If you’ve ever searched for personal finance advice, you’ve probably come across something like the 50/30/20 rule, or some other financial advice that suggests you should save a relatively small amount of your income: somewhere in the region of 10-25%. While this is certainly better than saving nothing (and is higher than the average UK household savings rate of 9.9%), I’m here to tell you that it’s not enough.
Your savings rate determines one of the most important financial outcomes of your life: how long it will take you to become financially independent. This should be the primary focus of your savings and investment goals. There’s nothing more precious than your time, and financial independence gives you the option to choose what to do with it.
The chart below shows how long it takes to retire with various savings rates. Without relying on the state pension, the average person in the UK would effectively have to work until they die (85 years).
One thing immediately stands out: increasing your savings rate dramatically reduces the time it takes to reach financial independence. For example, under the assumptions used in this chart, someone saving 20% of their income would reach financial independence in around 37 years. Increase that savings rate to 40%, and the journey is almost halved (22 years). Further still, at 60%, you’re looking at only around 12 years to retirement. And at 80%, only 5.6 years(!)
Why is the relationship so powerful?
Most people think that saving more only helps because you’re investing more money.
That’s true—but it’s only half the story.
Every pound you save has two benefits:
- It increases the amount you’re investing today.
- It reduces the amount you’re spending each year.
That second point is easy to overlook, and is the key to why increasing your savings rate is your frugality superpower.
The less you spend, the smaller your retirement income needs to be. Under the widely used 4% Rule, your target retirement portfolio needs to be 25 times your annual spending. And the sooner in your career you start aggressively saving, the less time you’ll allow for lifestyle inflation to creep into your spending habits.
Starting early and saving 40% on an early-career salary of £30,000 yields the same total savings as a 20% savings rate on a mid-career salary of £60,000.
So, if you can get used to a high savings rate from the start, and living frugally on the leftovers, you’ll dramatically increase your savings rate as you earn more in the years following. You’ll also need less to retire. This is a savings superpower that will fast-track your route to retirement.
Imagine two people earning the same salary.
- One spends £40,000 each year and therefore needs around £1 million invested to retire.
- The other spends £30,000 each year and only needs around £750,000.
By saving more today, you’re simultaneously growing your investments and reducing the finish line you’re trying to reach.
That’s why the graph curves so steeply.
How much should you save?
I’ve given you the mathematically-proven evidence. How much you want to save depends on how happy you are to continue working. Personally, I think earners in the top 30% of the UK wage distribution (see below) should aim for at least a 50% savings rate, and a 70-80% savings rate if in the top 10%. I believe we should all make financial independence a top priority so we can gain control over our time.
However, I appreciate that for many people, mortgages, rent, and the cost of living drain much of the income, and it may be difficult to achieve high savings rates. Instead of chasing an arbitrary target, focus on improving your savings rate gradually.
Could you increase it from 10% to 20% over a few months? And then from 20% to 30% next year? Small improvements made consistently over many years can have a surprisingly large impact on your long-term finances.
Ultimately, the best savings rate is one you can sustain. If you’re happy saving 50%+ of your income every year, great! I fully encourage you to keep going – before you realise, you’ll be financially independent with control over your time. If you’re on a lower wage and struggling financially, focus on what really matters to you. How can you spend your money most effectively on what makes you happy, and cut out the things that don’t?
Saving every penny while making yourself miserable isn’t a recipe for a happy life. Equally, spending everything you earn today leaves little flexibility tomorrow (and will not make you happy either).
Final thoughts
If there’s one lesson to take away from this blog, it’s this:
Your savings rate matters far more than your salary.
Two people can earn exactly the same income but end up reaching financial independence decades apart, simply because one consistently saves a larger proportion of what they earn.
Doubling your salary overnight won’t improve your financial future if your savings rate remains unchanged. You’ll just be spending even more. Focusing on your savings rate is what really matters – especially if you can learn to live on relatively small amounts of money – you’ll be saving more and you’ll need less money to retire. It’s a double benefit.
Thank you for reading. Here are some other posts you may find interesting:
- Cheap things to do on holiday (and at the weekend)
- The Best Paycheque Routine to Save, Invest and Build Wealth
- How to build wealth in the UK
- VO2 Max: The Ultimate Health Metric and How to Measure it
- How to get rich as an employee
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