Why Your Personal Savings Rate is the Key to Financial Independence


Your personal savings rate is the key to amassing huge amounts of savings in a short time. It’s a key financial concept the wealthy understand well and use to stay wealthy. 

Knowing this number will help you control debt, make important money decisions, and reach financial independence faster.

What is Your Personal Savings Rate?

It is simply the money that you keep from your income. Here’s the formula:

Formula for personal savings rate: money kept as a portion of money earned.

As you can see, you can focus on the top part of the formula by decreasing your expenses, or the bottom part by increasing your income. It’s all about what you keep!

What Should Your Savings Rate Be?

The societal norm and general financial standard is to save 10% of your salary when you’re young, or 20% if you’re older and haven’t started saving yet.

Most people believe if they follow the 10% rule they’ll be on track to retire at 65. They don’t ever try to save more than this. This works if:

  • You have employer matching investment programs, pensions or other employee benefits,
  • You don’t have debt, mortgage or rent payments or major expenses once you retire, and
  • You love your work and don’t mind working for 30 to 40 years without much change.

However, waiting until 65 is a long time. For many people, this doesn’t work because

  • Life has thrown you a curve ball (job loss, poor job fit, health or family issues, etc.); or
  • You don’t have a company savings plan or don’t wish to be tied to one; or
  • You want to do something different, like start a business or travel for a few months; or
  • You want the freedom to work if you choose and to choose your work.

Imagine having the freedom to choose work based on passion and purpose rather than the need for the money!

Once you reach a point where you have enough savings in income-producing assets or investments to cover your living expenses, you’ll have reached financial independence.

Ignore the 10% Savings Rule!

A high personal savings rate can help you reach financial independence quickly. Here is a man who is ripping off his business suit in favor of a comfortable t-shirt.

What if you were to save more than 10%? Say 30%, 50% or even 70% or more? How fast could you be financially independent?

According to this chart based on the *4% Safe Withdrawal Rate from Mr. Money Mustache’s blog, a 50% personal savings rate will enable you to be financially independent within 17 years.

At a 70% personal savings rate, your years to freedom drop to 8.5 years. 

At 80% you could “retire” in just 5.5 years. Imagine the freedom you could have to work if you choose and to choose your work!

*The 4% Safe Withdrawal Rate is also generally accepted by the financial community as the number to use when calculating your interest off your investments and whether this amount can cover your living expenses.


Increase Your Personal Savings Rate with
4 Effective Strategies

1. SELECT A LEAN LIFESTYLE (Reduce Expenses)

Changing your lifestyle can make a HUGE impact on your financial position. 

What kind of lifestyle do you currently live? Is it a no-frills lifestyle or one with all the bells and whistles?

Living a modest lifestyle is the easiest and quickest way to decrease your expenses and jumpstart your savings. Once you are anchored in a solid financial position, you can afford to loosen your budget.

Who Can Retire Young? 
A Case Study: The Frugals VS The Lavishes


Stick picture image of the Frugal family. They have one primary income earner and still manage to save. They have low expenses and save more once the wife grows her business.

The Frugals

Fred Frugal earns a modest income as a banker and his wife Farrah is a stay-at-home mom. Farrah does some casual work as a freelance writer, which does not earn a lot. But once the kids are all in school, she has potential to grow her home business. 

The Frugal’s lifestyle consists of a small home in an average neighborhood. Fred and Farrah use public transportation and learned how to save more money by living well beneath their means.. 

  • After-tax Income = $3,850 per month
  • Expenses = $2,500 each month
  • Savings = $1,350 per month
  • Personal savings rate = 35%


Family stick picture of the Lavishes, who are a high-earning dual income family with high expenses.

The Lavishes

Len Lavish is a high earning business development manager for a well-known consulting company. Len’s wife Lily has a stable government job.

Image is important for Len in his industry. He wears expensive suits, carries a huge loan on his BMW, has a large mortgage on his spacious home in a high-end neighborhood, high childcare expenses, and his family eats out at fast food places frequently.

The Lavishes also enjoy splurging on electronic gadgets, exotic vacations, high-end furniture and multiple kids’ activities. While they earn much more, have much higher expenses:

  • After-tax Income = $10,000 per month
  • Expenses = $9,000 each month
  • Savings = $1,000 per month
  • Personal savings rate = 10%

The Frugals have a much higher savings rate even though their monthly savings amount is not much more than the Lavishes.

Who Will be Financially Independent First?

If the Frugals maintain their current level of expenses and 35% savings rate, they will be on track to reach financial independence in 25 years. 

Starting work life at age 21, they can choose to stop working at age 46 and do something totally different because they’ll have enough income from investments to cover their living expenses.

