Where will your savings rate take you?

Morning! Today I want to show you a very simple thing: there is no ridiculous amount in savings. $10 per week can add up to a great deal of money over the long term. Yes, it won’t be sexy at first, but with the power of compound interest it can help you build a serious nest egg.

courtesy of tiffanymblack.wordpress.com

courtesy of tiffanymblack.wordpress.com

Let’s say you make $2,000 per month and invest over your 40 productive years the same portion of your income at a 6% rate of return. All figures were calculated here, you can also tick a box to adjust each year’s savings with inflation.

At 4% savings rate you save $80 per month and will have $160,115 in 40 years for $38,400 invested

At 10% savings rate you save $200 per month and will have $400,289 in 40 years for $96,000 invested

At 25% savings rate you save $500 per month and will have $1,000,724 in 40 years for $240,000 invested

At 50% savings rate you save $1,000 per month and will have $2,100,448 in 40 years for $480,000 invested

At 75% savings rate you save $1,500 per month and will have $3,002,172 in 40 years for only $720,000 invested! How would you like a free $2,300,000???

Now let’s assume a safe 4% withdrawal rate to see what that money will buy you.

At 4% savings rate your nest egg will produce a monthly income of $533. Since you live on $1,920, it is not enough to live on. Use all your nest egg and you can live for 7 years.

At 10% savings rate your nest egg will produce a monthly income of $1,334. Since you live on $1,800, it is still not enough to cover your lifestyle. Use up all your nest egg and you can live for 18 years.

At 25% savings rate your nest egg will produce a monthly income of $3,335. Since you live on $1,500, you can live forever. Or, to generate $1,500 per month, you will need a $450,000 nest egg that you will have achieved in 29 years.

At 50% savings rate your nest egg will produce a monthly income of $7,001. Since you live on $1,000, you can live forever. Or, to generate $1,000 per month, you will need a $300,000 nest egg that you will have achieved in 16 years.

At 75% savings rate your nest egg will produce a monthly income of $10,007. Since you live on $500, you can live forever. Or, to generate $500 per month, you will need a $150,000 nest egg that you will have achieved in… 7 years! Learn to live on 25% of your income and financial independence is only 7 years away!

Those calculations do not take into account inflation, but it does not consider your raises at work that will make up for it. The 6% rate of return is lower than the usual 7 or 8%

 

You can see that going from $80 per month to $200 per month in savings (4% to 10% savings rate) makes a HUGE difference on your financial future. What is an extra $120 per month? $30 per week, just over $4 per day. Maybe it is the interest you are paying on some debt, or the daily indulgence you don’t notice anymore but won’t give up. It can also be, quite easily, the amount of extra income you could bring each month. How? I talk about it on Make Money Your Way. There are plenty of ways to make $120 per month. A couple of nights of baby sitting per week, a student you could tutor on Wednesday, pet sitting, dog walking, house cleaning, taking a paper route, a night shift at a local bar once a week, making a couple of extra hours… It is really feasible for the majority of you. We are not talking thousands, just $4 a day. If you earn it, you won’t even have to change your habits, your lifestyle or your luxuries.

Rather than learning to live on $500 per month like the 75% savings rate example, you can decide to make more. Keep your $2,000 monthly lifestyle and make an additional $1,500. Yes, that is harder, much harder than the $120 we were just talking about. But your $2,000 job can give you a 2.5% raise every year. That is $50 taken out of the way. You can train to become a better employee and get a real promotion. Start a side business, and so on. If you keep living like you are today, like you currently like to live, and squirrel away any raise, windfall or extra income, you can reach really easily the next rate of savings.

 

This post was featured on the Evolving Personal Finance, Mom and Dad Money, Common Cents Wealth, Outlier Model, Sense and Sensibility, Chance with Finance, Control Your CashSweating the Big Stuff, Carnival of Financial Planning, Festival of Frugality, Cash Funny, thank you!

