Latest posts by Cody (see all)
- “What is My Time Worth?” - January 22, 2019
- How to Be Frugal Without Depriving Yourself - January 13, 2019
- Blogress Report – December 2018 (and End of Year Recap!) - January 4, 2019
The legendary 50% savings rate – for some it seems unattainable. But, the truth of the matter is that it’s just simple math. The math is the easy part, though. In order for this to actually work you will have to (1) track your spending, (2) control each expense category, and (3) save the difference.
This post will show you exactly how much you can spend at various income levels in each of your expense categories in order to achieve a 50% savings rate (or better).
Are you up for the challenge?
How to Calculate a 50% Savings Rate?
For the purposes of this exercise, we will break down the differences between ‘savings’ and ‘expenses’ (it’s more complicated than you might think). To keep things simple, anything that increases your net worth counts towards savings. Anything that does not, is an expense.
What Counts as ‘Savings’
- All after-tax, take-home pay that is not spent
- Any contributions to an IRA, 401K, HSA, 529, or other tax-advantaged investment accounts
- Any type of debt pay-down (mortgage, student loan, credit card, etc.)
Fun Fact: Increasing assets and reducing debt both increase net worth.
What Counts as ‘Expenses’
- Any purchased good/service
Expenses are basically anything that doesn’t increase your net worth.
Note: Taxes are already accounted for in this analysis.
Average American Expenditure Broken Down
Let’s Get Number Crunching!
Now that we’ve laid out all of the statistics, let’s get to number crunching!
First, let’s analyze the annual spend for different individuals across the entire income spectrum — from after-tax income of $20,000 all the way up to $300,000. In this post, we will focus on the numbers highlighted in yellow / outlined in red to determine how much an average family can spend in order to achieve a 50% savings rate.
Next, let’s break down the spending into the categories we defined in the ‘How Americans Spend Their Money’ chart above: Housing (32.9%), Transportation (15.8%), Food (12.6%), Personal Insurance / Pensions (11.9%), Healthcare (8.1%), All Other (6.9%), Entertainment (5.1%), Cash Contributions (3.6%), and Apparel and Services (3.1%).
Now, we can apply these percentages to each of the annual spending brackets to see how much a family can spend per year in each category to achieve a 50% savings rate at a certain income level. See the charts below to determine how your family can save 50% of your income!
50% Savings Rate – Annual Expense Breakdown
For example, a family earning $60,000 per year (after taxes), can spend $30,000 per year to achieve a 50% savings rate. Let’s break this down into categories to illustrate how much this family can spend annually in each expense category.
Housing (32.9%): $9,870
Transportation (15.8%): $4,740
Food (12.6%): $3,780
Personal Insurance / Pensions (11.9%): $3,570
Healthcare (8.1%): $2,430
All Other (6.9%): $2,070
Entertainment (5.1%): $1,530
Cash Contributions (3.6%): $1,080
Apparel and Services (3.1%): $930
50% Savings Rate – Monthly Expense Breakdown
Now let’s look at these same numbers on a monthly basis and analyze the results.
Using the same family from the example above, at $60,000 in after-tax income, this family can spend $30,000 per year, or $2,500 per month to achieve a 50% savings rate. Using the same percentages as before, let’s examine each monthly expense category.
Housing (32.9%): $823
Transportation (15.8%): $395
Food (12.6%): $315
Personal Insurance / Pensions (11.9%): $298
Healthcare (8.1%): $203
All Other (6.9%): $173
Entertainment (5.1%): $128
Cash Contributions (3.6%): $90
Apparel and Services (3.1%): $78
Can You Hit The Magical 50% Savings Rate?
Now you know the math, but that’s the easy part. The hard part is to actually execute on your game plan to (1) track your spending, (2) control each expense category, and (3) save the difference.
According to Mr. Money Mustache’s Retirement Chart, a family who maintains level spending (adjusted for inflation) and a 50% savings rate can retire in just 17 years! Living below your means doesn’t translate into deprivation, it translates into buying the world’s greatest asset: time!
Achieving a 50% savings rate is great, but financial independence doesn’t just happen through diligent saving. In order to really supercharge your path, you will want to earn more, save as much as you can, and invest the rest. Once you understand how to control your money, the journey becomes a whole lot easier.
The “track everything” advice is so overpreached in the personal finance community, but only because it’s so true. In order to really take hold of your finances, you need to know where all your money is going! On a micro level, this could include tracking expenses in a notebook, on Excel, or in a program like Mint or YNAB. Pick which option works best for you. I personally use a custom budgeting spreadsheet that I created in Excel (yeah, I’m a nerd).
On a macro level, you always want to be tracking your net worth. Remember, Net Worth = Assets – Liabilities. Knowing where you stand in the big picture is just as important as tracking your daily spending. My favorite app for this is Personal Capital. It’s a comprehensive, super-easy-to-use platform that allows you to check your net worth in real time whenever you feel like! I highly recommend checking them out if you’re not signed up already.
And that’s it! Now that you have the tools and knowledge, it’s up to you to execute.
Do you think you have what it takes to achieve the legendary 50% savings rate (or better!)? Let us know how you’re doing in the comments below!
If this content helped you, please share! Website traffic helps to keep the lights on and allows me to keep producing helpful content.