Additionally, once Farrah grows her freelance writing business, the Frugals project a household savings rate of 65%, which reduces their years to reach financial independence from 25 to 10.5 years. 

They can comfortably exit the rat race in their thirties and work if they choose and choose their work.

The Lavishes, however, at a 10% savings rate, will need to work another 66 years until they are 87 years old if they want to maintain their expensive lifestyle!

The good news is that the Lavishes have lots of room to reduce their expenses and increase their savings rate, thus shortening their time to retirement. 

The challenge however, is that once people are used to a certain standard of living, it takes much more determination to live more modestly.

*Note to compare apples to apples, I have not accounted for any company savings programs or benefits.

2.       LIVE ON ONE INCOME OR HALF YOUR INCOME
(Reduce Expenses)

Bump Your Personal Savings Rate to 50% or More and “Retire” in 17 Years or Less

At a 50% savings rate, you’ll be able to “retire” within 17 years and can withdraw from your savings at a 4% rate, leaving your investment portfolio untouched.

Saving half your income sounds impossible, even ludicrous, to most people and it’s rarely promoted in our society.

But thousands of families are already doing this! Consider the many families that have only one primary income earner, as in our case study of the Frugals. 

Single-income families must be careful to live beneath their means, but this positions them extraordinarily well for increasing their savings at an astronomical rate if the other spouse can earn an income.

We have become dual-income families whose expenses have expanded to match or exceed our household earnings. This is risky if life throws a curve ball (i.e., job loss or health complications) and your family has little emergency savings.

It’s time to reassess how much our choice of lifestyle impacts our freedom.

Acceleration to Financial Independence

As in the Frugals’ case, the one-income family, Fred and Farrah have the potential to increase their household savings rate to 65% as Farrah grows her freelance business, enabling them to reach financial independence within 10.5 years.

Where primary earners can save 10% to 20% of their income, and secondary earners can find a way to earn an income and lifestyle does not change, your household savings rate can jump to more than 50%. At a 70% savings rate, a family can reach financial independence within 8.5 years!

Now that is motivation to live small before living big.

3. INVEST WISELY (Increase Income)

Invest your money, don't just save it. Buy mutuals, bonds, stocks, precious metals with the help of a financial advisor.

Grow Your Savings

Money in the bank is NOT an Investment. Pay attention to the interest rates of your bank accounts. As I write this in 2016, savings account rates are an unimpressive 0.75% in Canada. This means that for every $1,000 you save in a year you earn $7.50 for the entire year (or 63 cents per month)!

Since inflation is typically around 2% to 3% per year, you are actually losing money by keeping money in your bank account.

Therefore, once you’ve amassed some savings beyond your emergency fund, you should start investigating options for where you can get a good return on your money.

Financial Vehicles

You need to invest in financial vehicles like bonds, stocks and mutual funds that earn a decent return each year to grow your money. 

If you’re not familiar with investing it’s time to roll up your sleeves and take charge of your future. Don’t worry, you can learn it! And believe me, once you start accumulating your savings rapidly, you’ll be extremely motivated to be financially independent and you’ll learn quickly.

Start with consulting a financial advisor who can help you formulate a plan to grow your stash.


4. BECOME MORE PRODUCTIVE (Increase Income)

If you can’t change any of your expenses, you need to find a way to increase your income in order to increase your personal savings rate. There are many ways you can do this, but generally, there are 3 major ways:

  • Take on another part-time job (or two or three!)
  • Find a higher paying full-time career
  • Start a side hustle or business

Anyone of these or a combination will help you get ahead dramatically if you keep your expenses the same (therefore increasing your personal savings rate). Depending on your situation, the above 3 ways to increase income are ranked in order of the time or effort to attain them.

Part-time Work

Getting a part-time job is an immediate solution to a shorter-term problem. It gets you extra income right away but steals time and energy from you without greater rewards in the longer-term future.

Higher Paying Career

Finding a higher paying job takes longer to secure, and so is more of an intermediate to long-term solution. 

Starting a Side Hustle

Starting a side hustle can take substantial time and effort because it may not provide immediate income and requires extra time and energy for which you may not reap the rewards until much later. However, the potential for earnings can be great, and you’ll have autonomy in your work and can pursue work you are interested in.

Getting a Higher Personal Savings Rate Comes Down to
2 Primary Actions

In a nutshell, increasing your personal savings rate amounts to 2 primary actions: decreasing your expenses and increasing your income. This can all be captured in the above 4 strategies: choosing a lean lifestyle, living on one income, investing wisely and increasing your productivity.

There’s no such thing as getting rich instantly. But with clear strategies and the end in sight, you can reach financial independence at a much faster pace than most people.

› Personal Savings Rate