 

A 30 something French girl embarking on a journey towards Financial Independence. I blog about money, travel, simple and deliberate living, freedom and choices. You can find me on Twitter, Google+, or Reach Financial Independence's Facebook Page

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Comments

  1. Yep, the numbers speak for themselves. There are different scenarios here though – one is to use some of this money to ‘invest in dself’ so that the increase of income becomes really substantial. Beating compound interest is hard but not impossible….
    maria@moneyprinciple recently posted..Pension? I don’t have one of those.My Profile

  2. It really is pretty amazing how the math really speaks for itself. All it takes is the discipline not to want to spend every cent that falls through your fingers.
    Mrs. Pop @ Planting Our Pennies recently posted..DIY – Strip Wax Off Linoleum FlooringMy Profile

  3. The thing I love about your example here is it shows how an increased savings rate not only leaves you with more money, but it also decreases your lifestyle which actually means you need LESS money. It’s a double-benefit that’s incredibly powerful.
    Matt Becker recently posted..Why Do You Have to Beat the Market?My Profile

    • that’s right, or you can increase your income and keep your lifestyle too. Not inflating too much your lifestyle over 20 years while you get a 3% raise every year to save can be huge.

  4. Nice post Pauline! Its people realizing that every little bit counts that is the problem. You hear oh I just got $50 that isnt going to help me retire. Its better than nothing and how much do you spend on coffee and lunch everyday. The average person wastes more than $50 per week. They can put away $200 if the budget for it and end up with a nice little nest egg. I like how you gave different interest rate calculations. Work your regular job and get a side job to save instead of buying clothes and spending it on alcohol.
    Thomas recently posted..The Liebster Award – Being Nominated For ThreeMy Profile

    • if you save all your extra income you can get a really nice nest egg but I often hear “I don’t have time for an extra job”, no matter they spend 3 hours a day on fb/tv/doing nothing.

  5. Excellent point! Honestly I’m all about increasing income. I do live relatively frugally and save money on the things on I buy, but overall if you can increase your income your options can really open up and long-term savings/investing becomes easier.
    DC @ Young Adult Money recently posted..Is it Possible to Focus on Both a Career and a Small Business?My Profile

    • Yep, you can’t lower expenses forever, unless you can live on water and bread under a bridge but then life isn’t really worth the trouble.

  6. Our savings rate fluctuates a little depending on the month…but the goal is always to save as much as possible. Luckily, our expenses are low so it’s really not that difficult.
    Holly@ClubThrifty recently posted..My $508 Garage Sale: An In-Depth AnalysisMy Profile

  7. We are trying to save as much as we can. Financial independence and early retirement are definitely on our minds!
    Michelle recently posted..How to Set a Wedding Budget – Part 1My Profile

  8. Love these examples! I plan on going the $500/month route. I like that, with a conservative investment outlook, this will satisfy my retirement requirements without ever having to increase my contributions! Once my debt is paid off (three months to go!) I plan on starting this retirement plan. I’m only 23, so I still have lots of time to make compounding interest work for me.
    Jordann @ My Alternate Life recently posted..How Much Does it Cost to Get Married? Part 2My Profile

  9. It’s exactly these types of numbers that has us encouraging our children not to make the same money mistakes we have, and to start saving now and keep saving. The financial reward is just too big to lose!
    Laurie @thefrugalfarmer recently posted..Stockpiling Basics: How to Stockpile on a BudgetMy Profile

  10. The most attractive number there is what happens if I put away $1500/month, but that’s just not realistic. That’s more than double my mortgage portion. I like to think people save what they can, but I know that’s not always the case.
    Daisy @ Prairie Eco Thrifter recently posted..6 Steps for Creating a More Successful CareerMy Profile

    • Well your mortgage is still part capital repayment so there is a bit of equity building there that can be considered savings too. This example should be considered more with % of income than exact numbers.

  11. A post I will forward to my sons but they probably won’t read it because retirement is just so far off for them.. I never thought about my retirement when I was in my twenties and I am just starting now in my forties because I did not have control of my finances for long time.

    I wish I had been financially aware earlier and things wouldn’t be such a challenge now and retirement would be a certainty instead of a dream.
    Jane Savers @ Solving The Money Puzzle recently posted..A Rich Ginger, A Takeover Makes Stock Prices Jump And Money Quickies For July 17,2013My Profile

    • It is not easy in your 20s, you want to live it up with your first salary, then give the best to your kids… but the best way to help yourself is to build wealth so you can then help others and gain freedom.

