Savings rate

One of the basic principles of reaching Financial Independence (FI) is having an above average savings rate. Your savings rate ie how much of your net income you save directly depends on how much you spend. Therefore the lower your living expenses, the higher your savings rate, the faster you will reach FI.

The theory goes that if you save 25 times your living expenses, you will be able to live off this amount forever, by withdrawing 4% per year from this invested amount.

For example, if your living expenses are $40 000 per year, then you will need to save 25x $40 000 ie a million dollars before you can retire. This means you can withdraw 4% of a million dollars ie $40 000 per year and reinvest the balance. Then the next year, withdraw another 4% and so on for your living expenses.

There are of course, a lot of assumptions – the chief being that your investments / savings provide a higher return than inflation. In other words, a million dollars today may not buy the same things as a million dollars in 30 years or 50 years’ time. Therefore, your investments or savings must beat inflation.

Returning to the example above, if you can reduce your living expenses then the amount you need to save for retirement will be less. For example, if you can live on $30 000 per year, then you only need to save $750 000.

This incidentally is the same formula that is used to calculate how much you need for traditional retirement. The difference is that pursuers of FIRE actively reduce living expenses in order to aggressively increase their savings rate, aiming at a 50% or more savings rate.

Numerous blogs expound on this eg in this  article, The Shockingly Simple Math Behind Early Retirement. According to this article, if you save 5% of your pay, it will take you 66 years to retire but if you can increase it to 60%, you can retire in 14.5 years. That is a whopping 51.5 years shaved off!

Therefore using the article as a reference, if  I want to retire at 55, a mere 8 years away, my savings rate would need to be a massive 70%! Now, that is a scary number.

At this stage, I had no idea what my savings rate was so it was time to start tracking my expenses … yikes! I have never budgeted in my life, not consciously, at least. I have always lived below my means so I never felt the need to stick to a budget.

I use ASIC’s free track my spend app on my phone to record all my expenses – it does require discipline to enter ALL expenses especially little cash transactions without receipts eg a take away cappuccino. I have only been doing this since March. I have noticed though that since I started recording expenses, I am more mindful about my expenses.

My monthly savings rate have fluctuated wildly depending on whether it is a month when utility bills are due, once off expense such as fence replacement or when annual professional association fees are due. So far my best month was 72% and the worst month 26% with an average of 54%.

Conclusion? I have a LOT of work to do to increase my average savings rate to 70% if I want to retire earlier at 55 instead of 60 or 65.


What I learned about the FIRE community

It was very overwhelming as I started to dive into the world of FIRE – people were so hard core!

They rejoiced in being frugal and had insane savings rate. They sold their cars and bought bicycles. They sold their homes & downsized. They moved to different cities with a lower cost of living. They pursued side hustles to increase their income. They exchanged ideas on how to save on tertiary education. They reduced their living expenses. They sold things they no longer needed. Their meals cost $2 per meal – wow!

But the one thing that stood out for me was that they were happy while pursuing this path. They were happy eschewing consumerism, the need to keep up with the Joneses next door. They were happy with a lot less material stuff. They spent time doing what they enjoyed – activities that were free such as hiking. They were happy doing things for themselves instead of outsourcing.

My first thought was there was no way I could be that hard core. I’ve always had a fear of cycling in traffic. The last time I cycled was on a holiday in the Hunter Valley where we hired bikes to cycle between vineyards. What a fun thing to do, except I fell off my bike at least a dozen times between the first and second vineyard (which was a short distance from each other). I was ecstatic when the heavens opened up and the bike hire company offered to pick us up and refunded our money – I was spared the ordeal of cycling to another 4 vineyards.

I am very fortunate as I have the use of a company car so my car costs are nil, yes zero. That means I save on car registration, insurance, fuel and maintenance costs. I have not calculated the exact dollar savings over the last twenty years or so but my best guess would be thousands of dollars. Plus I live 15 minutes from my workplace which means I don’t have a long commute. So I think I can safely leave bicycling out of the picture … for now.  Note to self – may need to explore biking as a recreation … or to prepare for my retirement when I no longer have use of a company car. Hmmm …. it may be easier to save money to buy a second hand car.

I have paid off my mortgage so at least my housing costs are neutral from now on except for ongoing maintenance. Another note to self – must set aside some money to budget for this expense. House maintenance can be costly as evidenced by my recent expense of new fences. I have no wish right now to downsize to a smaller abode even though I acknowledge that my house is larger than I need it to be. The goal of FIRE will take longer to reach, as a consequence.

The two biggest expenses incurred by most of us are housing and transportation. I am very grateful that in my case, expenses in these two major categories are under control. I just need to work on the other areas of my life …





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