Day 20 / 31 Calculate your Savings Rate

Now that little by little you are improving your financial life, it is equally important to understand how people succeed and how people fail in this area. Why exactly do so many people still have debt or not enough pension or no financial plan for their future?

Ask anybody in your environment and a vast majority will say that they just do not have enough money to pay off their debt or to throw at their pension fund. But even when those same people get a pay rise, chances are they still won’t be using that money to pay off their debt, nor will they tuck it away and use it to invest in their pension. They will simply spend it on new things and without them even realizing it, their lifestyle will gradually inflate to a new level.

Instead of waiting for that miraculous moment when you suddenly earn more, spend less and are in no other possible way hindered to invest in your financial future, today’s challenge will let you take the reins in your own hands to speed up your savings goals.

Your Savings Rate is the proportional amount of your income that you are able to save monthly, i.e. your savings expenses divided by your total income. Say you make $2,000 and manage to save $200 per month, your savings rate is 10%.

Interestingly enough, if you earn more you might not necessarily be saving more. If your neighbor makes twice as much money and takes home $4,000 per month but only hits a savings rate of 5%, his monthly savings are equally $200. You would be surprised at how often people with higher incomes have shockingly low savings rates. Why? Because of lifestyle inflation…

The great thing about your savings rate is that by focussing on improving it, two major things happen:

1. you stash away more money, meaning you reach your savings goal faster;
2. you need less to live off, meaning your savings goal can be lower.

Similar to when you calculated your net worth at the start of these 31 Days, sit down for a moment and calculate your Savings Rate of the past month or months. Then make it a goal to increase your savings rate little by little and to keep track of it at the end of each month (set a reminder in your calendar if needed!).

Feel free to share and compare your current savings rate in the Facebook group or via Twitter or Instagram. You can also find more on this topic in Step 80: Your Savings Rate, one of the 100 Steps to Financial Independence.