  12. Simple and to the point…and with numbers to – I love it! It’s seeing numbers like this that should encourage people to start saving and saving early.
    John S @ Frugal Rules recently posted..Frugal, My Ass: Are You Guilty of These Money Draining Behaviors?My Profile

  13. I think it’s hard for most people (myself included sometimes) to know that even a little adds up.
    Budget and the Beach recently posted..Money: The Cold Hard FactsMy Profile

  14. Every little does add up. I try to think about savings in chunks. If I can save $10 a month, it’s $10 that can go into savings. It’s a good way to think. A lot of people don’t save because they don’t think it’ll ever add up.
    SavvyFinancialLatina recently posted..How Do You Focus?My Profile

  15. Power of compound interest is always very refreshing to hear. This concept works not just in savings, but also in your daily habits and tasks as well. Compounding money and compounding minutes.
    Peter recently posted..How to Save Money on Electric Bill – Forever, for lifeMy Profile

  16. Nick @ ayoungpro.com says:

    This is why I love compound interest. :)
    Nick @ ayoungpro.com recently posted..When is it Okay to Spend Money?My Profile

  17. Finally an example in the PF blogosphere that uses numbers relevant to MY life!! :) Thanks!

    What an inspiring post! I would want more detail in between that 10 and 25% savings rate, though, to see where that tipping point is… I’ll play with the numbers myself.
    Emily @ evolvingPF recently posted..Money Updates from the EPF HouseholdMy Profile

    • Thank you Emily. To me the point where you should be is when increasing your savings some more means lowering your quality of life or giving up things that are important to you. As long as there is waste, you can increase.

  18. Girl Meets Debt says:

    “If you earn it, you won’t even have to change your habits, your lifestyle or your luxuries.” I love that line. I’m aggressively paying off debt right now and even though I have scaled back a lot in my lifestyle and everyday ‘luxuries’, it’s the making more money part that is helping me kill my debt faster. This was a GREAT post Pauline! Thank you!
    Girl Meets Debt recently posted..GMD is Going to Portland and Seattle!My Profile

  19. Wow, Pauline. I appreciate you running the numbers like this. So much to think about!
    Tammy R recently posted..Escape from Man BoobsMy Profile

  20. A fascinating post again, Pauline! Tammy and I cut spending as much as we could without sacrificing quality of life. Now we are trying to earn more so we can raise our quality of life while we pay down our few remaining debts and save/invest. Too bad we were not doing this in our 20s!!! Damn aging and damn ignorance!
    cj recently posted..Escape from Man BoobsMy Profile

  21. I love the power of compounding interest. The numbers can’t lie and I am glad you put up the numbers.
    Grayson @ Debt Roundup recently posted..A Beginners Guide to InvestingMy Profile

  22. Inspiring figures. That’s is what I am trying to do to maintain our cost of living even I earn more income. I hungry to save more… I am impress the power of compound interest. I like to multiply my money over the time.
    My Wealth Desire recently posted..Free Cash for Gold Jewelry – How I get itMy Profile

  23. It seems like a massive saving plan. I am remembering my childhood piggy bank. Though, I am not sure if I could start at 4% savings rate and reach until I make it to 75%, but still I am going to give it a try. All it’s going to require is my sincere dedication. Believe, good for all those who run impromptu at saving grace!

  24. The argument that many people use of “I don’t have time” is false. If they would not watch TV for an hour a few times a week, they would be amazed as the extra income they could make during that time. Whenever I feel like vegging out on the couch I catch myself and ask if there is something productive I could be doing instead, and most times, there is.
    Jon @ MoneySmartGuides recently posted..How to Get Rid of Student Loans in 5 Easy StepsMy Profile

  25. Nice math to think about… I’m shooting for $3,500,000 by the year 2045… by my estimates this will produce an income of approximately $50,000 in today’s dollars… but who knows how that’ll change over time!
    Chuck@Tortoise Banker recently posted..How Do I Retire on My Portfolio?My Profile

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