One of the most important aspects of achieving financial independence is maximising your savings through minimising your expenses and where possible, maximising your income. The saving rate is the percentage of income saved after expenses have been accounted for. Many financial independence calculators rather simplistically use the savings rate as a key metric to identify how many years it takes to be able to retire. Providing the savings rate are invested into productive assets, usually using the S&P 500 as a benchmark for the returns, a person can expect to retire in x number of years as long as they maintain that saving rate throughout. While this is useful to get an indication of what a person needs to do to achieve retirement, there are a myriad of assumptions baked in and countless complications that come with life that make it just that, a rough indication. With that said, it is still useful as a tool to see how well you are managing your income for the future.
I have taken a view of my savings rate as a portion of my net income since I began tracking and managing my finances in June 2020. I use net income as the metric as my tax free pensions savings as a PAYE worker, aren’t accessible until my mid sixties. Overall, I have managed an average savings rate of 43% in that time with the month by month breakdown shown below.
An average savings rate of 43% is not to be scoffed at, but still falls short of the 50% target I have set myself. Naturally at the start, with enthusiasm high, I made a more intentional effort with my savings, being more frugal with expenditure and conscious of what I spent money on. The first year of tracking I maintained an average savings rate of 54% but this has fallen off a cliff in the last 6 months averaging only 25%. This has been driven by the lockdowns being lifted, allowing myself to spend more on eating out, takeaways, drinking in pubs and holidays. Gifting and dental expenses were also a key driver in increased expenses.
Key Action Going Forward
Savings need to be allocated first every month. This is done for the house savings portion, but I need to be more disciplined with my own personal savings. Investigate secure low risk investments to portion off income out of reach until the house is bought. I’m holding off on investing in more ETFs until the house is bought, which is hopefully within the next six months.
Overall, I’m happy with 43% for the time period but conscious that more concerted effort needs to be applied this year to maintain my ongoing target of 50%.