Your savings ratio on steroids

budget, early retirement, expenses, FIRE, income, personal finance, retirement, savings, savings ratio

We posted before how to reduce your time to retirement by 20 years. I claimed it was “simple math”, all you need to do is increase your savings percentage. This post will dig a little deeper and into how you can make that happen.

There is evidence that it’s working for us; our goal is to be financially independent in 15 years. There are possibly a thousand variables that could impact this date (ex. we don’t have kids…yet). But, we don’t care if we don’t meet this timeframe. We try to be conservative with our assumptions and we live an abundantly comfortable life. As we will repeat, we don’t want you to have our life; but we hope that our knowledge can help you improve your financial well being and enjoy more of life. More joy, happiness, and health.

Nuts and Bolts: Savings and Income

Your savings rate is impacted by two key variables: your income and your expenses. A combination of boosting your income while decreasing your expenses is the answer to a quicker retirement. Some sources calculate it differently and so the numbers will vary, but the base principals remain. For our savings calculation, we take (401K contributions + Roth contributions + HSA contributions + Savings after expenses) / Income after taxes.

The following chart portrays a scenario to show how a few changes can improve your savings rate and put you on the road to an accelerated retirement.

Increase Income and Savings to Retire Early

This chart illustrates that by improving income and boosting savings you can decrease your time to retirement

By increasing your income by 15% from the American household average of $52,250 to $60,000 and decreasing your expenses from $42,250 to $32,250, your savings rate will have increased from 19% to 46%. That’s more than double the savings rate! And this will allow you to cut your time to retirement by nearly 20 years. At that savings rate, you will be approximately 19 years from retirement.

Lifestyle Inflation


Captain Obvious

Thanks Captain Obvious!

Captain obvious says that having a higher income makes it easier to save. Yes, thank you captain obvious! However, as the savings rate is dismal across nearly all income classes, it is important to note that LOWER INCOME DOES NOT PROHIBIT YOU FROM EARLY RETIREMENT. Again, the key to financial freedom is your savings rate. The person in the chart below making $40K a year is able to retire quicker than the person making nearly 4 times as much at $150K a year. Lifestyle inflation and a high expense base of the high-income earner devastates their ability to retire. So the person who spends all of their large paycheck on fancy new vehicles, enormous McMansions, and dozens of daily extravagant expenses will save far less than the person who is scraping every last available cent into their savings.

Income and Savings Ratio Example

Even someone who has a high income can have a low savings ratio if they don’t keep their expenses in check

What this also demonstrates is that the smaller your expense base, the easier it is to retire. It is even more important than the income that you make.

Given the importance of your expense level, we will focus on that how to reduce expenses first. How do you manage your expenses… BUDGET. If saving is a dirty word to some, budgeting is vulgarity to the extreme.  Now, Mrs. Winning Williams and I, self-proclaimed nerds, love our budget to the umpteenth power. Maybe it’s in our blood or maybe it’s because we can see the progress we are making. Whatever. I will not say that you need a budget. That is up to you. However, you MUST track your expenses and you must be honest. Everything should be included and categorized. Why is this important?

  • You need it to calculate your savings rate.
  • You need it to calculate the magically number YOU need to retire (more on this later)
  • You will be shocked by how much of something you are spending on (no more lies)
  • We will explain how long some of these expenses are setting your retirement back

Start a spreadsheet, googledoc, etc. It is never too late to start this process, your spending is never too out of control to start tracking and developing a plan to save. You can message us if you need help setting this up. Track your monthly expenses, semi-annual or annual expenses (taxes, insurance, etc.), and irregular costs (repair and replacement, gifts, etc.)

Time to take action with Expenses

Keeping a low expense basis permanently lowers the amount you will need to save for retirement. A popular rule of thumb is that you need 25x expenses for retirement. Spending $25K a year, you will need $625K for retirement. Spend $60K a year, you will need $1.5 million.

Dave Ramsey has a snowball effect for dealing with debt, which can be a regular monthly expense for some… most. His philosophy has consumers focusing on the smallest denomination of debt first and paying that off. With that debt off of their monthly expenses they can use the money they would have spent on that payment and apply it to the next smallest debt, and so on and so forth. It’s just one strategy to tackle the debt (we will discuss other strategies later).

A strategy for taking on expenses is to attack the most important and largest expenses first: housing, transportation, and food expenditures. These items (especially housing and transportation) can also take the most time to address, but have the largest impact on your expenses. Don’t feel like you shouldn’t address all other expenses concurrently. Perhaps making small changes, such as the snowball effect, will also help you make the big changes that are game-changing.

We will try and further explore many of these topics with additional articles, the key for you is to define what is most important in your life and then determine how to eliminate the rest. Once you’re saving 30% – 50% of your income, then you should definitely pat yourself on the back, and keep saving/investing!

Below are the categories that we use for identifying and prioritizing our expenses (check back later as we will be updating these categories with details on ideas to remove/reduce costs):

Time to take action with Income:

While expenses can be broken up neatly into categories, income will vary drastically between people, industries, geographies, etc. Some have relatively safe and consistent jobs (perhaps government jobs) with stable income and job security, while others might be self-employed or work in a volatile commission based industry. For now, we’re just considering income in regards to the savings rate calculation and how you can improve your chances at becoming financially independent at an earlier age.

  • Protect your income source. Losing whatever income source you have can cause significant setbacks if absent for a material length of time.
  • Become the go-to-person at work. What can you provide that no-body else can? According to:
  1. Always offer ideas and suggestions
  2. Do not sit quietly in meetings
  3. Do more than what the job requires
  4. Always offer to help others
  5. Be proactive
  6. Become a part of the company
  7. Do things without being asked
  8. Volunteer wherever you can
  9. Take the lead if you can
  10. Never bad mouth the company
  • Think of side income or even part-time opportunities. What would you do if you didn’t have to work your 9-to-5 career job? Get moving on those.
  • Sell stuff. This isn’t going to be a long-term solution. However, it will help you de-clutter the crap out of your life, generate a small burst of cash, and enable you to downsize into a more reasonably and less expensive place! Having less crap also makes us more productive individuals and propels us to get outside, mingle, and do other things that make us happier and more successful.
  • Go to It is a website geared towards, well you guessed, extra ways to make money (and they have an abundance of ideas)

We can’t predict how everything will turn out for our plan and we sure as heck wouldn’t even want that! However, there is much excitement in knowing how quick our journey will take us to financial independence. Our ability to be flexible and adaptable and how we can change course and direction at OUR leisure is a key factor in maintaining our savings rate. We have no debt or obligations enslaving us to a desk for the next four decades, forcing us into an endless cycle of paying off these obligations while seeking immediate pleasure and impulses that exacerbate that cycle. You don’t have to either, get to work boosting your savings rate!

2 thoughts on “ Your savings ratio on steroids

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