Financial freedom is the biggest goal I have right now — both personally and professionally.
What I mean by that is it’s my goal to help as many of my clients as possible build and grow wealth to the point where they can enjoy financial independence. It’s also my own personal goal for my financial situation.
Achieving the goal requires developing a process you can follow over time, and that process is driven by one factor above all others: your savings rate.
Why Your Savings Rate Is (Sometimes) Even More Important Than Your Income
Your savings rate is the percentage of the money you earn that goes to savings and investments. Using a percentage rather than a dollar amount is key.
Let’s say you make $100,000 today and you save $20,000 of that income per year. That’s a 20 percent savings rate, which is pretty impressive.
But imagine as you continue working and earning raises, you eventually make $200,000 per year — but you still save the same $20,000. That’s only 10 percent, or half your previous savings rate.
Using a percentage and focusing on your rate of savings is more powerful than simply targeting a dollar amount, because it:
- Helps guard against lifestyle inflation.
- Allows you to more easily compare apples to apples if you want to see if you’re on track year over year.
- Applies to you no matter how much you make.
Kali and I judge our own progress by percentage of income saved. Because of our big goal to reach financial independence and grow wealth, we know that requires a higher savings rate.
We set a goal to save at least 30 percent of our gross income — and we’re on track to surpass that and will likely end up with about 35 percent saved for this year.
If You Want to Save Big Percentages of Your Income, Start with Why
It’s not easy to put away 30 percent or more of our gross income each year, but we’re committed to our goals. That’s the first step in answering how we do it: We set clear goals and prioritize those above all other spending.
In other words, we pay ourselves first each month and ensure our monthly goals are funded before looking at how much we may be able to use for discretionary spending in the next 30 days.
That automatically limits how much money is floating around in our checking account, freely available to spend. If the money just isn’t there, it eliminates the temptation to spend it on something other than what’s truly important to us.
But it also helps us keep our eyes on the prize. Because we have clear goals, we know exactly what we’re working toward. It also makes it really easy to compare the tradeoffs.
We can look at spending $500 on going out and having some really fun date nights this month in context. We can literally say, “do we want to go out that much more than we want progress toward building a level of wealth that would provide the freedom to choose how we live later on?”
Sometimes, the answer is actually yes! Every once in awhile, we get a chance to do something in the moment that, together, we decide is worth slower progress toward financial independence.
But most of the time, the answer is an easy, “no way, we don’t want to spend that money this month. We’d rather save it and feel confident about where we’re going with our wealth.”
4 Other Steps We Take to Increase Our Savings Rate
Those goals serve as a powerful guidepost, but just setting out what you want to accomplish isn’t enough to get you there by itself.
You also need to take actions like:
- Keeping expenses low. Lifestyle creep kills more dreams of financial independence than dealing with a low income ever could. We aim to default to $0 when it comes to “how much are you going to spend today?” rather than focusing on how much we can consume.
- Looking for free or low-cost activities. That doesn’t mean we spend $0 every single day, of course. That would lead to a very boring, pretty unfulfilled life. When we do want to get out and do something or explore, we try to think about what we can do without spending money first. If we find an option that appeals to us, we choose that over spending.
- Aligning our spending with our values. In addition to trying to choose really inexpensive over pricier options, we work hard to make sure any spending we do, no matter what the amount, aligns with what’s actually important to us. That doesn’t look the same as what’s important to other people — and that’s okay. It’s our money and it needs to be used on things we find valuable.
- Keeping a budget system that we can check in with anytime. We use the same system I offer to my clients to track not only our transactions, but our overall budget, income, and net worth. We can do this all from one spot and it’s updated in real-time. That allows us to be constantly aware of what’s going on with our money — and it gives us the power to know exactly what our spending situation is at any time during the month.
It also gives us the ability to make an informed decision about “can we buy this right now?” whenever the question comes up. And again, sometimes the answer is, “nope, not worth it.” Other times, the answer is more like, “sure, we can do that today.”
These steps, combined with a commitment to our biggest goal, allow us to save and invest at least 30 percent of our income every month. It’s not easy, but the good news is that it’s very simple — and something you can do in your own life, too.
What’s your savings rate — and more importantly, is it enough to allow you to reach the goals that are most important to you?