Everyday, we experience things that we have no control over. It doesn’t matter if it is related to our investments or lifestyle – things are going to occur that we have no to directly influence over. Instead, we set ourselves up as best we can but have to roll with what life hands us. The lack of control can be a bit defeating. So how do we get around this?
Focus on the things we can actually control.
You can’t control what the market does on any given day. You can, however, control how much money you invest into it.
You can’t, after the fact, control how much money you borrowed. But you can control how much you pay towards that debt each month.
So why should I focus my goals around something that I can’t control?
That is why I choose to focus on my savings rate. When it comes to growing wealth, it is one of the few things that each individual has control over.
How do you calculate your savings rate?
Everyone seems to have a slightly different way to calculate their savings rate. Some calculate it off of gross wages. Some include debt payments. Others are only worried about money they actually invest each month.
While each method has its pros and cons, I calculate my savings rate in the following way:
Savings Rate = (All Savings – Including Debt Principal Repayment)/(Gross Wages – Taxes)
If you look at each individual component of a savings rate, there is very little that we can’t control. We can’t control the fact that we have to pay taxes, but we can utilize strategies to lower how much we pay. I can determine how much I save into my 401k. I can control how much I spend each month on groceries or eating out.
Your savings rate is about making decisions on how put as much money to work for you as possible. And it all comes down to your decisions.
Why I Include Debt in My Savings Rate
When it comes to calculating your savings rate, one thing no one seems to agree on is if you should include debt or not.
Some people believe it doesn’t belong since you aren’t actually putting money aside. Others say it shouldn’t be there because it could encourage you to borrow more in the future since the principal payments will stay included in your savings rate, thus keeping your rate high (effectively masking your debt).
While both of these are good points, I don’t agree with them entirely.
Your savings rate is a tool to put as much of your money to work as efficiently as you can.
It doesn’t matter if that is putting money into an emergency fund, 401k or paying off your student loans. Setting a goal and calculating your rate each month is a form of motivation to continue putting a high percentage of your after-tax money to good use.
As I talked about above, one of the arguments against including your debt payments is that you may just borrow more in the future because paying back the money can keep your savings rate high, so in a way you are “hiding” the borrowing from yourself. In my opinion, people need to take responsibility at some point for their financial life. If they are going to look for ways to continue taking on debt to fund their lifestyle instead of saving and investing, then they really aren’t motivated to achieve financial freedom.
I believe that by including your debt in your savings rate it actually encourages saving more once the debt is paid off.
Imagine you are saving 55% of your after-tax money, with 15% of that being student loans. Once you pay the loans off, are you more likely to drop your rate to 40% or keep striving to hit a savings rate of 55%? If you made your savings rate the key item in your financial plan, I believe you will save more to continue to hit 55%. It is like the Jerry Seinfeld chain method, once you begin racking up month after month of high savings rates, you aren’t going to want to see it drop significantly.
My Savings Rate
I don’t share a lot of numbers on the blog, but I believe that savings rate is one of the most important financial KPIs (key performance indicators) on your journey to financial freedom and a remarkable life. Because of this, each month I am going to start sharing our savings rate from the month before and how we got there. Just like how many bloggers share their net worth and budgets, I think sharing real life information can help people get a handle on their own financial situation and help them realize that a lot of the things bloggers talk about are actually possible.
So far this year, we have been able to achieve a savings rate of 60.15%, with approximately 64% related to saving and investing, and 36% related to debt principal payoff.
Since our goal for the year was 50%, I am very happy with where we are at. This number is propped up a bit due to the fact that our company distributes profit sharing payments during the first quarter of the year and since we have implemented a cash priority plan, the extra money from these payments go straight towards our money goals. I have seen our savings rate slowly come back decrease over the last couple months. However, we have continued to hover around 50%, keeping that goal within reach for 2016!
When it comes to finance and investing, there are so many things that affect us that we have no control over. The market makes sure to remind us that we can’t predict what returns will be any given year. We have no control over when interest rates will rise or fall. The only thing that we are in control of is how much money we save and put towards improving our net worth each month.
So instead of worrying about how much the market needs to return this year, focus on increasing your savings rate as high as you can. There are so many things we can’t control in the world – it might be time to finally focus on something you can.
Do you track your savings rate? What financial metrics do you track?