How To Improve Your Savings Rate-Benchmark It

Improve your savingsCompound interest is the most powerful force in the universe, it’s also the most difficult to grasp.  Money buys you time, how often do we hear that if you save $20 today compounded over 40 years you’ll have X amount of dollars saved.  I can’t even plan for next week yet we expect people to plan out for 40 years?

It isn’t easy to see  how a few hundred bucks a month can add up to hundreds of thousands down the road.  Our brain simply doesn’t work that way.  You’re presuming there are no life changes, no bear markets and that people will continue to contribute every month regardless of the market.  Instead of measuring in years you should benchmark your savings to improve your saving rate.  Applying benchmarks on an annual basis is much simpler and more attainable than focusing on decades.  Start with the small wins, celebrate it mildly when you achieve it. For those saving for retirement over time your small wins will snowball into a financial avalanche.

When starting out even if you’re in debt you should save up to the 401K employer match.  Push to increase your savings rate every year. Here are some benchmarks to reach:
When your portfolio hits $10,000.
When your portfolio gains more than $1,000 in year.
When you are able to save more than $10,000 in a year.
When you reach 1X your salary by 30.
When you reach $10,000+ in investment gains in a year for the first time.
When you max out all your retirement accounts.
When your portfolio reaches six figures.
When you reach 3X current salary by 35.(This is needed if you want early Financial independence.) If not 3X salary by 40.
When your portfolio gains are greater than your annual contribution.
When you reach 5X your annual income.
When your portfolio increases from gains and contributions that surpasses your annual salary.
When every year your portfolio increase with contributions and market gains greater than your annual salary.
When the gains in your portfolio on an annual basis without contributions covers 100% of your living expenses.

At this point you’ve crossed over into true financial independence, where you can choose to work if you want to. Last year in our household our portfolio gains with contributions surpassed our combined income for the first time. My goal is to aggressively save and invest so that my portfolio every year exceeds our combined annual income. Of course bear markets will happen, as long as I can average my net worth goal over the next 10 years I will achieve early financial independence. Don’t worry about saving over decades, instead focus on short term benchmarks. Your future self will thank you.

How do you measure your savings? Do you use benchmarks? How do you measure success?

Comments

  1. Good job on your savings rate! Our goal is really just to save as much as we can. Our rate hovers at around 50% and we could probably do more but aren’t willing to make the changes needed to do so.
    Holly@ClubThrifty recently posted…How to Survive a Divorce: A Firsthand AccountMy Profile

  2. As a single woman in her late 40s who still has debt I have a long way to go to catch up.

    I think I am like many people who do the bulk of their retirement savings in their 50s when the mortgage and the children are gone.
    jane savers @ solving the money puzzle recently posted…My Tax Audit Ended With Me Owing MoneyMy Profile

  3. At one time we had goals based on amounts we wanted to earn. But this year we reached another goal of earning as much or more income from investments as we do in pension income.

  4. Those milestones or benchmarks are really nice when you hit them. Compounding definitely is pretty awesome. When I first started saving, the balance was so tiny and there wasn’t much growth in it that it can be disappointing. But once you hit a certain amount, the returns and the growth in your portfolio really takes off. Being that I’m turning 34 soon…I’m gonna try to hit the 3x salary by 35…that might be tough though…but definitely should hit it by 40. I’m not sure how I count my pension though…
    Andrew@LivingRichCheaply recently posted…Image is Everything. Isn’t it?My Profile

  5. I like the last two benchmarks – they sound pretty good to me!

    “When every year your portfolio increase with contributions and market gains greater than your annual salary.
    When the gains in your portfolio on an annual basis without contributions covers 100% of your living expenses.”

    How do I measure “successful” savings? I’m not really sure right now. I’m almost solely focused on increasing cash flow right now and I am (maybe foolishly) assuming that increased savings will come with it.
    DC @ Young Adult Money recently posted…12 Tips for Beginner CouponersMy Profile

  6. Setting benchmarks for savings goals is a great way to motivate savings. It’s important to set realistic benchmarks so as not to get discouraged, and of course set a new benchmark once the prior goal is achieved. I’m setting benchmarks for my dividend stock portfolio, having a goal of getting $1700 in dividend income this year.
    Kay @ Green MoneyStream recently posted…Liebster Award!My Profile

