My Savings Goal
Hello readers! Thanks for vising The Green Swan. As we all know, to retire early one must live well below their means, tuck away the extra and invest it wisely. Lately I have talked a fair amount about the investing side. Today I will be going though the savings side of the equation. More specifically, allow me to explain my savings goal and approach toward saving.
Savings Rate, Right?
What is my savings goal? Quite simply, my goal is to save as much as I can. I know many folks out there set their savings goal based on a savings rate. That is great, but it is not for me. The savings rate methodology is very, very common among personal finance buffs and I respect that and there is nothing wrong with it. But let me explain why it doesn’t work for me.
A certain savings rate doesn’t mean anything to me. Say my goal is a 40% savings rate…great you may say, but what does that really mean? If I reach 40% is that a good thing? What if I didn’t reach my performance objectives at work and my bonus was cut in half…all of a sudden my 40% jumped to 50%…that’s good right?
Maybe if it means that the numerator came down (because my bonus was lower) and I cut back expenses in order to maintain my investment contribution levels. Say I cut out a vacation to offset the drop in income and I still saved the same dollar amount…so in reality I exceeded my savings rate goal, but invested the same dollar amount I had originally planned. If saving the same dollar amount is the ultimate objective, why not focus on that rather than the less meaningful savings rate.
When my retirement day ultimately comes, what will I need? I’ll need dollars saved in my investments to live on, not percentages or savings rates. If I know how much I plan to spend in retirement, and therefore can calculate how big my investments need to be to retire, I can then determine how many years of a certain level of contributions it will take to reach “my FIRE number”. So why not just set the goal for a certain dollar amount of contributions rather than savings rate?
For those reasons I have never been that big on calculating or tracking my savings rate.
Save as Much as I Can
So instead my goal is quite simply to save as much as I can. Each year my wife and I go through a budgeting process. We estimate our income and corresponding taxes as best we can, but more importantly we outline our expenses in fine detail and the resulting amount we have left over to invest. If we end up making more / less during the year, we will save and invest more / less.
It is truly as simple as that. We usually budget out our expenses fairly well, we are quite a predictable family at this point. Even with the little one these day, we can map out our expenses each year within a 2-3% variable. Last year was an exception though as we came in about 5% over budget. The large variance last year was due to an unexpected health issue with the little guy (ear tube surgery), although that was offset partially by the unexpected drop in gas prices (woo-hoo). The year before though, we came in with an approximate 1.5% variance overall.
The bottom-line is we keep our expenses low and we do our best to earn the most we can and advance our careers. The savings rate will work out however it will, but it ultimately doesn’t matter to us as long as we are saving the most we can. Ideally, so long as we can manage our expenses and keep advancing our careers, our savings rate will go up and up and up.
What is our savings rate?
Like I said, I’ve never used that as a measure so I couldn’t even tell you. For us, it would be a tireless exercise to determine the appropriate way to calculate it, and then actually running the numbers for each year. If I had to guess what it is currently though, I would give it a SWAG of somewhere between 65% to 75%.
How much do we save each year?
As much as we can! I am sorry for being intentionally vague, but I’m doing so for privacy reasons as well as the difficulty in figuring out how to share such a figure based on a number of unusually large discretionary purchases / investments we’ve made in recent years which add noise to the numbers (e.g. new roof, solar panels, LASIK, healthcare expenses, and the purchase of a small business).
And for the sake of privacy, I just need to determine how much I want to divulge and the most appropriate manner. For instance, maybe I show the expense side but ignore the income side, etc. But what might not be a secret these days is the fact that my wife and I do save a lot. As you can already see from the Net Worth Explosion post a few months ago, it has been increasing rapidly. So it is safe to say that our annual savings has been north of six figures for a few years now.
The Real Goal
While we don’t really have a definite goal with regards to how much we save each year, besides as much as we can (are you sick of hearing this already ☺), our real goal is to accumulate as much wealth as possible and retire young. To do this, we try to meet or beat the S&P 500 each year and double our net worth every four years.
Let me know what you think in the comments below? Do you track savings by using a “savings rate” or “dollars saved”? No right or wrong answer to that, it is just a matter of how your mind processes it best. What’s your primary reason for monitoring your savings rate?
And bonus question, should I begin sharing the expense side of the equation with readers? Monthly, quarterly?
Thanks for taking a look!
The Green Swan
Work Harder, Word Smarter, Retire Earlier and Find Your Beach