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What is the biggest predictor of wealth?

Your savings rate is the most important number to monitor when pursuing financial independence because it's not your total wealth that matters; it's your wealth relative to your living expenses.

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Money

Your Current Savings Rate Is the Number One Predictor of Future Wealth

How you can boost yours and reduce financial anxiety

Designed by Freepik

Tell me your savings rate, and I’ll tell you where you’ll be financially in five years. Your savings rate is the most important number to monitor when pursuing financial independence because it’s not your total wealth that matters; it’s your wealth relative to your living expenses. The higher your savings rate today; the more wealth you will have relative to your expenses in the future. In this article, I drill down into the importance of increasing your savings rate and how you can do it.

How to calculate your savings rate

We need to start by establishing a shared understanding of what your savings rate means. To do that, you’ll need to know the difference between gross and take-home pay. Gross pay = The total amount you make before any taxes or deductions are considered. = The total amount you make before any taxes or deductions are considered. Take-home pay= The total amount you make after taxes or deductions. This is the amount that hits your checking account on payday.

Savings rate= monthly savings ÷ monthly take-home pay.

If your monthly take-home pay was $10,000 and you save $5,000, you would have a 50% savings rate.

What should you consider “savings?”

Some people overthink their savings rate by only including money that is invested or other arbitrary rules. I have a much simpler definition of what constitutes savings; I consider savings to be any use of money that will increase your net worth. That includes the principal portion of any loan payment. Every dollar of principal paid increases your net worth by a dollar. However, I do not include savings that are intended for future consumption. For example, I have a savings account I use as a vacation fund. It’s been accumulating a decent balance recently because I have not had the opportunity to travel. I don’t consider it as savings because the purpose of this money is to be spent in the near term. Now that we have a shared understanding of how to calculate your savings rate, let’s get into the good stuff and talk about how to boost yours.

How to increase your savings rate

Remember, there are only two variables in the savings rate equation;

How much money you make. How much money you save.

Therefore there are only two actions you can take to increase your savings rate; Reduce your spending while maintaining your current income. Increase your income while maintaining your current spending.

Let’s dig into each of these ideas a bit further.

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What is a powerful morning prayer?

Dear Lord, help me remember what a difference it makes when I make time with You a priority in my morning. Awaken me in body and spirit each day with a desire to meet with You and to hear You speak words of affirmation, assurance and wisdom over my heart as I prepare to go into my day. In Jesus' Name, Amen.

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Lord, may nothing separate me from You today. Teach me how to choose only Your way today, so each step will lead me closer to You. Help me walk by the Word and not my feelings. Help me to keep my heart pure and undivided. Protect me from my own careless thoughts, words, and actions. And keep me from being distracted by my wants, my desires, my thoughts on how things should be. Help me to embrace what comes my way as an opportunity, rather than a personal inconvenience. And finally, help me to rest in the truth of Psalm 86:13, "Great is your love toward me." You already see the ways I will fall short and mess up. But right now, I consciously tuck Your whisper of absolute love for me into the deepest part of my heart. I recognize Your love for me is not based on my performance. You love me, warts and all. That's amazing. But what's most amazing is that the Savior of the world would desire a few minutes with me this morning. Lord, help me to forever remember what a gift it is to sit with You like this. Amen.

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