Alan Donegan: Rebel Business School Co-Founder, Rebel Entrepreneur podcast host, Rebel Finance School co-founder and Queen's award winner. Marvel movie fan fanatic, breakfast lover and financial independent traveller
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How much of the money you earn do you save and invest? Do you save any of the money that you earn each month?
The average savings rate in the United Kingdom is 6%. In the USA it is 7.9%. Do you know if you are saving more or less than that?
Do you save more money than the average person? Do you save less money than the average person? Do you know how much you’re saving?
Your savings rate is one of the key indicators of when you can retire! Knowing this number you can predict how long you have to work in paid employment. We can predict your retirement date based on this number.
Created 11th August 2020. Updated May 31st 2022. Updated 19th June 2022
Why should I bother calculating my savings rate?
If you save 50% of your income each month then your working career will be 17 years! How do I know that?
Your savings rate is actually far more important than the total amount of money you earn.
Let’s compare two different individuals. The first is a well-paid executive that earns £200,000 a year. They have a lavish lifestyle with lots of holidays and nice cars. This executive saves £20,000 a year.
The second individual is a builder. They earn £20,000 a year working on a building site. They have a modest lifestyle and live within their means, saving £2,000 a year.
Who can retire earliest?
The obvious answer would be the executive because they are saving more each year. However they have a very expensive lifestyle and need far more money to retire than the builder ever would.
The actual answer is that they would have the same predicted retirement date. This is because they are both saving 10% of their income. If we assume that they will spend the same amount in retirement as they do whilst working we can accurately predict when they are able to retire!!
If you know your percentage savings rate you can predict how many years you have to work.
How do you actually calculate your savings rate?
Each month you earn a certain amount of money after tax. Most people spend everything they earn each month! However if you keep some of that money and put it into savings and investments then you have a savings rate.
As an example let’s say you earned £3,000 in a month. If you took £300 of that money and put it into savings and investments you would have a 10% savings rate.
If you took £1,000 of that money and put it into savings and investments you would have a 33% savings rate.
If you took £1500 of that savings rate and put it into investments you would have a 50% savings rate!
Let's say you wanted to work out your savings rate for April. You need two numbers to be able to do this.
A) How much you earned in April
B) How much you spent in April.
Then you compare how much you earned (this is after tax by the way) and how much you spent to give a percentage of how much you kept/saved.
For example, if you earned £1000 and spent £800 then you saved £200 and your savings rate is 20% (200/1000). In this example you are using 20% of what you earned to buy freedom.
IMPORTANT! We coached someone last year and he was very despondent because he thought his savings rate was zero. He was putting £200 a month to buy investments and counting this as spending. Any money you use to buy assets is NOT spending. Do not include this in your spending figure. Any money you use to save for future spending (e.g. holidays, car etc.) is NOT spending for this month. Do not include this in your spending figure (although of course it WILL count as spending in a future month).
Your savings rate might change on a month-to-month basis. Katie and I used to calculate each month how much of our earnings was saved. Then over the year we could calculate an average.
One reason for the monthly fluctuations is down to your spending. Some months you might have more expenditure buying things like glasses or medical bills. Some months you might have lower expenditure and be able to save more. Your percentage savings rate will change with your spending.
The other reason for your savings rate changing is fluctuations in your earnings. If you're self-employed or a company director you probably have uneven income each month. There might be months where you have a negative savings rate because you didn't earn as much and other months where you have close to a 90% savings rate because you had a very good month in your business. In this case once you have a few months of tracking your savings rate you can start to average out over the last quarter, 6 months or year.
Katie and I recommend using a tool like money dashboard (UK), mint (USA) or personal capital (USA) to track your spending each month and to calculate your savings rate.
We then treated it as a game to see if we could continually improve our savings rate and put more of our money into our investments. We were prioritising buying our freedom over buying extra stuff.
Help is at hand – free template
Katie and I would love to know what you think of the template and if it is useful for you. Please leave a comment below or send us a message and let us know what you think. We just want to help you take control of your finances!
The better informed you are about your spending, where your money is going and how much you are saving for your retirement the better able you are to plan for a bright financial future!
Saving for .............
During the 2022 Rebel Finance School there was a lot of confusion over saving for Christmas, birthday presents or the next car and how to calculate for that in the spreadsheet. is it savings? I am after-all saving for something!
The way the Donegans look at this is that these types of savings are for future spending. Or as Wendy, Derek and Claudia from the Rebel Facebook group so rightly pointed out it is budgeting not saving.
You are setting aside money / budgeting for a future purchase. This isn't saving for your financial future, for investing, for your retirement, it is a different thing.
For example you decide that you are going to save £50 a month towards Christmas so it doesn't come as a shock and you have to buy all the food and presents when it happens. This is brilliant budgeting. We LOVE IT. Come Christmas what happens to all that money you have "saved"? It gets spent in one foul swoop. Gone. Disappeared. Enjoyed. Blown. Gifted. It can't really be counted in your savings rate as you are planning on spending it.
Katie has created a new version of the savings rate tracker to allow for this. There are two ways to account for this which makes it confusing.
The first is that you mark these budgeting amounts as saving which makes your savings rate look higher each month and then when you come to spend them; such as at Christmas or when you buy your next car; you will have a massively negative savings rate to make up for it. This will average out over the years so you can see your actual savings rate but you won't be able to tell very accurately.
The second which is the one we have decided to put in the above template is where you mark the budgeting down as future spending in another line as you will be spending it in the future. Then when you come to spend that money you don't make it down as spending that month as you have already told the tracker it is spending.
For example you are saving for a car. You are putting £200 a month aside for it. You put this in the tracker and then when you come to spend this money in three years time and you take the £7200 and spend it on a car you don't mark it as spending.
Sometimes a goal like reaching financial independence can see so far off that it puts people off starting! This happens so often that I wrote a whole article about it called the Insurmountable Mountain!
What people don't realise that creating an exceptional life starts with the smallest of actions. making a call, sending an email, tracking your spending. These small daily action compound over time to build the life of your dreams.
All you need to do is start today and take action. Download the spreadsheet, work out your savings rate and discuss it with a friend, your partner or your cat.
All you need to do is start to take action each and very day and you will be AMAZED at how far you got in a year. Do something today that future you will be proud of!
How to get involved?
You may have noticed Katie and I have got very creative recently and are producing more and more content to support you.
Katie and I wish you a wealthy, healthy and happy future.