They’ve Always Been Faster – why it’s hard to compare your savings rate to someone else’s

One of the more talked about issues in the FIRE movement is what your savings rate is.  If you’re not familiar with the term savings rate, it’s usually worked out by taking the savings/investments you made this year, dividing it by your after tax income, multiplying by 100 to get a percentage figure, and voila there is your savings rate.  So if you make say $80k after tax, spend $30k and save $50k then your savings rate is 62.5%.

Pretty obviously a high savings rate is better than a lower one.  This is because it means you’re saving more money, and also because it means you are living off a smaller portion of your income so will need to have less invested to retire early and can get there quicker.  So working out your savings rate should give you a nice easy to compare number vs how everyone else is doing. 

Except actually it doesn’t.

There’s a bunch of reasons for this, but what they all have in common is that your situation is likely pretty different to whoever you’re comparing yourself to.

Money Out

If we look at first of all at what we’re spending, it’s going to be pretty different for people with different ages and different circumstances. 

If you’ve young and have just started your first full time job then chances are pretty good you’re either living at home (maybe even rent and board free) or living in a sharehouse with others in which case your living expenses are probably pretty minimal.  You’ve probably got a cheap car, you’re not paying much for contents cover, you probably haven’t worked out that you should have personal insurance yet, your health insurance is cheap, basically it’s a pretty low cost time of life.

Move on ten years and you may be partnered up so you get the benefit of sharing a bunch of bills, but then you may well be renting/own a house or apartment by yourselves rather than sharing with others so your overall expenses are higher. 

Move on another ten years and you’re probably in your late 30s or early 40s, more than likely have a mortgage you have to pay each month which can be a huge chunk of change.

In your 50s you’ve hopefully paid that mortgage off and there is a fair bit of surplus cash you can hopefully start putting towards retirement.  Or you may even be retired already!

Two things which can also make a huge difference are whether you’re single or part of a couple, and whether you have kids or not.

Although lots of people get married or are in long term relationships, plenty aren’t and this can make a big difference to how much you’re spending.  It doesn’t matter so much for some areas of spending like eating out or entertainment where it tends to be a per person cost, but there are lots of bills that are pretty much the same whether you’re single or a couple.

Then there are kids.  If you have them, you’re likely on the hook for childcare or school or kinder fees, feeding them, clothing them, whatever activities they are doing, taking them out from time to time, maybe having to buy a bigger car depending on how many you have.  Sure you can do all this cheaper than what all of the scare stories say, but kids ain’t free.  If you don’t have them, you don’t have any of those expenses. 

Money In

Then there is the earning side as well. 

As a generalisation, your earnings tend to go up over time as you get better at your job, get promoted up the ranks etc.  So when you’re 25 you’re probably earning a lot less than you will at 35 which is less than you’ll earn at 45 etc.

https://www.dailymail.co.uk/femail/article-4385448/Australia-s-monthly-salary-according-age-revealed.html (I had to slum it at the Daily Mail to get this infographic, I hope you appreciate my sacrifice!)

As you can see from the infographic above earnings tend to ramp up pretty rapidly from your teen years to your late twenties/early thirties, and then increase again in your mid 30s and hold fairly steady until your early 50s.

Obviously these are averages (don’t get me started on the flaws of using averages!) but it gives you some idea at least, although it doesn’t mean that this will be your exact trajectory.  As well as this it hopefully goes without saying that different careers have different pay scales, some cap out fairly quickly and some don’t.

Then on top of this you again have the difference between couples and singles.  If you’re part of a couple you have two incomes you can use to save (depending on how you manage your finances) instead of just one and so likely have a higher income overall.

Kids are again an issue, if you have them then there is a reasonable chance that at least one of you is working part time or taking some time out from the workforce which tends to reduce your income.  If you don’t then that is obviously not a factor.

What do the numbers look like?

You knew there would be math right?  The actual math here is pretty simple, savings and investments divided by after tax income.  So if you saved 20,000 out of an after tax income of 50,000 you take 20,000/50,000 and multiply by 100 to get the percentage, your savings rate is 40%.

Where it gets interesting (for me anyway!) is the inputs for those two numbers and the effect on your savings rate.  I’ve run a bunch of different scenarios based on one or two income earners, overall earnings, overall expenses etc.

I’ve tried to keep it all pretty simple but the below is a bunch of different permutations based on being single or part of a couple, pre and post tax income, then different levels of expenses and therefore savings, all of which combines to give us the savings rate.  I used the Moneysmart income tax calculator to get all the post tax figures, obviously if you’ve got deductions etc you’re going to get a different amount of after tax income.  

