. May make for a good article on the pros and cons of the investing approaches. Curious because I keep seeing this as an argument of sorts on the Web and I myself am trying to combine the two approaches. Thanks and keep up the good work!
    Marcus

    • Marcus –

      Of course, I love your question and we will add it to our topics to write about. For the most part – here can be some examples from the last 2 years or so: NSC – up over 60% with dividends, EMR – up over 40% with dividends, ADM – up over 36% with dividends, TROW – up 32% with dividends, CVS – up 7.79% with dividends, GWW – down 10% with dividends, CSCO – up 3% with dividends, KR – up 2.8% with dividends, DAL – down 3% with dividends. Those are a few that are on the bottom of my portfolio list i.e. typically in order of purchase. Now ADM/EMR/TROW I have owned portions for 1 year, 2 years etc.. so on a per year basis may very i.e. 12%-13/14%. However, CVS, less than a year and almost 8% there and I made an additional small position in CZNC and am up about 4.5% or so within less than 30 days. Honestly – it’s about cash flow for me and dividend growth in the end. I do compare to the overall market on how I’m doing, but now – strong dividend growth rate, fundamentals that are strong, etc.. are what becomes more important. Living off the income, not the appreciation!

      To note – my 401K is a mutual fund – VINIX, as no ability to purchase individual stocks unless I pay hefty as heck fees.

      -Lanny

  10. Saw your post Lanny and thought “Amen!” haha. I’ve been working to get a consistent 40% savings rate while I grow my business, maybe by this time next year I’ll be above 50%. BUT running a business has taught me that whilst I always am seeking to cut costs there, I haven’t until recently had the same attitude at home. Applying the same attitude can go a long way.

    Stoked your last car repayment is just around the corner. That extra cash is going to be put to such good use I can tell! Have you got anything specific in mind for it?

    • WFT –

      Heck yah – 40% is awesome to strive for, once you get there and sustain that for three months, try to do what you can to get to 50%. Manage your wealth as if it is a business – I Guarantee your wealth increases : )

      As of right now – it’s going into savings for investments that come about. I did have to repair my driveway, an article I’ll come out with, and did it myself using those savings. You’ll get a kick out of what I did, haha.

      -Lanny

    • DD –

      Man… I cannot believe I am less than $800 away from $10k in forward dividends. YOU ARE SO CLOSE to the $2K MARK!!! Ready to jump that hurdle? I’m hear cheering you on diligent, you got this!!

      I made my first investment ever February of 2009. From a stock investment standpoint – more in the early stages of 2010. So I would say 7 years; and really picked up steam starting in the 4th quarter of 2011 and haven’t looked back.

      -Lanny

  11. This is very true.When I reviewed the returns on our 401Ks for the last 12 years, it was more like 6.5%. Yet our net worth grew by 20% on average each year. Guess where the growth is coming from?

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