Why My 77% Savings Rate … Means Nothing

Why My 77% Savings Rate ... Means Nothing

Finance nerds have strange habits.

Here’s one of mine:

Once a year, I lock myself in a room with nothing but a laptop, spreadsheet, and boatloads of determination.

The mission: Decipher my savings rate.

Am I saving 30 percent of my income? 40 percent? 60 percent?

As longtime readers might recall, Will and I saved half of our income in 2012. We did it by following one simple rule: Pretend we’re a one-income couple. Live entirely on one partners’ salary, and invest 100 percent of the others’.

Since we earned roughly the same amount, we ended up investing about 50 percent of our income in 2012.

In 2013, we didn’t follow any strict rules about spending from one bank account or the other. But both of our earnings escalated, and I suspected this might translate into a turbocharged savings rate.

(After all, the best way to fast-track your savings is by earning more, and saving every dime of that extra income.)

I crunched the numbers, and made two shocking discoveries:

  • We have a 77% savings rate
  • That statistic is meaningless

Here’s why that factoid is crap – and how to find the metric that really matters.

Measure the Metric That Matters

I don’t want to wax philosophical – at least, not too much.

But before this conversation can continue, we need to discuss an important question: What are “savings?”

Is saving the absence of spending? Is it the money that’s left over at the end of the month?

— Or —

Is it cash that’s set aside for a specific goal?

If so — Does the timeline of that goal matter? Does it qualify as “savings” if the goal is five years away? Five months? Five days? What’s the cutoff?

Furthermore, does the content of the goal matter? Are certain goals, like retirement, more worthwhile? What about world travel – is this a worthy goal, or a frivolous expense?

You can see where the definition of “savings” gets hazy.

Here’s the crux of the problem:

“Savings” is money that you’re setting aside for the future. Which means that “savings” is deferred spending. When you save money, you’re saying: “I’ll spend this later.”

But spending later won’t get you closer to financial freedom. There’s a better metric that we can track — one that’s even more important than savings. (We’ll come back to that metric in a moment.)

But first:

Back to my meaningless savings rate.


This issue arose during a conversation with a friend who happens to work as a financial planner. We were chatting about income (yeah, I’m a fun conversationalist) and he asked how much I had saved in the past year.

I took out my laptop, showed him the spreadsheet … and drew a blank.

Because here’s what it says:

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Look at that second line-item: “Pay Cash for 2 Cars.”

Last year, Will and I both paid cash for our cars. I bought a 5-year-old Honda Civic; he bought a 7-year-old Acura.

So …

Is this “savings,” because we saved enough money to buy cars in cash? Or is this “spending,” because we spent the money on cars?

“It’s savings,” my financial planner friend remarked. “‘Spending’ is month-to-month.”

I contemplated that remark for a long time. I’m not sure if I agree — but then, it doesn’t matter.

Because within those reflections, I realized: We’re discussing the wrong metric. Savings won’t bring you financial freedom. Investing will.

That’s the metric we should track.

Savings Are Awesome … But Investing is the Real Mack Daddy

Savings are great. They help you pay for big-ticket items like cars, graduate school, medical bills, world travel and a wedding. But savings – alone – won’t help you achieve the nexus of all freedoms.

“Savings” is a feel-good word that means, “I’ll spend this money later.” While that’s great for buying big-ticket stuff, it won’t move the needle on creating your life’s freedom. It won’t help you reach the 4 Types of Retirement.

“Investing,” on the other hand, allows you to grow your assets and passive income. This creates freedom.

So …

If my mission is to track my progress towards Financial Freedom, I need to throw away my so-called savings rate, and focus on my investing rate.

I tightened those line-items into a more condensed version. Here’s the breakdown:

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Let’s attack this.

“Cash” represents money that will morph into refrigerators, washing machines and other junk that doesn’t command a return. Sure, these purchases are important — I need a fridge to keep my food cold — but it won’t move the needle.

Let’s throw it out.

Next, let’s look at the “Health Savings” line.

Prior to a few months ago, I would have thrown out that line for the same reason – this money will get spent on wisdom tooth extractions and blood tests. (Those are important expenses, for sure, but our mission is to track financial freedom.)

But then I read an awesome article from the Mad FIentist on How to Hack Your HSA. He advised leaving your money inside your HSA, so that it can continue to grow tax-deferred. Pay out-of-pocket for medical costs. Conceptualize the HSA an a “bonus” retirement account.

