I talk a lot about saving on this blog, and here is why:
Your savings as a percentage of your income dictate when you can retire.
Here is the idea: if right now you are in the position that you can live the way you want, without any income from active employment, and can do this for the rest of your life, then congratulations, you are in a position to retire and can do so when you see fit.
On the opposite end of the saving scale are those who save nothing from their income, and if they stay in this position, they will have to work everyday for the rest of their lives and will never be able to retire. Everyone else is somewhere in the middle of these two points.
This article on the same topic by Mr. Money Mustache was one of the first I read when I began my search for early retirement, and it opened my eyes to the fact that there is another way to consider my finances.
The link between savings and retirement is an obvious one, but how they affect one another is really rather surprising. For example, saving an extra $1,000 per month could mean you can retire 25 years earlier than planned (based on the average family income of $53,000 per year and an initial savings rate of 10%).
For simple tips on saving that extra $1,000/month, read Saving $13,000 by Ditching These 7 Things.
It may surprise you to learn how soon you could retire with a couple of little life-style tweaks. The rather awesome tool behind the link below will help you calculate your time to retirement based on your saving percentage. The assumptions in the graph are laid out at the bottom of the page, but lets reiterate them here:
- a 5% return on investment (ROI)
- withdrawing at the 4% “safe withdrawal rate”
This runs on a very similar system to my Compound Interest Calculator which you can download and play with at your leisure. However, the cool graph in the link gives a great representation of how a little extra saving goes a long way to reaching your goal faster, and the higher the percentage of your income you can save the closer you are to retirement.
Let’s take a look at the average house hold income of $53,000: if they save $5,300 (10% of their income), they will be able to retire in about 51 years. However, if they were to increase that number by $833.30 per month to $15,900 (30%) of their income, they would be able to retire in about 28 years.
Saving that extra $10,600 per year would knock 23 years off their working lives.
Surely spending less on groceries, getting rid of your car payments, no longer buying coffees, and canceling the cable TV are worth an additional 23 years of work-free, enjoyable life?
This graph also illustrates why saving money is so much more effective than getting a pay rise, not to mention much easier to do. When you save money, it benefits your finances in 3 ways: 1) The money saved can be invested to make you more money, 2) you learn to live on less and thus need less, 3) it increases your financial security each month, providing you increasing freedom to do what you like in life even before your decide to stop working.
Run your after-tax numbers through the link and compare where you are and where you could be by saving those extra dollars. And remember, finding that $13,000 is surprisingly easy once you start thinking about it.