# What is your Savings Rate?

• How to calculate savings rate?
• Calculate savings rate with pension contribution
• A look at my personal savings rate for last three years

Your savings rate percentage will determine when you will be financial independent. No matter how much you earn, whether you earn €25,000 per year or €100,000 per year, financial independence date still comes down to your savings rate. The reason for this is that a person’s expenses are usually a percentage of their income. Hopefully, their expenses are less than their income otherwise they could not possibly survive for long. Their savings will contribute to the passive or additional income that will cover those expenses once they reach FI.

Let’s say someone is earning €25,000 per year and their expenses is €24,000, which is a 4% savings rate. In order to become financially independent they need to get to a point where income from other sources, not PAYE, covers their €24,000 expenses. A 50% savings rate will get them to financial independence in 17 years, 5% savings rate will get them there in 66 years.

There are a few ways to calculate your savings rate. If all our income is deposited directly to your bank account or via cheque then it is easy to calculate. Your savings rate would be the total expenses divided by your net income. Add up your expenses and divide the total amount by the net income and the result is your savings rate. However, if you are contributing to a pension this gets more complex.

## Savings Rate with Pension Contribution

As pension contributions are excluded from your net income, it is difficult to calculate it as part of your savings rate. I include my full contribution in my savings and I add the employer contribution in both net income and savings.

Let’s define what is net income and what is included in savings:

Net income = Gross Income + BIK + employer contribution – Income tax – PRSI – USC.

Benefit in Kind (BIK) is included in net income because it is an expense that you would normally have but now your employer covers it.

Savings = Pension contributions + employer contributions + any post-tax cash/investment savings

Savings Rate = Savings / Net Income

I have been working on financial independence for three years. I would like to share my savings rate on my personal path. I have simplified it here and only included net earnings from PAYE and expenses but I believe it still tells the story.

## One year into the Financial Independence (FI) path

In 2017, I was just discovering financial independence. I wasn’t even convinced that this was going to work. Especially in Ireland, where taxes are so high and investing is punished by further extremely high taxes compared to countries such as U.S.

However, I kept tracking my expenses and tried to find ways of decreasing them. This was the picture of my income minus expenses at the end of 2017 divided up by month. I am counting my net income into the bank and all expenses that left my bank account. Any investment growth or P2P lending that I was doing back then is not included in this.

A few things to notice here. I had three negative months; these are the months where I spent more than I earned, probably by dipping into my savings or using a credit card. There was one break-even month (Aug), and one great month (Sep). Overall for the year, I saved 14%.

## Second year into the financial independence (FI) path

In 2018, I really dug in deep into researching financial independence. I was reading blogs, watching videos, and reading books. I also started to gain some discipline with my spending habits and investing more money, more wisely (index funds).

Even though I didn’t realise it at the time, my personal financial situation was getting better. It was only at the end of the year that I could see that though. Viewing the chart below, there was only one negative month (May), one break-even month (Sept), and all other months were positive. This was a great improvement on 2017.

I had medical issues in February of this year, which did set me back a little financially but apart from that it was a great year; 16% savings rate for the year. I’m starting to see my investments grow slowly and I am full-on into financial independence now. So much so, that I decided to setup a meetup.com group to see if I can find other people in Ireland that may have a similar mindset.

The first meeting in August, six people came along, which I thought was great. Little did I know how big it would grow. The initial meeting was great, I met some other people in Ireland whom I was able to share what I learned so far, talk to them about the taboo subject of finances and learn what they had found out about FI.

## Third year into the financial independence (FI) path

This was a great year, financially speaking. I am now tracking my savings rate along with my expenses and I have watched my net worth grow exponentially this year. I feel that the fruits of my labour are starting to pay off.

I don’t feel that I done too much differently this year compared to last year except that I am more conscience about what I spend my money on. When I am about to spend money I ask myself will this make me happy? If the answer is no or maybe then I don’t buy it. If the answer is yes then I may buy it unless it is a big ticket item then I will think about it for a while.

For example, sometimes I would buy a coffee for the train journey to work. I didn’t really need it or even want it, I realised that I was buying it because I could. I thought to myself, I deserve this so I am going to treat myself. But it really wasn’t making me any happier when I drank it. This was just blind consumerism taking over. I stopped buying those coffees and realized that I didn’t miss them.

This spending discussion came up in the meetup group and some people have a todo list on their phone (todoist app) to track what they want to buy. Instead of buying something straight away, they write the item in their list. It could be tangible items such as a chair, or new phone or intangible such as boiler service, or wine tasting holiday. Smaller items are bought when needed but these larger items are reviewed on a regular basis and prioritized, and if they can afford it then they will buy the item on the top of the list. I thought this was a great idea. This is something that I will be implementing myself.

The Meetups have jumped in leaps and bounds. We went from six people at the initial meeting to well over 60 at the August meeting this year. It truly is a sign that people in Ireland want to take control of their personal finances and take control over their freedom.

My expenses this year have decreased significantly, which of course improved my savings rate. Only one slightly negative month (Aug) this year, all other months were positive. My savings rate this month jumped to 30%. It’s still not where I want it to be but I believe I can’t cut anymore expenses without depriving myself. So, now I will focus more on increasing income and as long as I can keep my expenses at the same level then that should increase my savings rate.

Throughout these three years, my PAYE income did increase but only slightly. It just kept up with the inflation rate.

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