The Secret to Saving 50%

To achieve financial independence, we need to save and invest. The more you save, the quicker you’ll get there. Unfortunately, the personal saving rate in the United States is quite low. Normally, it is under 10%. At that rate, it will take nearly 50 years to become financially independent. That’s why most normal workers won’t be able to retire early. If you want to join the FIRE (financial independence retire early) movement, you need to increase your saving rate drastically. A mere 10% won’t cut it.

Personally, I encourage everyone to shoot for 50% saving rate. This is a good compromise between the length of time (how long you need to work) and how much you can realistically save. At 50% saving rate, it will take 16 years to reach financial independence. That’s a long time, but not really that long compared to a normal working life (40+ years). Reaching financial independence could be shortened further by working part-time, a pension, outsized investment gains, and many other factors. The point is to shoot for 50% and you should be able to retire early in a very reasonable timeframe. Even if you don’t reach 50% saving rate, you’ll be better off than almost every household in the US.

Saving 50% is possible

We all know it’s good to increase our saving rate. However, saving 50% looks very daunting when you’re used to saving around 10%. You’ll have to save 5 times more! Who can afford to save that much? Today, I’ll show you how to get there. It will take time, but saving 50% is possible.  

1. Cut back a bit

The first step is to track your spending. This is a very difficult step for most people. In my younger days, I never tracked my monthly expenses. It was a good month whenever I spent less than I made. This is perfectly fine if you want to live a regular lifestyle and plan to retire at a normal age. However, you need to be more diligent if you want to achieve financial independence while you’re young. When you don’t pay attention to where your money goes, you tend to spend more.

I suggest tracking all your expenses on a spreadsheet for a few months. It really isn’t that hard since most of us charge everything on credit cards. You can just look at the monthly statement and transcribe the charges. This will show you where the money goes. Once you become aware of exactly where you spend, you can prioritize what matters to you and cut back on the things that don’t make a big difference in your life. You can strategize and figure out how to reduce your monthly expenses while minimizing the impact on your happiness.  

This is just a start, though. You can become frugal and boost your saving rate quickly, but there is only so much you can cut. We don’t want to be extremely frugal because most people can’t last long in that state. You want to find a comfortable lifestyle that you can hold the line at for many years.

2. Minimize lifestyle inflation

The second step is very simple. Once you’re in a comfortable spot, stay there and avoid lifestyle inflation as much as possible. This concept is simple, but it is very difficult to execute over the long haul. Most households have a low saving rate because they spend more as their income grows. Everyone wants to reward themselves for working hard and making more money. That usually means spending money on nicer stuff. However, freedom is a better reward. If you can minimize lifestyle inflation, you’ll be able to save more and reach financial freedom much faster than any regular person.

3. Increase your income

Here is the really hard part. The first 2 steps only hold the line. You might be able to boost your saving rate to around 20% by becoming more frugal. However, you need to make more money to really increase your saving rate.

Let’s look at an example.

*Saving rate = saving / income

$12,000/$60,000 = 20%

Lena makes $60,000 per year. After cutting back a bit, she can save $12,000. Her saving rate is 20%.

$32,000 / $80,000 = 40%

After a few years, Lena makes $20,000 more per year because she worked hard and got a few good raises. Luckily, she read this post and minimized lifestyle inflation over the same period. She channels all of her raises toward saving and investing. As a result of her dedication, her saving rate increases to 40%. It’s getting close to 50%.

Investment generate passive income

Let’s see how we can push her saving rate closer to the 50% mark. First of all, Lena invested all her savings over these few years. We’ll assume 7% gains for the sake of simplicity.

 Accumulated savings+ 7% Gains
Year 1$12,000$12,840
Year 2$20,000 + $12,840$35,139
Year 3$28,000 + $35,139$67,559
Year 4$32,000 + $67,559$106,528

After 4 years, her investment portfolio grew to $106,528. This portfolio generates passive income for Lena. We’ll assume she invested in a good low-cost index fund and her yield is around 2%. This is part of her income. We can add this to the equation too.

Passive income = about $2,000

Lena’s saving rate = $34,000 / $82,000 = 42%

This passive income doesn’t make a big difference at the beginning. Here, it just raises Lena’s saving rate by 1.5%. However, it will become a bigger factor once her portfolio is more substantial. Lena can also invest in a rental property or real estate crowdfunding to generate more passive income. However, let’s stick with the stock market for this post. It’s simpler for most people. Anyway, her passive income should be much bigger after 10 years or so. It will help boost her saving rate tremendously.

