Target to save and invest at least 50% of your money if you want to retire within 20 years. Or aim to save 65% for a decade to enjoy the fruits of your other’s labour.
It is a very common question in the FIRE community. Indeed, you would likely want to know what kind of effort you must endure and for how long, before you are set for the rest of your life.
They say we should save, but how do we measure it?
Before diving into the numbers, let’s define what a saving rate is. More or less, it is the amount you save, divided by the money at your disposal, such as salary, commission and other incomes. Some bloggers include their taxes, some others don’t. There is no single perfect answer. What matters more is to measure it constantly, the same way over time. For example, you may choose to live in a nice 3-bedroom house or a 1-bedroom condo, thus home expenses are within your control. However, you can’t choose to decrease your taxes indefinitely after trying to optimize to the max, nor avoid paying child support, nor any over expenses that are absolutely necessary and/or out of your control. This is the reason why I would exclude it from the bucket of money at disposal.
My suggested formula for calculating saving rate
= (Money saved or invested) / (All sources of income – Taxes)
= (All sources of income – Taxes – all other Expenses) / (All sources of income – Taxes)
Keep the formula simple
Note that all items should be measured with the same time frame, i.e. per year, per month, per week. In the end, the ultimate objective is to keep it simple, because it is a simple tracker of your saving effort. No need to waste your precious time to reinvent the wheel.
The saving rate you target is a very personal choice, as some people would rather not sacrifice their current standard of living, whereas other people are totally fine to spend the bare minimum to reach the survival zone. There is no real need to compare with others down to the decimal places. FIRE is a journey, not a sprint. Pick a saving rate, and be consistent. If you can improve over time (likely as you will not fall into the lifestyle inflation trap, and your income will increase), it would be even better. However, do not beat yourself up if you can’t max out as you planned, maybe you were a bit too ambitious.
Why is a high saving rate important?
By definition, reaching FI means you either have enough money sitting there for you to use for the rest of your life, or you have recurrent passive income so that you do not need to trade your precious time for money, unless you choose to. I found it stunning that the saving rate required is almost unrelated to your income. It is related to your savings and your lifestyle. Keep in mind that the savings need to be invested to generate the passive income. Further posts will cover how and which investments.
Let’s say Bob makes $10k a month, but spends $9k a month, then he has $1k left (10% saving rate). $1k sounds reasonable, but not so much to someone spending $9k! It will take Bob about 51 years of work to retire (assuming his lifestyle remains similar). However, if John spends $1k a month and saves $1k a month out of a $2k salary (50% saving rate), it will take him only 17 years of working to retire. So refreshing to know most people can be successful on this path if they put their mind to it.
Savings rate and length of time matrix
You may check the post of Mister Money Mustache, one of the earliest promoters of the FIRE movement in his post, The Shockingly Simple Math Behind Early Retirement where he explains the rationale. Another blogger reviewed the details and confirmed the numbers in his post “Does Mr. Money Mustache’s Shockingly Simple Math Hold Up?”
For easier access, I reproduced the data into the chart below:
| Savings Rate | Years to FIRE |
| 5% | 65 |
| 10% | 51 |
| 15% | 42 |
| 20% | 36 |
| 25% | 32 |
| 30% | 28 |
| 35% | 24 |
| 40% | 21 |
| 45% | 19 |
| 50% | 17 |
| 55% | 14 |
| 60% | 12 |
| 65% | 11 |
| 70% | 9 |
| 75% | 7 |
| 80% | 6 |
| 85% | 4 |
| 90% | 3 |
| 95% | 2 |
In our case, we were very very aggressive in our saving rate and investments, almost too much to a point where we reached frugal fatigue, which I will share more in another post.
Actually, it was more adventurous than challenging
What do I mean by adventurous? Well, don’t we say that we should pay ourselves first? This is exactly what we did. Every month, we invested about 80% of our salary, putting 15% for our loan repayment and keeping 5% for our expenses. Yes, you read it right, about 5%. We weren’t depriving ourselves of anything, we were living very frugally, and we were fine with it. So I guess that we have always been cost-cautious, mainly because of the way we were raised as children. Indeed, I was part of a middle-income family. My parents weren’t taking us to eat at the restaurant. My father was a fantastic cook, and my mom would always make sandwiches when we were going out or on the road. Being frugal is easier when you are used to frugal mindset. Old habits die hard.