The range I’ve used for expenses covers a wide variety of situations, if you’re single with no kids and living in a share house or perhaps a couple with no kids and living in a paid off house then you might be towards the $20,000 end of the expenses range if you’re pretty frugal.  Alternatively if you’re a couple with kids and paying off a mortgage you’re much more likely to be towards the $70,000 end of the expenses range. 

And obviously your household income will vary depending on whether you’re single or a couple, full time or part time, what your job is etc. 

At the risk of being Captain Obvious, it’s a hell of a lot easier to have a high savings rate if you’re part of a couple and both earning a decent amount of money.  For example if you’re a couple of professionals both working full time and each on six figure salaries then you could spend $70k a year which would get you a pretty decent lifestyle and you’d still have a savings rate of more than 50%. 

Conversely if there is only one wage earner just starting out and on $50k a year then you need to get your expenses below $20k a year to have a savings rate of over 50%.  So pretty obviously if you’re looking at those two situations it’s somewhat of an apples and oranges comparison.

One of the other interesting things though is that there is very much a case of diminishing returns (well increases in savings rates to be more precise) even if you are earning a lot more money, so long as you keep your expenses very low. 

Looking at the last two tables for one wage earner getting $100,000 vs a couple each earning $100,000 so $200,000 in total, if we keep expenses constant at $20,000 the savings rate for the first situation is 72.79% vs 86.4% for the couple.  That’s not actually that big a difference in percentage terms (although you are actually saving far less money which is pretty important, but that will be the subject of a future post).

Where the difference starts to kick in is when your expenses are a lot higher and so the savings rate for one wage earner is a fair bit lower than for a couple.  Fox example if you’re part of a couple where you each get $75k gross and spend $50k between you then your savings rate is 56.58%.  But if there is only one wage earner on $75k and spending $50k then the savings rate is 13.16%.  And the difference is even more stark the higher your expenses become.

Why you shouldn’t compare yourself to most FIRE bloggers

I talked in my last post about finding a blogger you have something in common with, or someone in a similar situation, and using them to inspire you along your own journey to FIRE.

And that’s great if they truly are in a similar situation to you financially where they earn about the same, spend about the same etc.

The fact is though that a lot of the more prominent FIRE bloggers fall into the sweet spot of being in professional jobs paying high wages and being partnered up with someone earning similar money and with no kids.    They’re probably not at the peak of their earnings powers yet, but as a household they already have a higher income than 80-90% households.

I want to be clear that I’m not trying to shoot anyone down here.  Pretty much every Aussie FIRE blogger I read lives far more frugally than the average household so it’s not as though they’re not putting in the work to cut expenses.  And in my experience businesses generally don’t fork out a high salary unless they think they’re getting something worthwhile out of it so they’re presumably providing good value for money.

But the reality is that if you’re part of a couple both earning good money, and you can keep your expenses fairly low then you will likely have a much higher savings rate than someone who doesn’t get to share their expenses and is on a much lower wage.  

My point (and I do have one)

The fact of the matter is that it’s pretty difficult to do a fair comparison of your savings rate to anyone else’s unless they are in a very similar position to yourself.  So whilst I would certainly encourage people to be trying to get their savings rate up to a high level, there are limits to how high it can go depending on your own circumstances. 

If you’re single and have just started in the workplace with an entry level salary, it’s best not to compare your savings rate with someone who’s been working for ten years and is part of a DINK couple.  Conversely if you’ve paid off your mortgage and are part of a couple both working full time, you should probably be aiming for a higher savings rate than a single person in an entry level job.

I certainly want to encourage people to try and have a high savings rate, but more importantly I don’t want them to get discouraged by seeing someone with a 70% savings rate and then deciding to give up entirely on improving their financial situation when they realise they can’t get to that level.  Or thinking that having a 20% savings rate is all you should aim for when you have your house already paid off and likely are in a position to be saving money hand over fist.

It’s important to aim high, but be realistic about what is achievable rather than giving up because you can’t hit some magic savings rate or accepting a really low savings rate when you could be doing much better. 

Also, and this will be the subject of a future post, but obviously the same goes for your savings as well.  If someone else is saving $86,731.27 each year and that’s more than you earn as a household, well it probably shouldn’t come as a surprise that you won’t be saving that much either.  Don’t get discouraged by this!

So by all means follow other bloggers and use them to inspire you on your FIRE journey.  But remember that everyone has different circumstancfes, and just because your favourite blogger is hitting a certain savings rate doesn’t mean that’s the right one for you to be aiming for.

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