Side hustle

One last way to boost Lena’s saving rate is to hustle more. She can pick up a gig or two to generate some extra income. These days, nearly half of Americans have side hustles. Lena can become an Uber driver, deliver food, or take care of pets while their owners are on vacation. The amount of income varies greatly depending on the gig, but I think Lena can easily make $6,000/year on the side.

*If Lena is young, I highly recommend investing in herself instead of spending time on side hustles. She can get additional education, earn a certificate, or learn new skills. If her main career is good, then focus on getting promotions and moving up the ladder. Getting a raise/promotion in your main career is better than making money in the gig economy. On the other hand, if she doesn’t like her main career, she should try to focus on building her brand. She can start a blog, write a book, or start a YouTube channel. These brand building side hustles can become a new semi-passive income way to generate income. Young people should focus on entrepreneurial side hustle instead of working as a gig drone.

Everything adds up

So Lena did all these. Let’s calculate her saving rate.

Saving = saving from job + passive income + side hustle = $32,000 + $2,000 + $6,000

Income = active income + passive income + side hustle = $80,000 + $2,000 + $6,000

Lena’s saving rate = $40,000 / $88,000 = 46%

Well, we couldn’t get all the way to 50%, but you get the point. If Lena keeps this up, she’ll get to 50% saving rate after several more years. Her portfolio will grow every year and generate more passive income along the way. If her side hustle goes well, it’ll bring in more income as well. In the first few years, the saving from her main job will dominate the number. However, the passive income and side hustle income will keep growing. Eventually, she won’t need the income from her job anymore and she’ll have a choice to retire early or keep working. That’s what FIRE is all about. It gives you more choices.

Last year, we saved 58% of our income. It took us many years to get to this point, though.

In conclusion, it will take time, but saving 50% isn’t impossible. Keep investing and your passive income will grow to help carry the load. The right side hustle can help a lot as well. The key to this whole thing is to minimize lifestyle inflation. Most people spend all they make. You won’t achieve financial independence if you spend like that.

Image credit: Micheile Henderson

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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22 thoughts on “The Secret to Saving 50%”

  1. Saving 80 to 50% of your gross income: This can only be done if you make a large salary and absolutely live on nothing. It doesn’t sound like much of a life to me.

    Ms. L. Churchill

  2. I had a question on the savings rate. Is that gross or net income that you calculate the 50% on?

    For example, if you make $100,000 in salary, and you max out your 401k contribution, would you consider the 50% savings on the $100,000 gross income, or the actual net cash you received in your bank account of say $80,000 after the 401k deduction?

    Love the blog and thanks in advance!

    • I use gross. But many people use net income. Net income is just income after taxes and deductions like healthcare.
      401k should be considered part of the saving in both cases.
      Thank you and keep investing!

  3. Side hustle income is so important to saving 50%+. I’ve personally saved like 65% of my gross income and I honestly feel burnt out. Maybe I should cut back and save 50% and spend that 15% on fun so that I don’t leave the FIRE game completely 😉

  4. I’m proud that we were able to increase our savings rate to about 60% by the time we reached FIRE a few years ago. For us, the income wasn’t the biggest factor – in fact, by the time we retired, that 60% SR was just from my income since my wife wasn’t working.

    In our case, lifestyle inflation didn’t play a huge role. As I got raises, we just continued to save more. Because we were already living a pretty frugal lifestyle, it just happened pretty naturally and helped us get there much faster. We also made sure that we didn’t cut back on the things we loved either – that’s a recipe for disaster.

    Nice job on the 58% savings rate last year, Joe!

  5. Hi Joe, a great post. Yeah, 50% of saving rate (before tax) is a good approach. It worked with me, and took me 15 years to get to the point of retiring early. Saving and investing requires a lot of discipline and consistency, and nobody can help except ourselves. I learnt the lesson from my parents early on: spend money only when absolutely necessary. So to me, it was not that hard to do. It may be hard for some people.

    – Helen Wang, author of the memoir “LIVING OR DYING?: A Chinese American’s Life, Dreams, and Journey with Cancer”

  6. I found the increasing income worked best for me, went from $50k to $100k to $250k of gross income, without increasing my expenses. That way it went from 0% saving to 50% to 80%+ over time. It’s easy to save when your income suddenly jumps, hence I liked jobs where there was a large performance component. Spend a portion of your monthly income, but when a bonus hits, bank the whole bonus. Also, banking most of any salary increases rather than inflating expenses.

    • I agree. That’s why I recommend that young people focus on their main career first. If they don’t like their main career, then they should try to look for alternatives.
      Great job increasing your saving rate to 80%+. That’s pretty amazing.