  7. I measure success by how comfortable I feel with my savings and income rate. When I don’t have to over think everything. I’m far from that feeling, but working towards it with everything I got!
    Tonya@Budget and the Beach recently posted…A Budget Traveler In Iceland: Part OneMy Profile

  8. Fantastic advice, Charles. I wish I’d thought of this angle. Compound interest is not convincing to us because we are, on some level, short term thinkers by default. Better to tap into that instinct and use it for good, rather than fighting against it.
    Done by Forty recently posted…That Time Someone Ran Over My ScooterMy Profile

  9. I try to live by percentages rather than specific number benchmarks. It allows me to stay flexible with my unpredictable and variable income.
    Stefanie @ The Broke and Beautiful Life recently posted…Survival Job Spotlight: Actress EntrepreneursMy Profile

  10. I got a late start, one because I went to school for a long time, and two I didn’t max out retirement for several years, which was a huge mistake. I am trying to make up for lost time and am determined to max out my solo 401k employer and employee contribution from here on out, and hopefully that will get us back to a place where we can retire in about 11 years.
    Kim recently posted…“Smart” Ideas That Can Keep You From Paying Off DebtMy Profile

  11. Having a benchmark or savings goal is a great help for motivation. Just make sure to make your benchmarks realistic or you might get discouraged. I’ve set a goal of getting $1,700 in dividends this year.
    Kay @ Green Money Stream recently posted…Liebster Award!My Profile

  12. Love the benchmark idea, Charles. We aren’t doing this now, but just may start!
    Laurie @thefrugalfarmer recently posted…How to Pay off Debt : Beating the Broke MindsetMy Profile

  13. Well said Charles- I was actually just working on a post similar to this, but it will have to sit in the draft folder for a while now. I’m with you though. People are terrible at making decisions for the future, because we’re wired to make the decisions that will benefit us the most today. If we were better at seeing down the road, and how our present decisions would effect our future, there would be much less smoking, drinking, spending, etc., and I think people would in general, make much better choices.
    Ryan @ Impersonal Finance recently posted…clothes don’t equal successMy Profile

  14. Very nice and simple to grasp benchmarks :) I’ve recently just reached the “When your portfolio reaches six figures” stage. Celebrating those small milestones are important because it’s the smaller things in life that matter the most :D I currently measure my my savings based on how many years I can live off my investments and update the number every year, assuming no big surprises in the financial markets. Sometimes local economic problems could arise though. Hopefully the Port Metro Vancouver truck driver strike can be resolved soon.
    Liquid recently posted…Silver WagesMy Profile

  15. I agree that doing it on a yearly basis is way better. That way, whatever the adjustments, because there will be given the ever-present changes, it will be easier to apply. Which made me wonder if planning years ahead in terms of saving works for some. I mean effectively work.
    Jen @Sprout Wealth recently posted…3 Simple Ways to Start Making Extra Money NowMy Profile

  16. Our portfolio is well past the 5x annual income benchmark. It has also earned more than our annual expenses for several years now, even excluding contributions. But we need it to do more than that in order to be covered during down market cycles.
    Bryce @ Save and Conquer recently posted…Grok’s Tips #3 and #4My Profile

  17. Great job creating goals that are very possible of accomplishing!
    My goal last year as well as this year is to make as much money from investments as my side job income.
    Great post!
    David recently posted…Economic Impact of the Crimea Crisis on World EconomyMy Profile

  18. Benchmarking the goals is great. You can also look at what you saved last year, and see what you should save this year.

    If you paid off a 100 per month bill, you should save all of last year, plus the $1200 additional.
    No Nonsense Landlord recently posted…Risk of People with Low Credit Score ExplainedMy Profile

  19. We are constantly trying to improve our savings rate by cutting costs but lately I’m focusing my efforts on the other part of the equation…making more money! We have cut our expenses so much I literally do not know how much more we’re willing to sacrifice. In all honesty, we’ve sacrificed for so long it’s starting to get old and the rubberband is about to snap (so to speak).
    Marvin recently posted…3 Reasons Why Financial Literacy Is ImportantMy Profile

  20. I like the benchmark of having portfolio gains exceed your annual income. Our comfortably exceed our expenses, we need to make gains exceeding income as our next benchmark
    Integrator recently posted…My Dividend Portfolio Q1 2014 UpdateMy Profile

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