A savings rate is the percentage of take-home pay that is saved. For example, £200 saved out of a net income of £2000 gives a savings rate of 10%. A good balance between your consumption rate and the savings rate is good. This is because the higher your savings rate, the more money available to meet mid-long term goals.
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Why is your savings rate important?
The savings rate is a key aspect of your budget and financial goals. For instance, saving towards a £2000 holiday goal will take 10 months to achieve with a monthly savings of £200. This is provided that the only goal is the holiday. The majority of people have multiple goals. The rate at which you save determines how quickly you reach your goals regardless of income. See an example of some of my goals:
| Goal | Horizon | Monthly savings amount |
| Holiday | Short-term/recurring | X |
| Children’s savings | Mid-Long term | X |
| FIRE (financial independence retire early) | Mid-Long term | X |
| Late retirement fund | Long term | X |
These are just a few items on my list. My real list is longer however anything below one year is included in my budget as a monthly recurring expense. My focus in this post is on the mid to long-term goals because these are the ones often overlooked.
The role of your budget
Your budget is your main planning tool. If you haven’t gotten started on a personal budget yet or need a good overview of budgeting, download my budget eBook below:
Given that you have to prioritise your needs and essentials like food, shelter, utilities, and so on, your budget is the tool to determine how much you can actually put away in savings. This is then distributed accross the items on my goal list on a monthly basis. The alternative is to work towards one goal at a time then move on the the next when the target savings is achieved. Regardless of the method used, the important thing is that increasing your savings rate is the key to achieving them quicker. You can calculate your savings rate by using the formula:
Savings rate =(Total savings/Total income)*100
People who use the 50/30/20 budgeting method will usually apply a savings rate of 20%. So if you have a target savings rate and your current rate is below target, then you can work on boosting the savings rate up to your target rate. Alternatively, you can work with the actual target savings required for your set goal.
Worked example (hypothetical)
Assuming I have a goal to buy a house in 5 years’ time and worked out the costs (deposit required, stamp duty land tax (SDLT), buying costs, and moving costs) to be £50,000 having decided on the price range. After doing my budget, I realise I can only set aside £500 every month. It will take 100 months or 8.4 years to save up the deposit with a monthly savings of £500. This timeline is nowhere near my desired 5 years so what do I do? Here are my options:
- Save the £500 every month and accept it will take 8.4 years instead of 5
- Accelerate the goal deadline. To do this, I will need to increase my savings rate. If I put away £1000 a month instead of £500, then I will hit the goal in 4 years,1 year better than initially proposed. Here are my suggestions on how to boost your savings rate:
5 steps to boost your savings rate
Decide on your goals
Start by making a list similar to mine above. What are your financial goals? Why are you setting the goal? Knowing your destination is important and will be a great source of motivation. Instead of just saving randomly, giving your savings a purpose is key. With the end in mind, there is greater discipline and focus.
Make a plan
A plan will include the strategy you want to adopt to pursue that goal. Think about what you want to do, why, when you need it and the target savings required. Include this in your budget which is your main planning tool, and decide where the savings will go. The reason why I set a timeline for my goals is to determine what kind of account I save in. For instance, savings for mid-to-long-term goals are invested in the stock market to make good use of compounding and the higher return rates. Automation is helpful in keeping things going with little effort and staying disciplined.
Decide what needs to change
Now, this is where the real work begins. To decide where the additional savings will come from, a budget overhaul is needed. There are only 2 variables in your budget. Your income and expenditure. A choice needs to be made between finding ways to make extra money, reducing discretionary expenditure, or both. Cutting down on takeouts/eating out, working harder to reduce your grocery costs are examples of expenditures that you can let go of. It takes determination but when there is a will, there is a way. If things are tight already, you need to look for ways to increase your income.
Create an implementation plan
When you have decided what needs to change, it is time to implement it. For instance, if your income needs a boost, how do you want to go about this? Create a plan with a timeline and a figure attached to it and implement the plan. Documenting a plan and committing to it is important. So get to work.
Review, Reflect, Refresh
Remember to review as you go along, reflect on what is working and make adjustments where necessary. Set milestones and reward yourself (reasonably) when you hit them. Look for ways to stay motivated. For instance, you can create a vision board or a milestone board so you can visualise your goals and also check progress. Get an accountability partner if needed to keep in check and always remember the end goal. This is why is important to clarify the ‘why’ for your goals.
Conclusion
One of the things I like doing is watching Dave Ramsey on youtube, particularly the debt-free screams. There is a segment on the Ramsey Show where people talk about how they tackle their debt and scream “I/We are debt free” at the end. It is always so inspiring listening to how people took on side hustles to increase their income, working 2-3 jobs and crazy hours in other to pay off their debts. The joy is always contagious and the stories inspiring. I believe the same intensity and purposefulness can be applied to any type of financial goal if there is a desire for it.
Do you need to boost your savings rate? Make the decision and follow the step above. Let me know if you plan to accelerate some of your goals using these steps in the comments below.