Brilliant idea. I can’t believe I didn’t think of that.

So my total retirement investing rate is:


Next come the extra mortgage payments. I’m paying down my rental properties (so that they’ll produce even stronger passive income.) Extra principal payments comprised 14 percent of my income last year.

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What happens when we add these figures?

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Now we’re reading the metric that matters.

We’re focused on investing, not savings.

And that’s what moves the needle.


  1. says

    Really great food for thought. I’m inclined to agree with you, even though that somewhat makes me depressed (my current savings are high, my investments are low).

  2. says

    Nice write up. I was getting ready to pummel you with objections based on the 1st half of the article, but I should have known you were going to bring it full circle and have it spot on. Defining “savings” in terms of early retirement is extremely important and should absolutely be all long term savings/investment.

    I save various buckets of money each month for the purpose of lump sum or eventual spending (property taxes, homeowners insurance, vacations, car repairs) that don’t count as savings. In fact, any hopeful retiree should be creating as honest a budget as possible to make sure they’ve got enough for both recurring and periodic expenses.

  3. says

    I think this is a really important distinction to make! It’s been in the back of my mind since someone on another blog made the comment that savings is really just differed spending. I want to be marching towards freedom not just saving money on interest. It would probably be valuable to parse out what percentage of my net worth is “freedom oriented” and what percentage is “short term.”

    Usually when I calculate my savings rate I go backwards from spending. Any income that didn’t get spent was saved. However, I just looked at it this way and even though my spending is 26% my investments are only 30%, not as large as I would have hoped. However, at least its higher than my tax rate!!

  4. says

    I don’t know exactly how to calculate our savings rate either. But a big part of that is I’m not sure how to calculate our income either. Obviously W-2 income is easy to track, as is interest income. But then we’ve got equity increases, the values of non-standard investments we’ve made, and money spread across many different kinds of accounts.

    Because I don’t truly care what my savings rate is (like you), I’ve taken to just using our net worth spreadsheet to have an idea of our “monthly nut.” Looking at that over the trailing 12-month period gives me a good idea of how much we “grow” each month, and as long as that average is high and is trending upward over time, I’m generally comfortable with that.

  5. says

    Good article, Paula, and I fully agree. In fact I’ve written something quite similar in the past. When it comes to financial health what matters is how much one invests (again, investments should be understood more broadly than stocks, shares and real estate, I believe). Still, most people are hung up on saving; most governments around encourage people to save. Go figure!

  6. says

    It’s all just deferred spending eventually. Does it magically not count if you buy something when you decide to retire versus before then, especilly when early retirement is in the cards?
    Also, just because money is invested doesn’t mean that it’s better than cash, because cash only loses value at the rate of inflation less whatever interest rate you can get it and having cash means you can avail yourself of opportunities as they come along. If you don’t save for medium term expenses, like cars, then you have to line up some form of loan or leverage which may cost you more than the return you are getting from your investments (assuming you diverted that cash to an investment).
    Others have argued that paying off mortgages doesn’t count as savings, either. (I disagree with that.) In your case, it dilutes your ROCE and ROI, but increases cash flow and de-risks your investments, so it makes sense.

    • says

      @Anne — As far as early retirement / financial freedom is concerned: The idea is to never touch your savings. Live purely from the interest and cash flow. Keep the principal intact.

      In other words: You’ll never spend that money. Instead, you’ll invest that money, and live on the gains.

      Savings are awesome (because they help you pay cash for items that you need, like a car). But cash savings won’t ultimately lead to financial freedom. Savings are necessary, but not sufficient.

      • says

        Paula, I’d love to hear more of your thoughts on this, and I wouldn’t ask if I didn’t understand that you’re OK with talking details. What is your final “exit strategy?” Do you intend to leave a ton to family or charity? I lean closer to the Die Broke philosophy, which means that I do plan to spend as much of my money as possible, eventually.

        Overall, it is a great article, but I do wonder where the deferred spending vs. savings line falls.

        • says

          That’s a great question, Kate! First and foremost, my goal is to have enough money coming in through passive income that Will and I never “need” to work. We might (or might not) choose to work, for fun, but we’ll never be forced to work for money. (And if we wanted to take a few years off to travel, or to raise kids, we could do so, and still have passive income streaming in.) That’s the “end game,” and that’s why I’m so aggressive about savings and investments.

