The One Thing You Can Do to Be One Step Closer to Financial Independence
How an expense audit can increase your savings rate
Did you know that the higher your savings rate is, the less time you have to work? Assuming you’re investing the money you don’t spend, of course.
Mr. Money Mustache who popularized the FI/RE movement broke down the math behind this concept of saving more to work less in his article, The Shockingly Simple Math Behind Early Retirement.
For example, if you have a 10% savings rate, you have to work for 51 years. If you save 25% of your income, then that’s 32 years of working. What about 50%? 17 years of working. 75%? Just 7 years of working. Read his article to read about the assumptions being made.
At the bottom of this article, you will see how a fictional character who shaved 54.5 years of working by increasing her savings rate by almost 60%!
Financial Independence Misconception
Being in a position where work is not necessary does not mean that you have to stop working, it just means that work now becomes optional and you are no longer dependent on a paycheck from an employer. This level of living is called being financially independent, where work is optional.
Financial independence puts one in a position to call 100% of the shots in your life.
You can do whatever you want with your time, which can mean that you chose to engage in meaningful work, or not. Essentially, being financially independent means that you will have increasingly more choices than if you were bound to a paycheck to fund your lifestyle.
When you reach financial independence, you can live your life on your terms because you own your time.
Because a high savings rate can get me to financial independence sooner, my savings rate is my north star in my FIRE journey.
Defining a Savings Rate & How to Calculate it
A savings rate is simply the ratio of the amount of money that you don’t spend compared to the money that you earn. For example, if your net income each month is $3,500 and you don’t spend $800 of it, then your savings rate would be 22.8%
Savings Rate = Money Kept / Money Earned
Savings Rate = $800 / $3,500
In the case of FIRE, when we refer to a savings rate, it is implied that the money that is not spent is growing. In other words, in the FIRE context, the money that a savings rate represents isn’t treated as savings, it’s treated as money to be invested.
How I Increased My Savings Rate
There are two ways to increase your savings rate. The first way is to decrease your expenses. The second way is to increase your income. It’s a simple concept, but it may not be obvious where to start.
Once I was knee-deep in this community, it became evident that a savings rate was important. It is a commonly boasted figure on many Instagram financial account bios, and it even occupies space on many FIRE community Instagram feeds.
I started intentionally increasing my savings rate by first decreasing my expenses and increasing my income. Below are things that I actually did.
How I Decreased My Expenses
- Looked up ways to decrease my PG&E bill on their website.
- Got new car insurance through Costco’s partner company, Ameriprise.
- Downgraded my Costco membership.
- Changed where I grocery shop and how I grocery shop.
- Canceled one of my life insurance policies because I was overinsured.
- Use my brother’s Netflix account.
- Applied for a scholarship for grad school.
- Created a budget.
How I Increased My Income
- Got a new job with a higher earning potential than the first job I had after college.
- Got a housemate.
- Got a part-time job (multiple streams of income).
- Sold things around the house I did not need or use.
- Use a credit card for everything to get cashback.
- Use cash-back apps like Rakuten, Ibotta, Fetch
- Started flipping thrifted items (read this article to see how I made $1,050 in 51 days and 44 items.)
A Method To Potentially Increase Your Savings Rate by Over 50%
Take a look at this fictional person’s finances. They represent a realistic scenario of someone who increased their annual savings rate by almost 60%. They were able to accomplish this by taking a financial audit.
As you can see above, before their financial audit, their savings rate was 6.1% Why was it so low? Let’s take a look at the break down of her expenses below. Their monthly net income is $3,748/month.
After undergoing the process of tracking all of their monthly expenses, they took each item and made a decision to keep, cut, or lower that expenses. What was the result?
The result was that they were able to lower or cut almost all of their expenses. By increasing their savings rate from 6.1% to 65.5%, they only have to work 10.5 years until retirement instead of around 65!
In this example, the person would still have to consider their future expenses and consider inflation to get a true value of their future monthly expenses, but this simple example still shows you the potential savings rate transformation that an expense audit can have on your personal finances.
Your Turn
What would happen if you went through an expense audit? How much could you increase your savings rate and how much earlier could you retire? This is particularly exciting because small changes can yield BIG savings.
Check out my Expense Audit Tracker here to start your savings rate transformation and be one step closer to financial independence.
Don’t forget to invest your savings rate!
Let’s Connect!
Follow me on Instagram (@the.retired.millennial) to see more money content. See how I increase my savings rate by saving my money and increasing my income.
Take a look at the mentioned tracker here.
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