A high saving rate paired with a high income is the most guaranteed way to become rich.
It doesn’t matter if you make a six-figure or seven-figure income, you will never become rich if you don’t create a gap between your income and expenses. Think about the celebrities or athletes who went broke despite having multi-million dollar career earnings!
As a HENRY, the optimal after-tax saving rate is 50%. This encourages you to grow your income, keep fixed expenses low (rent, mortgage, cars, etc.), and save a year’s worth of living expenses with every year of work.
A 50% after-tax savings rate will also ensure you have sustainable lifestyle inflation, with half of every additional dollar you earn going towards savings and the other half towards improving your standard of living.
As a W2 employee it’s essentially saving one paycheck every month or saving one spouse’s income while living on the other’s (assuming both make similar incomes).
One of the biggest risks for a high-income earner is to assume their income will only go up and will last forever. Build some F You money first and then start increasing your lifestyle.
You only need to win the money game once. Practicing sustainable lifestyle inflation will ensure you are always improving your life and never have to go back down in your standard of living.
Calculating Your Personal Saving Rate
The Bureau of Economic Analysis (BEA) describes personal saving rate as the percentage of disposable income that people save.
Here’s a simplified step-by-step guide to calculating your saving rate for someone making a $100K income.
Personal Saving Rate Formula:
Step 1 – Calculate Disposable Income = Total Income – Taxes
- $100,000 Income – $30,000 Taxes = $70,000 Disposable Income
Step 2 – Calculate Savings = Disposable Income – Expenses
- $70,000 Disposable Income – $35,000 Expenses = $35,000 Savings
Step 3 – Calculate Personal Saving Rate = Savings (Step 2) / Disposable Income (Step 1)
- $35,000 Savings / $70,000 Disposable Income = 50% Personal Saving Rate
Tip: W2 employees can simply (and conservatively) start at Step 2 and use your bi-weekly or monthly paychecks as your Disposable Income since it already has taxes withheld and other pre-tax items deducted by your employer.
The US Average Personal Saving Rate
According to the Bureau of Economic Analysis, the US personal saving rate hit a high of 32% in April 2020!
The long-term average US personal saving rate is closer to 8% but the current rate in 2023 is only around half the long-term average.
Americans can clearly save more if they want to since it’s been done before! The Rich Henry readers strive to be above average financially and save more than the average American.
Source: BEA
Optimal Personal Saving Rate Challenge
I challenge TRH readers to save 50% of their after-tax income for one year. A 50% personal saving rate means you will save one additional year of living expenses.
Over time it will become easier to save more as you adjust your money mindset and your earning potential increases.
Let’s meet Henry, who starts working after college at 22 years old and is able to diligently hits his 50% after-tax target saving rate during a 20-year-long career. At 42 years old he would have roughly 20 years of living expenses saved, assuming his investments grew at the same rate as inflation.
He now has some financial freedom, flexibility, and a financial runway until the average retirement age!
Achieve Financial Freedom Much Faster
Want to achieve financial freedom faster? Your saving rate has the biggest impact on the time it takes.
The chart below shows how many years it takes to achieve financial freedom at different saving rates and assumes financial freedom is reached once the annual return on investments covers annual expenses.
| Personal Saving Rate (After-Tax) | Working Years Until Financial Freedom |
| 0% | Forever |
| 10% (~Average saving rate in US) | 42 years |
| 15% | 35 years |
| 20% (Mainstream recommended saving rate) | 31 years |
| 30% | 24 years |
| 40% | 19 years |
| 50% (The Rich Henry target saving rate) | 15 years |
| 60% | 11 years |
| 70% (Early retirement saving rate) | 8 years |
| 80% | 5 years |
| 90% | 3 years |
Source: TheRichHenry.com; calculations done with Networthify
Assumptions: 7% real return, 4% withdraw rate, and fixed annual expenses
From this chart, we can see the huge impact saving rate has on the number of years it takes to achieve financial freedom. With a 10% long-term average US saving rate (rounded up), it will take over 4 decades to achieve freedom!
With the current average US personal saving rate trending downwards, is there any surprise that most Americans won’t achieve financial freedom in their lifetimes?
Just increasing the saving rate to 20% suggested by mainstream finance media can decrease that time by 9 years. But that’s not good enough.
The Rich Henry readers know that time is our most valuable resource and start aggressively saving early to fuel an investment portfolio that harnesses the power of compounding, shaving off decades of work and buying back your time.
Along the journey, you’ll find that financial progress will spill over and improve other areas of your life. Your confidence will grow and you will feel freedom when you have options.
This will fuel your motivation to continue saving aggressively, allowing you to buy back valuable time that most people will never afford.
Screenshot from Networthify.com
Focus On Earning While Saving
While a 50% saving rate may seem challenging right now, it is absolutely attainable if you focus on both increasing income (offense) and controlling expenses (defense). This is personal finance 101.
In your early years, focus on increasing your income while investing in simple yet effective low-cost stock index funds to let the market build your wealth while you spend your time and energy on growing your income.
Saving 50% on a $100K income is much more difficult than $500K since there are fixed expenses in life such as rent, utilities, food, etc. that cannot be completely cut away. There’s only so much juice you can squeeze from one lemon… so grow a lemon tree!
Build your network, develop transferable and marketable skills, secure promotions in your career, and work on additional income streams on the side. Your earning potential is unlimited! Anyone can make more money if they try, but you must be willing to work longer and harder than the average American clocking 40 hours a week.
Practice sustainable lifestyle inflation and limit the growth of your expenses relative to the growth of your income. A 50% after-tax savings rate will ensure your lifestyle improves as your income increases. Start making small habit changes today and over time it will become easier to save as you adjust your mindset and build a money system to automate your finances.
The more you can make, the more you can save and invest, the faster you achieve financial freedom. Pretty straightforward.
Control Your Future And Buy Back Time
Americans tend to spend almost all of their income each month, allowing Parkinson’s Law to drain their paychecks.
High-income earners should all be able to get ahead financially since by definition they earn more than the median household income. It’s crucial to be aware of how easy it is to let uncontrolled lifestyle inflation enter their lives, limiting their ability to make financial progress despite their high incomes.
By sticking with an after-tax saving rate of 50%, you are inevitably going to make huge financial leaps and your standard of living will improve sustainably as your income increases. As you make progress towards financial freedom, your sense of confidence will inevitably grow, allowing you to take more risks and have options in life.
You will find yourself better at work since you will speak your thoughts and opinions more often without care of judgment. Everything else in your life from your health, relationships, and happiness tends to improve when you don’t have to worry about money.
Take control of your financial future by saving aggressively and buy back your time. You won’t regret it.