Best Savings Rate For Financial Independence You Need To Know

If you want to achieve financial independence in a relatively short amount of time, one of the most important numbers you should pay attention to is your savings rate. Your savings rate for financial independence is what percentage of your income goes towards increasing your net worth. More importantly, it is usually your "investment rate" or how much goes towards investments that support your early retirement. There is a mathematical "sweet spot" for how much you should save for F.I.R.E based on the marginal value of each percentage saved.
You gotta know how to correctly calculate your savings rate! Luckily I have just the video for you!
• How To CORRECTLY Calcu...
************************************************************
All Of My Favorite Financial Resources:
www.oncashflow.com/resources
How I Track My Personal Finances:
www.oncashflow.com/track
Investment Platform That I Use:
www.oncashflow.com/invest
My Favorite Calculator For Financial Independence:
www.oncashflow.com/retirement
Software I Use To File My Taxes:
www.oncashflow.com/tax
Products I Buy To Save Money:
www.oncashflow.com/shop
Get Personalized Consulting From Me:
www.oncashflow.com/consult/
************************************************************
#SavingsRate #FIRESavingsRate #SavingForRetirement
************************************************************
This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Before making financial and legal decisions, consult financial and legal professionals licensed in your jurisdiction. Some links provided may be part of an affiliate advertising program designed to provide a means of compensation for referring traffic and business to other companies.

[@OnCashFlow]

You gotta know how to correctly calculate your savings rate! Luckily I have just the video for you! kzbin.info/www/bejne/gnKnnpSsqKaEoJo

[@arthurstemler1160]

Shifting perspectives on early retirement: Saving 50% of income enables retirement in 17 years, while a 30% increase to 80% slashes the timeline to just 5 years, showcasing the non-linear nature of financial independence.

[@OnCashFlow]

You need a high income and you need to maintain that standard of living! If you are fortunate enough and able to then do so as you please! :)

[@mikeham5465]

Thanks for the great information Zach

[@OnCashFlow]

Anytime!

[@CalmerThanYouAre1]

Would be interesting to see how realistic a 50% savings rate is based off the median household income and the expenses associated with a family of 4. I bet the “best years” of that young family’s life would be pretty constrained. It’s definitely debatable whether all the sacrificed vacations and other life experiences during the years when the kids are young are worth it. I think it makes the most sense for high earners who can still live a comfortable middle class life while still achieving a high savings rate due to a high household income. Otherwise you are watching life pass you by to finally achieve FIRE in your 40s when your kids may be teens and on their way out of the house. Everyone is in a different situation with different motivations, but I think having a good balance between living in the now and investing for the future is important. And a 50% savings rate for most middle class families would lead to a very imbalanced lifestyle.

[@Rosetteismyname]

I think financial independence is for low income or high income

[@OnCashFlow]

It certainly is debatable and that's because different people have different tastes, beliefs, ideals, values, etc. The national median household income is around $70k per year. 50% savings rate would be 35k/yr A family of 4 with 2 children is paying $0 federal income tax with CTC and retirement account contributions. This means they have close to 3k per month to spend. I agree with you, that this would be tough, even assuming the medical is covered by an employer. This family should probably not have a 50% savings rate on the median income in many circumstances, depending on where they live. They should increase their income if they want a high savings rate.

[@muffemod]

The trick is to not have kids ^_~

[@CalmerThanYouAre1]

@@muffemod two incomes and no kids will definitely put a lot more money in your pocket! Let me know if you’re searching for someone to leave it to when you pass! 😂

[@stevexspeed7649]

@@CalmerThanYouAre1 I’m definitely spending most of it 😂 kids or no kids

[@rajvo7406]

8% adjusted for inflation is very optimisticy friend

[@OnCashFlow]

It comes from historical rates of return. Rolling 30 year returns. You might be right though. It may be optimistic.

[@rajvo7406]

@@OnCashFlow i thought it was 6.5% adjusted for inflation

[@rajvo7406]

10% or so nominally, which is not what we care about

[@OnCashFlow]

@@rajvo7406 It depends heavily on the historical asset mix. Historically, more stocks vs bonds led to higher after inflation returns.

[@OnCashFlow]

@@rajvo7406 IIRC, I explain my position in this video on stock market returns: kzbin.info/www/bejne/aoPUaJxnm7WIedE If you would mind watching and letting me know your thoughts, I would appreciate it.

