A savings rate is that amount of money which is considered as the ratio which someone saves from his personal disposable income. If you’re someone who earns $100,000 and you keep aside $25,000, the rate of savings is 25%. Isn’t that pretty simple?
Can the rate of savings be somehow related to monetary independence?
You might not know this that your rate of savings is one among the fundamental metrics, if not the main metric which decides how soon you can become fiscally independent. The higher will be your rate of savings, the shorter and smoother will be the journey towards achieving fiscal independence. The calculations that you have to make are pretty surprising.
In case you save an amount which is much less than 15% of your income post taxes, you will never be able to become monetarily independent given the fact that you’re working in a normal career. If this is your present situation, you will be subject to two situations:
- You’ll either run out of funds and depend on social security payments or government pension to live in peach during retirement or
- You have to downsize your lifestyle drastically to cope with the situation
Given the way in which the nations are striving hard with their Social Security burden, scenario 1 would anytime give you a sad ending. On the contrary, if you save 50% of your income, you will just be 16 years away from becoming financially independent. And in case you’re able to save more than 65%, you will become independent in less than 10 years. So, as you can see, savers will always win!
Why is your rate of savings much lower than what you thought?
As savings rate was defined earlier, there is a little bit of twist these days. If you’re saving for home improvement projects or for buying a car or new furniture, most will include them within their savings rate. But the moment you buy any of the aforementioned things, it won’t help you in any way in reaching towards your financial goals. People often think that their house is nothing but their ‘savings’ but this is also wrong when they consider their mortgage instalments as savings.
Why shouldn’t you include mortgage payments in your savings rate?
No, you shouldn’t do this for mainly 2 reasons:
- When you pay the mortgage payments, you have to pay the rate of interest on the principal amount that is outstanding. Since you’re borrowing money from the bank in order to purchase your home, you should clean off interest rates while calculating.
- Even when you own your home, it doesn’t produce liquidity and it doesn’t offer you food. The sole way of creating liquidity is by renting rooms or selling off a portion. However, this isn’t a way in which you would visualize being financially independent.
Therefore, if you’re still confused about saving and the rate that should help you reach financial independence sooner; take into account the above mentioned information and details.