Importance of Savings Rate for Financial Independence

Saving 25% of income is crucial for achieving financial independence and security in retirement.

### The Importance of Savings Rate in Wealth Building
* 💰  Your savings rate is the percentage of your pre-tax income that you save and invest for the future, with an aspirational goal of **saving 25% for financial independence**.
* 🔐  Savings rate creates **flexibility, security, and accelerates wealth-building** by providing a safety net, eliminating desperate decisions, and increasing momentum in your financial journey.
* 📊  Starting in your 20s, saving **25% of your income** can potentially replace **100% of your pre-retirement income** by age 65, assuming a **6% rate of return**.
* 🎓  While saving **25% in your 20s** is aspirational, even starting with **smaller amounts** can build the habit of saving for the future.
* 🔢  In your 30s, it becomes crucial to be intentional about **saving 25%** to maintain your **desired lifestyle in retirement**.
* 📈  By your 40s, the responsibility of saving for retirement largely falls on you, and if you haven't saved enough by then, you may need to consider **working longer or adjusting your retirement plans**.

[Music] Brian, let's jump into the first one. Number one, and this is a huge one. This is one that gets us so excited: your savings rate. And when we say your savings rate, what we're talking about is the percentage of your pre-tax or your gross income that you are saving and investing for the future. This is a huge one. Well, we get in trouble because people, when we say savings rate, and I sometimes interchangeably, I'm talking about savings, but sometimes I'm talking about investments. So, I love that we actually get to clarify this. So, we actually broke it into two columns. Savings rate can include a lot of different buckets. It can be your emergency funds. It can be any type of if you're saving for a future car, home, or vacation funds. It can be 529s, and of course, it can be your investments and retirement funds. But that is different when we talk about that aspirational saving and investing 25% goal. Yeah, we're talking about 25%. We're talking about money that

is being put aside for your future financial independence. So, this is money that you're saving in your 401ks, 403bs, in your IRA, in your pensions. If you have a pension available at your employer, you can even include your employer match in this number, assuming that you are below a certain income threshold. So, when we talk about we want you saving 25% of your gross income for the future, it's not for like future prepaid expenses. That is for financial independence. Now, early on in your journey, Brian, I think it's okay. You might be doing some of these savings rate things. You might have a lot of your money going to that emergency fund or going into your envelope system. That's great, but the aspirational goal is we want you to get to 25% for the future. So, let's talk about why does savings rate matter. You know, this is one of those things where I think people need to understand the positive here is that you're never going to get your financial operation off the ground unless you're disciplined or living on less than you

make and creating margin in your life. But why is margin so important? Yeah, it is the second ingredient to wealth creation. It's so important because there are three things that margin does for you. That little money that it comes from, that discipline from that deferred gratification, creates flexibility. And what that means is that if your circumstances change, if something happens outside of your control, but you have some margin, you have some savings, and you have to squeeze that margin down, it gives you a safety net, gives you a little bit of cushion where you can back down your savings, and you're still going to be okay. If you're living paycheck to paycheck to paycheck to paycheck, you don't have any flexibility available. Well, it's also a security, knowing you no longer have to make desperate decisions. I think this catches back to being an active participant in your own financial life. If you have margin, if you have savings and investments in your background, you don't have to worry about what happens if the fridge breaks, what happens if you know I have an auto.

accident. You have security. Know you're going to be okay no matter what life throws at you. And the third thing that margin does is it creates acceleration in your wealth-building journey. Well, it might feel kind of slow at first, the more that you can do it, the longer that you can last, the more momentum you're going to have going. So, that margin allows you to accelerate your wealth-building journey. It might start as a very, very small snowball at the beginning, but as it continues to roll down the hill and develop momentum, it gets bigger and bigger and bigger and bigger. And that is what that margin can do. Well, if you don't know your savings rate and you're not applying the appropriate savings rate, you might not be creating enough margin in your life to actually create the flexibility or the security or the acceleration. What I love about our content, though, is that we focus on giving you the mindset stuff. That's why we're talking about the discipline, getting that margin built in, but we also give

you the analytics, so let's actually talk about what 25% can do for you. And this is something I think this is so good. I was actually trying to bring it up into another show because we have, if you go to money.com resources, we have what 25% can do for you and a deliverable you can download. But let's break it down by decade. So when we talk about what a 25% can do for you, let's talk about the 20-year-olds first. Yeah, in this decade, it's a little bit aspirational because frankly, life is hard when it starts. When you first start working, it's hard. You have maybe not a huge income, and you have so much stuff pulling you in so many different directions, and you're still just trying to get your sea legs about you. So getting to 25% can be difficult. But if you're able to do that, you're able to do that at an early age. You can see how bright your financial future looks if you can save.

