Stock Ticker

  • Loading stock data...
Your Savings Rate Matters | AP Wealth Management

Your Savings Rate Matters

Your Savings Rate Matters

Your savings rate is the percentage of personal income saved based on your total gross personal income received during a period of time.

It is vital to understand your financial metrics – your net worth, savings rate, withdrawal rate, tax rate, and more given your financial situation. In this article, we will look at the importance of your savings rate and how it impacts reaching your financial goals.

Your savings rate is the percentage of personal income saved based on your total gross personal income received during a period of time.

Savings Rate Explained

A negative rate means you spend more than your income. So, if your income is $5,000 this month and you save $1,000 your personal savings rate equals 20 percent. For those in the accumulation phase, we like to see a 15-20% savings rate toward retirement. Your overall savings rate may be more than 20% when you include all other savings goals and debt payoff.

So why the 15-20% savings rate?

The math behind reaching financial independence is fairly simple. By making a few basic assumptions in this case a 5 percent real investment return and 4 percent real withdrawal rate you come up with the chart to the right.

THE CHART EXPLAINED

If you make $100,000 per year and save 50% then you only need your investments to provide $50,000 per year in income and you can reach that point after about 16 years. If you save 10% then you need your investments to provide $90,000 of income which would require 50 years of savings. For a person that starts working around the age of 18 to 22, saving 15-20 percent each year will help you reach financial independence in 36 to 42 years or between 55 and 65 years old.

When you are young, It is so important to cultivate the saving habit from day one.  Saving consistently each year, and choosing not to “touch” that money until retirement is key. As your savings build, working with a financial planner to help you understand all the other items you need to consider will help keep you on track for retirement.

It is important to note that the chart and example above oversimplify retirement planning as it excludes pensions, Social Security, tax planning, long-term care planning along with many other factors that we help our clients consider when planning for retirement or other saving goals. The main message this chart conveys is that it is important to save consistently and to start early. It also demonstrates how living below your means and on a smaller part of your income helps you save more and reach future goals quicker. Beyond reaching financial goals, saving money as part of your lifestyle has other significant benefits.

Other Benefits to Saving

Psychologists have studied the impact of individual’s financial habits on their overall health and wellbeing for many years. They have found that practicing good financial habits such as having a healthy saving rate will help you experience lower levels of stress.

It is also not surprising that studies have found a link between saving habits and the health of children or our future generations. A recent study by UCLA researchers found that children in households with less than three months of savings had a substantially higher risk of obesity and chronic illness and worse overall health than households with more money set aside. Given that children learn the majority of their financial habits from family and friends, it is especially important that we take the time to monitor our own saving habits which will help us teach future generations the habits which will lead to a healthy lifestyle.

Savings rates are something we really enjoy helping clients evaluate and understand. The discussions we have with clients provides an overall peace of mind, promotes living a healthy lifestyle, and ensures they pass on positive habits to future generations. This season is a great time to evaluate your savings rate as you may be surprised at what you find. A few small changes can make a big difference over time, not just for your financial picture, but also for the health of all members in your family.

Are you interested in learning more? Please call us at (706) 364-4281. One of our experienced advisors would be happy to discuss with you.

Clayton Quamme, CFP®
cquamme@apwealth.com
(706) 364-4281

Menu