[@gurrrrlish]

Good analysis

[@OnCashFlow]

thanks!

[@muffemod]

8% rate of return may be ambitious. Closer to 6.3% may be more realistic, and if 60/40 stocks and bonds portfolio, then even a more conservative return might be warranted. Of note, though the marginal gains in the third column are decreasing, they are doing so at a decreasing rate. Whereas the savings rate is constant (linear). Another way to look at this is to examine how much faster you will reach financial independence by increasing your savings rate in 5% increments. For example bumping up our savings rate from 5% to 10%, we go from 49.3 years down to 39.9 years, which nets us 9.4 years of time shaved off (marginal gain). Effectively this gets us to financial independence 19.1% faster (9.4 years/49.3 years) than if we stayed at the previous savings rate. Looking at the percentage gain we get the following results: SAVINGS RATE --- PERCENTAGE GAIN 05% --- 10% --- 19.1% 15% --- 14.3% 20% --- 12.0% 25% --- 11.0% 30% --- 10.5% 35% --- 10.4% 40% --- 10.2% 45% --- 10.4% 50% --- 10.4% 55% --- 11.6% 60% --- 12.4% 65% --- 13.3% 70% --- 14.4% 75% --- 16.9% 80% --- 20.3% 85% --- 25.4% 90% --- 34.1% 95% --- 48.3% Interestingly, while going from a savings rate of 90% to 95% nets us the smallest marginal gain of 1.4 years shaved off; one gets the largest percentage gain of reaching financial independence 48.3% faster (nearly half the time investment). There are many more nuances that could be examined, but they may go beyond the limitations of KZbin comments.

[@OnCashFlow]

Very interesting way of looking at this, especially how the marginal % gain remains so consistent from 30% to 50%.

[@garcia4062]

Interesante che! Gracias

[@OnCashFlow]

Thank you! :)

[@fabiGBOtown]

Id love to know which retirement accounts are best for self employed to maximize tax deductions. Caught between s sep ira and a solo 401k. Then i need to learn which investment to put in on those. Where can i get education about that?

[@OnCashFlow]

I learned a lot about SE taxes from Mark J Kohler here on KZbin. Short version of your question: Solo 401K is usually better but a little bit more paperwork to set up, but still very easy to do and worth the small amount of time to set up.

[@Eugene737]

In your other video about correctly calculating your savings rate, you pointed out that the phrase "savings rate" should really be called "investing rate" when talking about how long it will take to build a nest egg given return of X percent, etc. I 100% agree with that and find it pretty misleading when I come across articles that so and so family saves 70+% of their income. A 50% "investing rate" tells me that the typical family needs to invest 50% of their income, and perhaps another 10-20% for general savings such as inevitable car repairs, car maintenance, home repairs, home maintenance, doctor visits, public transportation passes, downpayment, etc. I could throw in things like setting money aside for Pet health, and travel but that's probably more subjective. So now we are talking about a family setting aside 70+% of their income. Are these folks choosing to forgo these general, non-investment savings for the next 10 years?

[@OnCashFlow]

Yeah exactly, I don't even count those other savings because they are literally earmarked to be spent. Some people refer to them as "sinking funds". I don't necessarily think anyone is forgoing these other savings, it's just that you should be looking at your spending on an annual basis more than a monthly basis. Sure you don't have travel expenses every month, but how much do you want to spend on travel this year? Sure you don't have car maintenance every month, but what is a reasonable amount to estimate you will need to spend on an annual maintenance event? etc. This is spending, just not as 100% predictable spending. That's where flexible budgeting comes into to play.

[@OurRetireEarlyJourney]

Savings rate is the most critical component of financial health pre-retirement. Last month our savings rate was 80% and YTD was 60%. If you want to retire early, you have to aggressively save!

[@OnCashFlow]

That's amazing! I think that I had hovered around 60%-70% most of the time I was saving for FIRE, but I was also very fortunate to be able to do that!

[@OurRetireEarlyJourney]

@@OnCashFlow We feel very fortunate as well!

[@QuesttoFIRE]

Interesting way to look at it! I struggle a lot with balance while pursuing FI.

[@OnCashFlow]

Absolutely! Most of us go through that struggle for sure.