25% of your pre-tax income, your pre-retirement income, and you can do that all the way until you get to retirement. And let's assume you have a conservative 6% rate of return on your investments. There's a really good chance that when you get to retirement age, when you get to age 65, you're able to keep 100% of your pre-retirement income. You're able to replace essentially exactly what you were out there earning and making in the world if you can figure that out in your 20s. But a lot of people have a hard time doing that. Well, yeah, that's why the saving 25% in your 20s is aspirational. I want to be very clear on that. This is not something many people can do, and that's okay. I mean, because when you're young and you're in your 20s, you're broke, but you more than likely have the most valuable resource on the planet, that is time on your side. And that way

you if you just do something, just do something, and that's why I love the power of starting young, is that even 10-15% is going to get the ball rolling and really potentially replace 100% of your income in the future. Now, what I think is going to happen is if you approach this from an aspirational standpoint of just doing something where I don't know if it's $50 a month, I don't know if it gets you to $100 a month, but if you start the process, you will in a healthy way get addicted to building for the future. And I think that if you'll just start doing something and getting it going, you'll be on your way to 25% in no time. Now, what I think is great, Bron, is you said that time is our most valuable resource, and yet it's also fleeting. Because by the time you get into your 30s, the numbers change a little bit where 20s were aspirational, we would argue that in your 30s you need

to be very intentional because if your goal is to maintain your pre-retirement lifestyle in retirement, you want to be able to live the life that you want to live on your terms. You better get serious about saving 25% because that is going to be what's required to be able to replace that pre-retirement income. What I like about this is now this is going to probably have people go back on YouTube, back it up, you know, hit that button 10 seconds backwards a few times because you're going to see the color coding and all my podcast listeners. I'd encourage you to go check out these charts because it is color-coded. There's like a heat map here because in your 20s, if you were just doing anything, it was pretty, you know, green lights all the way through. But notice now that we're in the decade for 30-year-olds, is that this thing is a mixed bag. If you wait too long, like if you think, Hey, I'll wait, and then you

save 10% 'cause there's still books out there written in the 90s that are telling you 10% or 15% is going to be enough. Well, if you don't discover saving and investing until you're in your mid-30s, there's a chance that this is not going to line up like you thought. So, you need to take an active role in knowing what each savings rate can do for you in the future. And then, as you get into your 40s, now a lot of the responsibility falls on you. And if you haven't done anything up until your 40s, there's a really good chance that 25%, even in and of itself, might not be enough. You may need to start rethinking, Okay, what are my sources of income going to be in retirement? Am I going to look at a true normal 65-age retirement, or might I need to work longer? You still have time in your 40s to change and adjust course, but it is a huge responsibility, and it falls

on your shoulders, and you have to take it very, very seriously.

Do You Know Your Savings Rate Percentage? (You Should)

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Your savings rate is the percentage of your pre-tax income that you save and invest for the future.

It includes various buckets like emergency funds, vacation savings, and retirement accounts.

The goal is to save 25% of your gross income for financial independence, with the potential to include employer matches in that number.

The Importance of Margin in Wealth Creation

Margin is crucial for wealth creation as it provides flexibility, security, and acceleration in your financial journey.

It offers a safety net during unexpected circumstances, reducing the need for desperate decisions.

Additionally, margin helps build momentum over time, ultimately accelerating your wealth-building process.

Saving 25% of pre-tax income in your 20s can lead to a bright financial future and potentially replace 100% of pre-retirement income by age 65, assuming a 6% rate of return on investments.

While this goal is aspirational and challenging for many young people, they have the valuable resource of time on their side.

Starting early with consistent saving can have a significant long-term impact on financial stability in retirement.

The Importance of Starting Early in Building Income

Starting to invest or save even a small amount in your 20s can set the foundation for replacing 100% of your income in the future.

By being aspirational and gradually increasing your contributions, you can become addicted to building for the future.

In your 30s, it's crucial to be intentional about saving 25% of your income to maintain your pre-retirement lifestyle.

The Importance of Saving and Investing Early

Saving 10% or 15% may not be enough if you start in your mid-30s.

By your 40s, the responsibility for your financial future increases, and 25% may still not be sufficient.

It's crucial to reassess your income sources for retirement and consider working longer if needed.