In an earlier post I zoomed into the transaction data I collected for 2012 and analyzed a few expenditure categories. Although that exercise helped me identify specific areas where I can modify my behavior to better achieve my ultimate goal (retirement!) it doesn’t give a very good idea of how far away from that goal I am. To zoom out and see the big picture, I needed to know my SAVINGS RATE.
I decided to track my savings rate on a month-to-month basis. Each month, I recorded my after-tax (i.e. take-home) income. By subtracting the sum of my expenses for that month, I could see the amount I had saved each month. To calculate my savings rate, I divided the amount I saved that month by my income for that month.
In other words: SAVINGS RATE = (INCOME – EXPENSES) / INCOME
Depending on your purpose, you may want to calculate your savings rate differently. For my purposes I did not consider valuation changes on my investments. I also considered my 401k contributions as part of my take-home income (even though technically they have not yet been taxed).
So in 2012 my monthly savings rate varied from as low as 23% to as high as 88%. I was curious to know my savings rate for the entire year, so I performed the same calculation again on all the 2012 data (averaging the monthly rates would have weighted each month equally, which would produce an inaccurate result).
My yearly savings rate for 2012 was… (drum roll) … 67%!
So in 2012 I saved just about 2/3 of my total earnings. Put another way, my one year of work could allow me to live at the same level of expenses for two full years! My one year of work was worth two years of retirement! This is why I never understood the frequently given advice to save 10% of your income; at that rate, 10 years of working would only be worth 1 year of retirement. Why stop there?
Since I managed to squirrel away 67% easily in 2012, how high should I set the bar in 2013? I like 85%. I’ve already proven to myself that this is possible by saving at an even higher rate in April, June, and October. There are two ways for me to approach this. I can either make more, or spend less. I have more direct control over how much I spend, so by waxing my frugality muscle in 2013 I should be able to achieve this increase.
According to some off-the-cuff comparisons (methodology documented very well in this Mr. Money Mustache article) at my current rate (of 67%) I should be able to stop working in about 10 years (reaching my goal of retirement by 35). At my target rate of 85%, I should be able to stop working in 4 years. And if I choose to continue working after that, so much the better; it will be because I want to, on my own terms.
See how easy this is? Join me, Pilgrims, and stay tuned.