[@FrugalTeacherFI]

I second Rebecca. It’s hard because most of FIRE is six figure incomes. And most investments you don’t really start to even notice gains until six figure balances. I have been investing since 2012 starting making 27k a year and working up to triple that. It’s only the last three years with severe sacrifices to try to save half my income that my balances really started moving I know that I’m already years ahead of my fellow teachers though. Most just assume they have to work til age 65!! I am hoping to be out 20 years before them!

[@TheFirstRealChewy]

Based on your chart, the sweet spot is between 45% - 60%. So you are looking at anywhere from 12-17 years to reach FI, assuming you are starting at zero. If you are 50 and can keep working for 12-17 years, you can reach FI by 62-67, which is the normal retirement age. At age 50 you are likely at the peak of your career, lifestyle creep should have greatly slowed or stopped, and you should have a very good understanding of your anticipated expenses in retirement. Once you have reached 50 or nearing 50, evaluate your retirement plans. If you have nothing saved and also can't save 45% - 60% for investments, then see if you can reduce your lifestyle, and/or make more money so that you can save that much. Anything you have invested prior to 50 will help. Keep in mind that this doesn't account for social security benefits. However, think of social security benefits as income to cover medical expenses for you and your family. If it pays more than needed then the extra is bonus money. Our goal is to reduce our expenses as much as possible by 50 and have our house paid off before we retire.

[@OnCashFlow]

Yeah so even at age 50 with nothing saved you can still make for a comfortable retirement. If you start younger then you can have a comfortable EARLY retirement!

[@frenchfruga4851]

Good afternoon mr cash flow , i live in south of France as a single man without family , i'm minimalist in order to be on retirement as soon as possible , wanna see my story about my fire ? Let's go ! In december 2022 , i will be 40 years old and have closed the reimbursement of my apartment purchased in january 2014 , thanks to my savings on transport-food-accomodation I left my car last monday because of inflation , european union will ban petrol and diesel cars for 10 years , then no fuel , no insurance , no more expensive repairs to pay 😁 Next year , time to invest in real estates , very excited by this new challenge , i prefer being careful with crypto and other things , i hope to find something beautiful , see you next time for exciting news , god bless america and vive la France 😉

[@OnCashFlow]

Thank you, and good luck on your FI journey! it sounds like you know what you want and you are making the choices necessary to get there! :)

[@MBTIinRealLife]

I do, like, about 85%. Works for me. In my estimation I will be able to quit my job in 10 years. However, if I work another 2-3 years it will further multiply my savings to ridiculous extent.

[@OnCashFlow]

Yes, very true. You just have to make the determination about whether or not it is worth it to you. Depending on if you are enjoying your lifestyle now, your job, etc. I've sorta changed my mind on savings rates over the years to actually saving less. I used to recommend about 65% and now I think closer to 50% is generally better. That's just my opinion.

[@MBTIinRealLife]

@@OnCashFlow Well, I believe that I could change my mind in the future too, it happened multiple times. I changed my mind about clothes, diet, some hobbies of mine. Sometimes it just happens. Sometimes it's interconnected, take for example my recent diet consisting of meat only. My stomach would never feel better as it did on ketovore diet. However, due to me changing my mind about money, I couldn't afford to carry on my meat diet because it costs three times as much as a casual not meaty diet. It's just the evolution process. Who knows what happens in a few years. So far though, I'm pretty adamant about saving and investing money to reach FI asap.

[@OnCashFlow]

Yeah, it's not like you need to have the same savings rate every year. Life changes and you can adapt to it and still reach your goals! :)@@MBTIinRealLife

[@MBTIinRealLife]

@@OnCashFlow very true.

[@Rosetteismyname]

I do dividend investing strategies to reach financial independence...I think it is closer to possible for me for earlier aspects

[@OnCashFlow]

Dividend investing is another viable way, probably a more conservative approach, but there are numerous ways to achieve FI!

[@frankalias7516]

I don’t care about saving rates. My goal is to live a life which satisfies me. I avoid lifestyle inflation. I don’t consume to impress other People.Even if i still work i feel FI. Saving rate is about 60-70%. I Not gonna cut it down because of math. I

[@OnCashFlow]

More power to ya! That's what FI is really about...Happiness and satisfaction! However you need to move closer to that! :)

[@FrugalTeacherFI]

Saving 60-70% is way different in six figure household than say a median income of 55-60k. Obviously if you make 200k you can live on 30% comfortably. But no way you are going to save 65%if you make 40k or 50k