Increase Your Savings Rate: It Determines When You Can Retire

How fast do you want to retire? Do you genuinely want to work until the full retirement age of 66? I know I don’t want to work for another 25 years.

But what is the best way to retire early? We all hear terms like Financial Independence Retire Early (or F.I.R.E.), but what does that mean?

The most significant factor in your ability to retire is your savings rate. This is how much money you can actually get into savings and investment accounts.

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Calculating your savings rate. Calculating your savings rate is simple, dividend your monthly savings by your monthly income.

For example, if you save $3,000/month and earn $10,000, your savings rate is 30% (3/10). The higher the rate, the faster you can escape the rat race. 

However, you also have to invest this money into income-producing products. After stocking your Tier 2 emergency fund ($10,000), you’ll want to start investing for dividends.

I prefer income investing above other forms of stock market investing, mainly index funds and dividend growth. However, all three can get you to the promised land.

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How to increase your savings rate. The trick to getting out of the workforce is achieving an incredibly high savings rate.

Most people believe earning more money is the answer, but that’s not the case. Getting a pay raise will most likely cause lifestyle inflation—your standard of living increases.

We can use a combination of many tactics to increase our savings rate. Ultimately, every month your net worth should increase, your dividends should grow, and you should own more assets. Let’s look at some ways to improve your savings rate.

1. Living below your means
2. Earning more at your job
3. Creating a side hustle
4. Buying income-producing assets

Living below your means. Living below your means is the most crucial path to increasing your savings rate. LBYM will be essential for surviving and thriving for the rest of your life.

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LBYM is not about recycling toilet paper and eating grits every day. It is about living one or two steps below your income level.

As your income grows, you can slowly grow your lifestyle. Hopefully, one day you will make $20,000/month in passive income and live on $12,000 or $15,000. That sounds like a good life to me.

The best way to determine your living budget is the 50/30/20 (needs/wants/savings) from the book “All Your Worth.” Start here to see where you are overspending and tighten your daily budget.

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Earning more at your job. Most of us have to work a job. If we are working, we may as well make the most money possible.

If you are in a dead-end job, you will need to “upskill” by getting a new certification, qualification, or degree. You can also work multiple jobs to achieve a higher income.

Remember, as you start making more income, it needs to make its way into your emergency fund and investment portfolio. That’s the entire point of making more money.

Creating a side hustle. As you look for ways to make more money, search for passive income. The term “passive income” throws people in a loop because it takes “active” work to build.

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Passive income is better than active income because you aren’t trading time for money; you are exchanging time for assets.

For example, I am writing a book right now. Once I complete the book, it can make me money until the day I die (plus 70 years). Work once, and continue to reap the rewards.

You can also make money with automated businesses like vending machines or rental cars. Once you understand the process, you can automate it by hiring an employee or a manager to supervise. 

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Again, these things take time to get into motion, but they can compound into a life of their own. Once you get these things flowing, your savings rate will increase exponentially. 

Buying income-producing assets. The final resting place of all your income is purchasing income-producing assets. The most accessible of which is dividend-paying stocks.

However, don’t forget about real estate and rental income. Owning land, houses, and properties can significantly speed up your wealth creation. 

The cool part is that revenue from income-producing assets will count toward your savings rate. For example, my wife and I average $1,200/month in dividends.

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We reinvest at least $800 of those back into our accounts. So our savings rate increased by $800 for the month.

Renting rooms is perhaps the most extraordinary way for the average person to become wealthy. It doesn’t take much time, costs nothing, and is a 100% profit. 

If you rent a room for $1,000/month and invest it directly into dividend stocks, you have created the best feedback loop to build wealth quickly.

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Combine all of these for the best effect. Most people only focus on one or two of these. Using all of them together will give you the best results.

For example, trying to live below your means forever will not greatly speed up your saving rate. You can only cut so much before you bleed.

However, when you combine living below your means, renting rooms, and dividend-paying stocks, you will see a massive difference in one or two months.

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My wife and I used a combination of these to quickly grow our passive income, net worth, and saving rate. In four years, we completely transformed our lives and future outlook.

Conclusion. Look at each of these four techniques separately and evaluate how to improve. Then, look at your overall lifestyle and savings rate.

You’ll have to do something drastic to gain a foothold in this life. Let’s put everything into one dramatic, life-changing move.

Let’s say you decide to become a remote worker. You find a job paying $110,000, but it’s super stressful. You want to work it for five years and set yourself up for easier jobs in the future due to passive income.

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You take the job and move to Alabama, where you buy a $250,000 home with four bedrooms. You rent two bedrooms for $700/each and buy a Tesla to rent on Turo for extra income.

In five years, you earn $3,000/month in dividends, which is enough to pay for your house payment and food budget.

You can now downgrade to a less stressful job making $60,000 remotely. Your passive income and automated businesses continue to grow while you enjoy the fruits of your labor. 

Life is good, and it’s all because you were willing to make a change to your savings rate. Good Luck!

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