The quickest way to FI (financial independence) is to have an extremely high savings rate. We touched on this in our post about reducing debt when we showed that in a matter of just a few years you can go from saving around $12,000 per year to $48,000 per year. And these numbers were based on "normal" salaries.
In other words, you don’t have to make $200,000+ per year to save this kind of money. Savings rate is more important than the amount you make. Savings rate is more important than the amount you make. (Repeat, as necessary).
What Does My Savings Rate Need To Be?

Everyone is different, but typically in the FIRE (financial independence retire early) community people aim for a savings rate between 50  70% of total income. You can calculate your savings rate by first figuring out how much money you brought in for the year (regular income, 401k, employer contribution to 401k, dividends, etc). Next add up the money you did not spend. Finally, divide total unspent by total income and multiply by 100 (Confusing right? Let’s look at an example).
Here is an example of a typical year for us:
So we are currently sitting at a 67% savings rate for 2018. Take some time to calculate your savings rate and strive to have it eventually fall within that 50  70% range, and you will be well on your way to reaching FI.
But You Mentioned $1,000,000 In 8 Years…..
Let's play with the numbers to see just how powerful a high savings rate can be.
Our family started saving for FIRE back in 2015, once all of our debt was paid off. It was at this time that we started living off of just one salary (a teacher's salary!). Here is a breakdown by year of what we have been able to save. (The annual increases typically come from the salary adjustments we receive).
I will also forecast out the next few years just so we can better illustrate the power of compound interest in the chart below. Everything after 2018 is what our planned savings amount for that year would be (in reality we should reach FI by the end of 2019 so these aren't our exact numbers, just an example). Note, just like above our numbers include:
I will also forecast out the next few years just so we can better illustrate the power of compound interest in the chart below. Everything after 2018 is what our planned savings amount for that year would be (in reality we should reach FI by the end of 2019 so these aren't our exact numbers, just an example). Note, just like above our numbers include:
Savings in our Vanguard Taxable Account
Savings in my company's 401k plan / plus the company match of 5%.
Dividends earned from investments.
While these numbers alone look great, this isn’t their true value because they will all be invested straight into our favorite Vanguard index fund: VTSAX. Being invested this way will historically net you about a 10% rate of return in the long run. When you adjust for inflation (typically 3%), we have an inflation adjusted rate of return of 7%.
Wow! We just went from ZERO to $1 Million in 8 years!
That is the power of having an extremely high savings rate, while also reaping the benefits of compound interest from a lowcost total stock market index fund.
I can’t stress enough the importance of having a large % of your investment portfolio allocated to stocks. For those that want to be conservative and smooth out the wild ride of the stock market an allocation of 75% stocks (VTSAX) and 25% bonds (VBTLX) is the way to go.
That is the power of having an extremely high savings rate, while also reaping the benefits of compound interest from a lowcost total stock market index fund.
I can’t stress enough the importance of having a large % of your investment portfolio allocated to stocks. For those that want to be conservative and smooth out the wild ride of the stock market an allocation of 75% stocks (VTSAX) and 25% bonds (VBTLX) is the way to go.
The key to reaching FI is having an extremely high savings rate (ideally between 50  70%) and investing those savings into VTSAX. The higher the savings rate, the more quickly you reach FI!
What is your savings rate?
Erik
Erik
This comment has been removed by the author.
ReplyDeleteI love how you breakdown the actual numbers like that, very organized and easy to follow. I'm going to try and set up a similar spreadsheet. Thanks for the info!
ReplyDeleteThanks for stopping by and the feedback! My husband is all numbers so he put this together. We will actually be able to achieve FI sooner than 8 years because of already having money in 401k, etc., but we thought this would be easier for some people to follow.
ReplyDeleteTara / Four Take Flight
So you say that before starting the high saving rate, you pay off debt. Does that include the mortgage? So work to pay off the mortgage at a fast rate before you start the 5070% saving rate? Or is there a middle ground where you pay extra on mortgage but also invest/save more? Thanks!
ReplyDeleteOur personal situation is unique in that we don't plan to be here longterm and plan to rent once we move so we haven't been concerned with paying ours off.
DeleteThat said, the mortgage is absolutely considered a debt if you plan to be in your home longterm. My vote would be to pay it off as quickly as possible along with your other debt, and then start investing. Then your savings rate could be so high that it would take no time at all to reach FI.
Erik
Great question! Sorry I missed your comment. I will defer this answer to Erik when I am able to do so... but in the meantime...
ReplyDeleteI think it depends on the individual / situation. For example, we've owned two homes (townhome and now current home). We've never seen them as a forever home because we planned on moving eventually so we didn't see the need or benefit. We consider our mortgage more of a monthly housing cost. Now if someone plans on being there forever or possibly using a home as income (rental property, etc), I can see the benefit. But right now in our lives, I don't see us staying anywhere "forever."
You may be interested in this post Erik wrote!: https://fourtakeflight.blogspot.com/2019/07/homesweethomerentersequity.html
Thanks for commenting.
Tara / Four Take Flight