Don’t overbudget the unexpected expenses
One day on my morning commute, my friend and I were discussing finance and savings. He was shocked to discover that we only had 5% left per month for expenses. “What happens if you have unexpected expenses?”. I replied with a smile “Well, we have credit cards for that”. Obviously, as a conscious spender, I would never spend money that I don’t have. The use of credit cards was purely as a cash management tool which got us one month of ‘free loan’ before the sum is due in the next billing cycle.
With this one-month window, we had time to think about how to settle the bill. At times, we dipped into our savings to pay off the needed expenses, and we made it a point to replenish the savings as soon as possible, such as with one-off extra income.
Indeed, payouts from my company were spread over the year: bonus in April, salary review in September, year-end double pay in January. Considering this sequence, I was always looking for that extra income in the near future to replenish any savings taken out before, and to maintain our aggressive saving rate.
Being Frugal is a blessing
Why wasn’t it challenging? Mainly due to us being relatively frugal. We were quite happy and satisfied with what we already had, and we always struggled to answer the question: “What do you want for your birthday?”. Now I would consider it a blessing, as frugality was already in our nature. Yet, we would also treat ourselves with a very nice trip every year (surfing in Hawaii, climbing in Tibet, paragliding in Australia, an epic tour to Easter Island…) and also enjoy fine dining at times. But we would treat it as an exceptional experience, and would not turn an expensive experience into a dramatic lifestyle recurrent expense.
According to the chart above, it should take us 6 full years to reach FI with a 80% saving rate. It actually took us 3 years
Many factors can influence the length of the accumulation phase. Below are the main ones that helped us to reduce the length of our savings.
- We had savings that were put to work in the market, so we did not start from scratch.
- We just kept grinding the work, taking in more work and responsibilities with the objective to max out the income and bonuses. However it did take a toll on my health, and I would not recommend the same approach. FIRE is a journey, not a mere destination.
- We kept our expenses as low as possible and invested any bonus or extra income in the market.
- The market has worked in our favour ( +20% in 2017, -2% in 2018 then +32% in 2019) during the time. We won’t mention what happened in 2022 though.
- Although we were not in the market for many years, we could still enjoy a nice compounding effect on our investment amounting to 55% over the 3-year period.
- We made use of tax loan to advance our yearly investment at the beginning of the year while repaying monthly with our income. In this case we could be in the market as early as possible, and luckily benefited from the nice bull market during the time.
p.s. Note that the market did have a roller-coaster ride during and after Covid. Our portfolio lost quite some value which exposed us to sequential risk we mentioned in another post.
Logging your expenses is key
Oftentimes, we can only improve on things we measure. This adage applies well in personal finance. During our journey, I was logging every single expense in an app on my phone, while Mama FC does the same for hers. Over time, I switched to a Google spreadsheet which I co-authored with Mama FC to keep track of our overall expenses. It is actually easier to manage our own spending categories and currencies, and build our pivot tables for tracking. Also, as I was concerned about the loss of data if the app or its developer disappears one day, I just wanted to better control the data. I was well aware that a FIRE journey may span over many years or even decades.
To live frugally was almost a mental challenge for me. How much I could avoid spending today, this week…? As I was logging every single expense, even the tiniest one such as a single bus ticket, I soon realized I would rather avoid the expense in the first place, just to avoid having to log it somewhere. In the end, I was not feeling deprived of anything but quite the contrary, I was happy not to have to log the expense. Logging expenses is tedious but in the end, it is easier than it seems and it has a positive impact on decreasing our expenses. I invite you to use our customizable multi-currency tracking expenses tool here.
Where to start trimming expenses
Once you start to track expenses, spending patterns start to fit into categories. Spending trends usually take shape over several months, after which you could analyse these categories for improvements. Instead of waiting till then, I would suggest first looking at recurrent subscription expenses. Questions I ask: Do I really need them all? Is there a better deal available?
