The average millionaire has seven sources of income while having the same 24 hours in a day. The number one source of income is their W-2 income. The next best source is their investment in assets that generate passive income. However, to invest in those assets, the average millionaire needs money first. Therefore, what’s really important is their savings, profit that is leftover after expenses are paid. So then, what is the best savings rate?
Recently, the U.S. personal savings rate went through the roof. Believe it or not, this is not a graph of Tesla stock’s performance. For July 2020, the rate is 17.8%, much higher than the historical average of 5-10% but we can still do better. For a median household income of $63,000 in 2018, that’s saving between $3,150 to $6,300 per year. At that rate, the median household will retire at.. gasp.. 65 years old! Even at a 18% rate, you would save $11,340 a year. Which is really good but you can do so much better.
As an astute filledwithmoney reader, you know better than to retire like everyone else at 65. No one likes to work their fingers to the bone for forty years to have a chance at retiring. Everyone likes to work to retire without fail. I’ve got great news for you. There is absolutely a way for you retire without worry.
The Best Savings Rate is When It Makes You Feel Powerless
As a 25 year old to have a $250,000, I admit that I’m at least in the top 5% net worth of people in my age. How did I do that? It wasn’t by chance or by luck. It was by saving until I felt powerless. For me, that was when my personal savings rate sat at 50% of my gross yearly income. Of $56,000, I saved $28,000 per year. No questions. No objections. Without fail.
To be brutally honest, every month when it was time to pay off my credit cards, I felt powerless. I was living paycheck-to-paycheck. Four years of college with a double major, triple minor, and internships every summer and to live paycheck to paycheck felt awful. I worked like a dog for years and at the end of the tunnel was a paycheck to paycheck lifestyle? How could I let this happen?!
Because I pay off my credit card statements in full every month, almost all of one after-tax paycheck went to credit card companies. Almost all of the other after-tax paycheck went to paying my $749/month apartment. There were few surpluses that I spent on. I budgeted $500/month dedicated to fun to bridge the gap between staying sane and going crazy. Most of the fun budget went to things like furniture, clothes, going out, and such so I only had short-term gratification from buying material things. Never lasting enjoyment.
Don’t get me wrong, weekends were spent exploring Houston and winding down with friends and I was happy. However, I still felt restrained by an invisible hand dictating what I could and couldn’t do. It wasn’t the best feeling.
The Results of Feeling Powerless and Saving Like a Maniac
It took me two long grueling years before I actually felt that my efforts were paying off. That it was finally showing results. I graduated college at 21 and two years later at 23 I created a $100,000 net worth for myself. By the end of the year, the stock market tanked so I ended up losing that $100,000 throne but I was still happy. I did it through my 50% savings rate which felt damaging.
Was it worth it? Absolutely. Would I do it again? In a heart beat. Yes, I was someone who carefully watched dollars. However, in exchange, what I received was progress towards financial freedom. That’s all this blog is about. Freedom. As I currently write this post and as my net worth stands at around $250,000, I am more than glad that I practiced delayed gratification.
These days, I still do watch and religiously track dollars flowing in and dollars flowing out. However, I have a huge cushion for when my monthly bills come due. It doesn’t feel as restrictive as it did before. I would check my credit card balance before buying anything that I didn’t need to live on. Nowadays, I buy things not based on where I need them but whether I want them.
Since I am trained to not buy a lot of material things due to years of practicing frugality, I usually don’t buy many stuff in the first place. However, I am not as mindful as I was before and have full confidence I have the budget to back it up. Additionally, a lot of the fun budget that I used for two years out of college were spent on things that last a long time. Meaning when I bought a bed one year, I didn’t need to buy a bed the next year.
As a result, my fun budget feels even more stretched than before!
Conclusion
The best savings rate ever to quit the rat race is to save until you feel powerless. Until it frustrates you then do it for over 2 years. That’s when you start to feel the effects of compound interest kick in. When you finally feel compound interest doing work for you, that’s when you start enjoying life. That’s when you move on to the next level to quitting the rat race.
I’m in the rat race right now, and believe me, there’s nothing more that I would like than to get out of it. Do I mind working? No. But I mind that I’m working because I have to. I am currently not working because I want to. So, come on, save like a maniac with me and then we can all achieve freedom from the golden handcuffs sooner rather than later. I can already see your future self thanking me.
