Your savings rate is the single most important factor in when you can hit FIRE. In fact, its the only thing you need to know to calculate when you’ll hit FIRE. Luckily, your savings rate is also in your control in a way investment returns will never be. Its simple maths, spend less, save more. Earn more, spend the same, save more.
However, like so many things in FIRE, its not quite as simple as it initially seems! Pretty much everyone is trying to save but, as an average UK savings rate of 5-10% shows, not many of us manage it!
That’s what we’ll be looking at here, how to maximise our savings rate.
When its comes to savings, the Pareto Principle rules:
80% of outcomes come from 20% of efforts
We all have a tendency to see the trees and not the forest; we obsess about detail while massive issues go entirely unnoticed. Here I’ll concentrate on the three largest expenses for the vast majority of us. Improving any of them will have a massive impact on how much you can save, leaving you to decide whether own brand ketchup is really worth it… Enjoy!
#1: Housing Costs
An Englishman’s home is his (her) castle. Or so they say.
Its certainly not a stretch to say that where you live is not just a matter of convenience and comfort. Its also bound up in how people perceive you, a status emblem and, importantly, how you perceive yourself.
This often leads people to attempt to buy or rent properties that they can only just (or even can’t) afford. Rationalising this is easy: often the more expensive areas are nicer, safer and more convenient. That’s why everyone wants to live there and those areas are so expensive!
The problem here is an obvious one. If you’re spending 50% of your incoming cash on rent, there is simply no way for you to have a savings rate above 50%. Its literally impossible. In fact, taking into account food, transport and discretionary spending, you’ll probably be doing very well to hit a 20% savings rate.
The solution here is simple. Rent or buy a cheaper place. Instead of stretching to your limit, buy somewhere cheaper, perhaps in an area close to but not quite inside one of the most popular areas. The extra incomings can then be deployed in investments and grow your wealth.
Not only that, but for those who are looking to buy, this strategy has the advantages of making you much less vulnerable to rising interest rates (which make mortgage payments go up) but also diversifies your assets across different asset classes, key for reducing risk and increasing resilience.
#2: Food Costs
Food. I love food. You love food. We all love food.
Food costs money. 🙁
Honestly, this is one of the savings points that’s a struggle for me. I adore going out for dinner with my girlfriend or friends. I enjoy cooking at home with good ingredients as well. However, one of those two costs a hell of a lot more than the other!
I’m not going to argue against going out ever but moderation is key. For years I went out for meals at least three or four times a week, as well as having lunch from a nearby takeaway every workday. This is one of the key reasons, if not the reason, why I barely saved in my 20s. A fact that has itself pushed back my FIRE date by a decade.
So, what to do? Go for a meal when you have you have a good reason. A date. A good friend coming to town. A reunion. All good reasons. I’m bored and can’t be bothered to cook? Less good.
Be creative about how you amuse yourself and your friends. Why not meet for a drink in a park? Go to the gym with a mate instead of the pub. Go hiking for a date rather than an expensive restaurant. If these sound like your idea of hell, I’m sure you can think of some other options!
This also has one hidden benefit, you don’t get used to dining out. You don’t get used to the finer things in life.
The human brain is an amazing thing, it can get used to almost anything, anything good as well as anything bad. Ever wonder why you’re not still pleased about a new car a month after you’ve bought it, or a new dress a week later? You’re used having them, so they don’t bring you as much pleasure.
By only going out when you have a good reason, you keep the experience fresh, you don’t let your brain get used to it. In the end, you save a lot of money, with barely a drop in overall enjoyment. Bargain!
#3: Transport
I’m going to be honest with you reader. I don’t get cars. I don’t get why people love them so much, why they seem to be the primary status symbol and why people are willing to pay a huge amount of their salary to go from place to place in slightly more comfort.
Having said that, just because I don’t really get it, doesn’t mean it isn’t valid! If you love cars and they bring you happiness, you do you.
But…
At least realise the costs. Look at it this way. If you’re earning £1,500 a month and you’re paying £350 a month to pay off your car, 23% of the time you’re working is solely to pay for the car you use to drive to work. You’re working a week, just to afford your car.
If that’s worth it to you, ok. But there may be a cheaper car out there or, if you live in a city, decent and reliable public transport.
There you have it! The three biggest expenditures for most of us and ways to boost them. See you next time.