On Monday we talked about learning how to acquire gold. Today I dip back into The Richest Man in Babylon for more wisdom on wealth creation.
This paragraph comes chapter 3: Seven Cures for a Lean Purse. The first cure is “Start thy purse to fattening.”
“For every ten coins thou placest within thy purse, take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to they soul.”
I want a fat purse, and I like the simplicity of taking 10 cents of every dollar earned and saving it for the future. Various blogs around the web will tell you to chase a savings rate of 50% or more, and they show you reasonable ways for achieving such a rate, so a 10% savings rate ought to be very manageable.
And since we already discussed it, I don’t mind saying I’ve been used to living off 90% of my income for years, as my definition of tithing is to take the first 10% off the top and give it to the church. It shouldn’t be a problem for me to simply take the next 10% and put it away for the future.
So let’s define savings rate and see where mine is.
A YNAB-friendly definition of saving would be “assigning a dollar the job of obtaining more dollars”, giving us a savings rate equation along the lines of:
Savings Rate = Sum of Dollars Assigned to Obtain More Dollars / Total Income
or, more specifically…
Savings Rate =
Personal Retirement Contributions +
Employer Contributions +
Debt Principal Payments /
Total Income Including Employer Contributions
Getting tabular with my actual numbers yields:
|Savings Type||Current Amount|
|1% Personal Contribution||$58.33|
|3% Employer Contribution||$177.99|
|Principal on Mortgage 1||$349.17|
|Principal on Mortgage 2||$62.11|
|Principal on Student Loan||$95.50|
|Principal on Residential Lot Loan||$25|
|Total Saved Dollars||$768.10|
Note: I added the employer contribution to my gross income and calculated savings rate accordingly.
I’m shocked to see it “so high.” The analysis gives me two big takeaways:
1. I can move my savings rate a lot with relatively small contribution increases.
For example, using freelance income to add an extra $200 per month to my 2nd mortgage payment would take my savings rate above 16%.
If you’re unwilling unable to increase your income, fighting to free up an extra $100 or $200 per month will make an enormous impact on your long term prospects.
2. Debt is killing my savings rate and my future.
If I didn’t have my Deep Shame 2nd Mortgage, my student loan, or the loan on the residential lot, I’d free up the current principal payments to the tune of ~$183 per month. I’d love to have that money going to Betterment or allow me to increase my contribution to the 401k.
But the freed-up principal would be the smaller win. Getting rid of those loans would also let me save the ~$513 per month in interest those loans currently cost. (Pardon me while I barf.)
Adding the extra $513 with the $200 from freelancing to my contributions shoots my savings rate to 25%!
In other words: getting out of ugly debt and increasing my income by all of 5%* allows me to double my savings rate.
*$200 would be a 3.3% increase, but I’m allowing for T&T (tithing and taxes).
This is a productive analysis for me – it shakes me out of complacency and reminds me that a) my debt is an emergency and b) small increases in earnings massively impact my finances.
Anybody care to share their savings rate?