Maybe this is not the right time of the year to talk about savings rates but… who am I kidding, it is always the right time to talk about savings rates, especially in the FIRE/dividend growth community. So, what I have the done this last couple of evenings is look at all my expenses in 2016. That was a little bit of an effort as I went back through the credit and debit entries on my checking account. But before I reveal what I have found, some words of introduction are in order. Here’s how it works at my family. My wife and I have a joint checking account. However, I am the bread winner at home which means that my wife does not have a job for which she gets paid. Don’t get me wrong, she does have a job as she for example takes care of our two kids which I think is more challenging than what I do for a living but that’s not the point. The point is, that part of my salary goes to our joint account. That amount is relatively fixed as it covers all of the expenses for the kids, food etc. Also, as I am the only one with a salary in my household but I take care of four people and a dog, I would argue that our savings rate will be lower than some of yours. Is that a fair comment or am I making excuses already? Because, excuses I need to make as you will see in a minute (I even involve the poor dog!). Another factor affecting my savings rate is that I sometimes have to make expenses for my job which I then get paid back later. However, I have not yet adjusted my savings rate for my work related expenses. So, some of the very bad monthly savings rates are explained by those expenses. Another question I had to you fellow bloggers, is how you deal with large expenses. For example if you have been saving for a new laptop or so, do you deduct it from your savings rate when you buy it in the end? For now, I have calculated my savings rate as income left for the month after all monthly expenses have been paid divided by the post income tax monthly salary. And here comes the shaming result:
The first half of the year looks pretty bad. But for reasons already mentioned above it’s not that bad. It’s still not good but it’s not as bad. Another reason is that I also get extra salary in May which is called holiday money. That is essentially a full extra monthly salary which in my case is paid in May. Your employer reserves essentially part of your monthly salary already in the year leading up to May. This is a relatively standard thing in the Netherlands. So, what you see in the chart above is me paying for holidays for which I get reimbursed in May. The reimbursement ie the additional pay is however not reflected in my savings rate. But what is the sad, sad conclusion from the above chart is that my savings rate if at all existent, is too low. I need to work on this and I will.
But why are savings rates important at all? Well, for most of you I hardly have to explain this but I will anyways 🙂 so here it goes:
- The more you save, the more passive, dividend or investment income you can generate with those savings.
- The more you save, the lower your monthly costs are.
- The lower your monthly costs are, the earlier your investment income will cover those costs and the earlier you will achieve financial independence.
Another blog, actually explained this very well. They even called their article ‘The Shockingly Simple Math Behind Early Retirement’ and I could not agree more. So, save more! is the message to myself from this blog article. Because if I don’t save more, I will never reach financial independence and early retirement. What about you, do you know what your savings rate is? There is actually a really nice website from the OECD where you can see the I guess average household savings rate for various countries. This is potentially a nice tool to compare yourself to other households around the world. A few examples taken from there are Germany 9.7% savings rate, Netherlands 6% savings rate, United States 6% savings rate and United Kingdom -0.2% savings (?) rate. There is of course a multitude of reasons why countries differ from one to another with respect to savings rates but nevertheless, this is a nice background for your own savings rate. I for one sure intend to increase mine to be able to retire early. So, how do we compare? What is your savings rate? Is your household comparable to mine (4 people, 1 income)? Do you have some advice on how I could increase my savings rate? All comments are welcome.