  7. It actually gets easier to save a greater percentage once your capital starts contributing by generating passive income. The key is to not let that money give permission for lifestyle inflation, which is easier said than done.

    • This is the part that got me really interested in buckling down. It was an eye-opening moment a year or two ago when I realized investment income had surpassed what we were setting aside. Our net worth just since January 1 has gone up by more than three times our savings in that time and more than twice our YTD gross salaries.

      When investments generate capital faster than our 9-to-5s do, possibilities and confidence bloom. It’s so reassuring.

      • These days, the bulk of our annual net worth increases come from our investment. It took a while to get to this point.
        Life is great when your investment is working hard for you.

    • Well, once you get to retirement age, it’s probably okay to inflate your lifestyle a little.
      But it’s better to live modestly while you’re young. Your money works a lot harder with time on your side.

  8. Nice layout Joe, as we all know the delayed gratification piece is what most folks fail at. And in today’s environment where they see what everyone else owns on their social media feed I don’t really see it getting better. Envy and jealously are strong feelings and coerce people into obtaining stuff instead of wealth.

  9. Good post Joe! This is basically what I did for the first 17 years of my life. I have a post where I broke down my savings rate every year on my blog. I didn’t manage to save 50% every year, but it was pretty close.

    I think the trouble is, a lot of people have trouble cutting back on their lifestyle. They’re too used to living an extremely luxurious lifestyle. Sure, they save for awhile, but then they’ll need a nice new car or high-class vacation and there goes all the savings.

    It takes a different mindset about money, and very few people have the willpower to make it happen for 15+ years.

    • We all had to start somewhere. 50% might seem intimidating, but you can start at 20% and improve every year.
      You’re right about a different mindset. For me, I finally realized that I value time more than stuff.
      It’s nice to have nice things, but nothing is as good as freedom and autonomy.

  10. I agree. I am a strong believer in saving 50 percent of one’s income. I normally use after-tax income as my parameter instead of pretax income (it’s a little easier this way).

    Here again are the two primary reasons that many Americans and Canadians, whether married or single, are in serious debt and will have financial problems in retirement:

    1. Immediate gratification takes too long.

    2. A “necessity” is any luxury that the neighbor happens to have.

    People not having enough money for retirement should read “You’re Broke Because You Want to Be” by Larry Wingate. I read the book even though I didn’t need the advice. Problem is, most people who need the advice from Wingate’s book will not read it. And even if they do read it, they will be in denial that they are responsible for their financial shortcomings.

    Here are some of the words of wisdom that have helped me create the financial prosperity and personal freedom that I enjoy today:

    “The greatest stock market you can invest in is yourself. Finding this truth is better than finding a gold mine.”
    — Byron Katie

    “People who don’t respect money don’t have any.”
    — J. Paul Getty

    “The rules for obtaining money “legally” are available for your study. If you think you want more money, and you are not studying the rules, I conclude that you would rather gripe about not having money, than have it.”
    — Ron Smotherman writing in ‘Winning Through Enlightenment’

    “If you borrow money to make money,
    you’ve done something magical. On the other hand,
    if you go into debt to pay your bills
    or buy something you want but don’t need,
    you’ve done something stupid. Stupid and short-sighted
    and ultimately life-changing for the worse.”
    — Seth Godin

    “If you want to fix your money problems, get your head examined. It’s your mindset and attitude about money that will either draw it in to you or repel it away from you. What’s in your head determines what’s in your wallet.”
    — Darren Hardy

    “Riches do not respond to wishes.
    They respond only to definite plans,
    backed by definite desires,
    through constant persistence.”
    — Napoleon Hill

    “Not to have a mania for buying things is to possess a revenue stream.”
    — Jon Hanson

    “The ownership of money and property comes as a result of doing things in a certain way. Those who do things in a certain way, whether on purpose or accidentally, get rich. Those who do not do things in this certain way, no matter how hard they work or how able they are, remain poor.”
    — Wallace D. Wattles, in “The Science of Getting Rich”

    “The amount of money you make will always be in direct proportion to the demand for what you do, your ability to do it, and the difficulty of replacing you.”
    — Earl Nightingale

    “Money will appear when you are doing the right thing in your life.”
    — Michael Phillips

    “There is nothing mystical about how to attain prosperity. The Universe supports and rewards us for taking risks on things that matter to the Universe. When we remember this, the mysteries about prosperity disappear, and prosperity stands explained. Prosperity will then manifest itself easily provided the Universe agrees that we are doing the right things in our lives to deserve this prosperity.”
    — from “Life’s Secret Handbook”


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