6 Savings Strategies

How much should you save? The honest answer is: as much as you can sustain. This chapter covers common targets and how to choose one that matches your goals.

Pay-yourself-first
Sinking funds for known future expenses
The savings rate as the single most important number

6.1 Math for Saving

Your Savings Rate (Your Most Important Metric)

Ben Felix and John Bogle both stress this above all else.

Formula: (Savings + Investments) ÷ Gross Income

Example: You save $500 and invest $700 from a $5,000 gross income. → 1,200 ÷ 5,000 = 24% savings rate.

Benchmarks to know:

<10%: Danger zone; build aggressively
10-20%: Average; you’ll retire eventually
20-30%: Strong; you’re building real wealth
30%+: Path to early financial independence

Your savings rate, the share of take-home pay you don’t spend, is the single number that best predicts how quickly you build wealth. It’s Housel’s “gap between ego and income,” expressed as a percentage.

Formula: Savings Rate = (Income − Spending) ÷ Income × 100

Example: you take home $5,000 and spend $3,500. → (5,000 − 3,500) ÷ 5,000 = 30%.

show/hide

savings_rate <- function(income, spending) {
  ((income - spending) / income) * 100
}

# $5,000 take-home, $3,500 spent
savings_rate(income = 5000, spending = 3500)
#> [1] 30

show/hide

def savings_rate(income, spending):
    return ((income - spending) / income) * 100

# $5,000 take-home, $3,500 spent
savings_rate(income=5000, spending=3500)
#> 30.0