When I first started down this road to FI, I knew very little about how it all worked. All I knew was that I either needed to save a large portion of my income or find ways to make more money. I realized that finding ways to make more money when I was already working full-time and going to school left little “me-time” and created a very grumpy and burnt-out Bea.
Therefore, I focused more of my attention on living simply. Hence the name of this blog. I still don’t get myself too caught up in the numbers of it all, mostly because I’d much rather spend that time doing something I enjoy. Numbers just don’t do it for me. However, it is helpful though to understand how a savings rate works so that you can make more informed decisions.
So here is my simple explanation for why your savings rate is more important than your income:
Let’s take two hypothetical people
Person A makes $100,000/year. Of this income, he/she manages to save 6%, or $5,000.
Person B makes $50,000/year. Of this income, he/she manages to save 50%, or $25,000.
Which do you think will achieve financial independence faster?
Person A can expect to become FI in 62 years.
Person B can expect to become FI in 16.6 years!
This is also assuming that they began with no money saved and that they will maintain their current lifestyle after hitting financial independence.
Why is this?
Because while Person A is making a lot more money than Person B, he/she also has a much lower savings rate. Therefore, it will take longer for Person A to accrue enough savings to cross the FI threshold.
Person B, however, is making half of what Person A makes, and has a much higher savings rate.
That is the difference!
While this is a very simplistic explanation, it is essentially all you need to know in order to start figuring out where you currently are and taking the necessary next steps. If you are ready, check out the calculator I used at networthify.com.
Have you analyzed your savings rate? What has been your experience?
Leave a Reply