Subscriptions
We love to read The Economist, but do we want to pay a full price for it? Every year, instead of allowing auto-renewal to kick in, I would cancel my subscription and restart a new one to get a special offer. You might think it is tedious to do it for limited gain, and you may be right. For me, it is a mindset. I still have a very vivid memory when I invited my key customer for a coffee at a cafe. Obviously he was earning a very decent income, nevertheless he found a penny, kept it, and told me: “A penny saved is a penny earned!”. Maybe this is the secret of wealthy people.
How about your phone plan or internet connection at home? Although our plans offer 50 GB of data, do we need that much? Do you actually know how much you are consuming? We went from a very large data plan to a prepaid sim card for the same level of service we needed. We cut our mobile bill by 10x just by stopping to be wasteful. Same for the internet, we do not play online games, nor we stream several movies at the same time, so the basic plan is already fast enough.
Black Friday deals
Furthermore, you may delay paying for any subscription until Black Fridays if you can. It works even if you are like us, who are not living in the USA. The amount of discount can be substantial. This is how I got my VPN subscription service and my exercise app subscription. I paid for a three-year plan for the cost of one, and I felt great.
Why buy new books when you have a library
We also used to buy lots of books. How often do you reread a book? Honestly, I think it happened less than ten times in my life. So getting a subscription to the public library and keeping 10 books for life that I really enjoy is my way going forward. Moreover, we save storage space needed to store those books.
Voila, these subscription-related savings are easy to track with immediate impact.
Analysis of expense tracking
After doing expense tracking for some time, you will be able to assess your key expense categories. Our top five expense categories are rental, groceries, transportation, education and F&B.
1. Rental
Rental is significant and is inversely correlated to transportation. If you want lower rent, you can scale down and move away from the city center. However, it might have an impact on your transportation costs and time. It is up to you to decide the effort you are willing to make.
2. Groceries
For the Groceries, although we do not shop at hard discounters, we do go to large supermarkets, and look for alternative options which are cheaper by weight. It takes some time at the beginning to change the assortment of food items which are of better value, but again benefits compound over time. My mom mentioned to me that she can buy gift cards from her supermarket with a 4% discount. Although it might not sound much for a week of groceries, for us it amounts to about $500 savings per year in France.
3. Transportation
Transportation cost is also significant as we lived in a French city with limited public transportation, we owned a car and we took our three children to their respective schools and daycare every day. Trust me, transportation costs added up pretty fast. When we were living in Hong Kong, we did not own a car and were using almost exclusively bus and metro to go around town, and our transportation bill was 20x lower. As for Dubai, although gas is much cheaper than elsewhere, there is always a vast distance to cover for each journey.
4. Education
Depending on where you are, it may be surprising that education was our 4th largest expense category (2nd largest as of 2022, and soon will become 1st). Although there is free public schools in France, unfortunately the system do not deliver the scope we are looking for. Two of our children were in international schools, which didn’t come cheap but we do not regret it. They were happy to go to school every day, and were sometimes sad during their holidays because they could not go to school. Our oldest daughter understands and speaks three languages, and is interested to learn more. Needless to say, education system in Dubai is very competitive with many options to choose from. Be prepared to work a bit longer just to be able to provide them with the education you like.
5. F&B
F&B is an experience. We usually do not go to restaurants to eat something we can make at home. Most often, it is a way to build memories for us or with friends when we go to celebrate an event, or to enjoy a unique experience.
But I really love my morning mocha!
I am all for treating yourself with what brightens your day! The flip side of overspending is frugal fatigue. For some people, the more you save, the more you want to save. And it is hard to know when to stop because you feel guilty if you spend. To know your (and your partner’s) limit, try to save a bit more every day. If you feel that you are missing something, or depriving yourself, it may mean that you have gone too far. Just step back and continue to spend on the selected few that please you. No one, not even yourself, should judge if your morning skim milk mocha, nail polish, or concert ticket is too expensive. FIRE is a journey, not a destination. There is no reason to be miserable along the way.
Regarding what we invested in, and what we would recommend now, is in another post.
And you, how much do you save right now? What is preventing you from saving more?
Title picture credit: pixabay.com
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