The big question. When will you be able to hit FIRE. Well, I’ve got news for you, you only need to know one thing: your savings rate.
Your savings rate is your FIRE MVP. It is the single biggest determinant of how soon you can hit FIRE and buy back your freedom. First off though, what is a savings rate?
Its very simple, its how much you manage to save as a percentage of your after tax pay. Breaking that down a little more, we only need to look at two things:
How much you earn after tax
How much you spend
That’s it! Divide the first by the second and you get your spending rate. What’s left is your savings rate, or how much you save each week/month/year.
But here comes the really interesting bit. Your savings rate (or the ratio of how much you save to how much you earn) is all you need to know for when you can retire.
You may be tempted to call bullshit here, I certainly was. Surely how much I have in the bank and how much I earn has a far bigger impact on when I can retire? Sure, both of those things have an impact, but only to the extent they impact your savings rate.
If you’re a tech engineer earning £200K (after tax) every year, but you spend £150K on a crazy lifestyle, you have a savings rate of 25%. If you’re a teacher earning £35K (after tax) every year and spend £17.5K every year to live, then you have a savings rate of 50%. The barista will be able to retire first even though the engineer is saving ~3x as much every year.
Doesn’t really make sense right? Look at it this way though, the tech engineer needs to somehow get enough assets to continue to live his £150K a year lifestyle. Its going to take a long, long time (just over 30 years) of saving £50K to get there!
On the other hand, the teacher has perfected the fine art of living cheaply. Saving enough to support a £17.5K a year lifestyle is much more achievable. At a 50% savings rate, the teacher will be able to retire in just over 16 years, half the time it would take the software engineer to retire.
This relationship holds across all savings rates, networthify.com has summarised this in an easy to use tool, summarised below:
So what savings rate should you be aiming for? Well, that depends what when you want to retire. Assuming you yelled “AS SOON AS POSSIBLE” when you read that sentence, I’ve got some good news for you:
The graph above follows as hyperbolic distribution, which is a fancy way of saying it decreases very quickly initially before flattening out. That means even small increases in savings rate can have big effects.
Look at the teacher and the engineer, the teacher will be retiring 16 years earlier than the engineer. That’s massive.
To give you an idea what to aim for, here’s a couple of savings rate examples:
- At a 10% savings rate it’ll take you 51 years to retire;
- At a 20% savings rate it’ll take you 37 years to retire;
- At a 30% savings rate it’ll take you 28 years to retire;
- At a 40% savings rate it’ll take you 22 years to retire;
- At a 50% savings rate it’ll take you 17 years to retire;
- At a 65% savings rate it’ll take you 10 years to retire;
10 years guys. 10 years.
If you started work at 25 and saved 65% of your salary for 10 years, you’d be retired by 35. That shit is CRAZY.
Unfortunately, I’m not there, no way did I save anything close to that much, but I’m pushing hard now to up my savings rate. Step by step, it is increasing. I’ve also found little tricks to sneak it further up as well. All this will follow in a subsequent post.
Finally, no doubt some of you guys have noticed I’ve been neglecting a key variable here: the income side. Surely if you increase your income you can keep spending what you are now, because the extra income will boost your savings rate? Very true, but there’s a couple of things to think about here:
- A lifestyle will always expand to fill the available pay check if not actively controlled (Art’s First Law, the sister list of the Golden Rules).
- Your income will cease when you finish work. A reduction in spending continues forever (or until you don’t continue!)
You absolutely should look to increase your income, but the most important thing to do is to control your spending. If you can do both you will have some amazing results.
So there we have it, the Savings Rate. I encourage you to play around with the tool I linked earlier. It really inspired me, hope it does the same for you. Until next time.