          Right now, thanks mostly to the rental properties, we collect about $35,000 annually in purely passive income (after all expenses, including management.) That’s a solid start, but we’d like to increase that annual passive income to about $55,000 before we can really feel “financially free.”

          While we’ll (hopefully) pass away with very solid assets, I’d like to encourage my kids to ignore the underlying value of the assets and focus instead on the annual income that these assets produce. In other words: Who cares if the houses are valued at $1 million? That’s useless information. What’s more important is that the houses create a passive rental income of $80,000 per year (or whatever they yield at that time. I’m making up numbers for the sake of illustration.) And we / our family can use that money to pay cash for college, self-fund a startup business, support themselves while they try to enter a creative or artistic career, travel the world, or pursue any other dream …

  7. says

    I love this idea. We are following it without realizing it, as the money we put into our targeting savings account for travel counts as “spending” right when we put it in. Then, when we spend out of that account, since it was already counted as ‘spent’, we don’t double count it. But it never impacts our savings rate.

    The one item that might be an exception is the savings we put aside for the downpayment on a rental property. I figure a downpayment still is an investment of sorts. But part of that is also going towards things like closing costs, which are more like true spending.

  8. says


    I want to thank you for this article. Its a very important distinction. I would even argue saving cash in the bank is no different than spending the inflation rate on that cash.

    BTW, we decided to follow the your one income plan idea. This year we will invest my income, next year our goal is to invest my wife’s income (she makes double what I do), and finally our ultimate goal is to invest 100% of our income and then walk away from our jobs.


    • says

      @Bilgefisher — I’m so happy you’re taking on the “live on one income” strategy … it’s one of the BEST ways to accelerate your results.

      It makes managing money easier (just pretend the other spouse doesn’t have an income!) and it’s shocking to see how quickly money can accumulate in your savings/investment accounts.

      You’ve got an awesome strategy … save/invest the lesser of the two incomes during Year 1, and switch to the higher of the two incomes during Year 2. That’s fantastic. :-)

      • says

        Hi Paula,

        I’m intrigued by the “live on one income” strategy. I wish my husband and I could do that, but honestly, I don’t think that living in Los Angeles as we do, that I could support both of us living on just my income (I make more than he does). I know because things got really really tight when he was out of work for a couple months last year. What do you suggest in this case?


        • says

          @Amy — Great question.

          Housing represents 28 – 33 percent of the average American’s expenses. So first and foremost, focus on reducing your housing costs.

          Couples often make their homebuying/renting decisions based on their joint income. But this locks them into NEEDING two incomes for decades (until the house is paid-off.) It reduces their freedom.

          I recommend, instead, that you buy/rent a home based on the assumption that only one of the two of you is earning an income. This makes the biggest impact in allowing you to live on one income, and it gives you the flexibility to allow one person to stop working (if they choose).

          If you’ve already purchased a home that requires dual-incomes, you’ve got two options: either downsize, or rent out part of your home to offset the costs. (Most people prefer downsizing, since that allows you to maintain your privacy.) In essence, just imagine that you’re single: Where would you live? What would you do? Make spending decisions like a single person — since two people can live for virtually the same price as one.

  9. says

    Loved the article. I only had one question and it’s because I need reassurance of something I include in as “investing” percentage. You counted the “extra mortgage payments” but should you also count the amount of principal that is paid off with each “regular” mortgage payment? Great read and separating true “saving” from “deferred spending” took me some time to come to terms with. I liked the higher “savings” rate I thought I had.

    • says

      Hi Jacob! Great question …

      I can see the argument working both ways:

      The “No” Camp might argue: Your “regular” mortgage payment is an expense, so it constitutes month-to-month spending.
      The “Yes” Camp might argue: The “principal” portion of that payment is building equity, so it constitutes investing (especially if it applies to an income-producing rental property).

      I think either of these interpretations would be fine. The more important question, in my view, is: Is the property itself a solid investment? Can it produce rental income and/or strong appreciation? (Or both?) As long as you have that piece of the puzzle locked down, you’ll be solid.

  10. says

    I love this. I don’t know why I never thought of “saving” as “deferred spending”, but it makes so much sense. I put the bulk of my money into real estate investments and actually get antsy when I have too much cash lying around, so this way of thinking is right up my alley.

    • says

      @Murmur — Making extra student loan payments is definitely a good thing. But I’d consider it savings, for the following reason:

      Jack saves $500 per month for 5 years. At the end of that timespan, he has $30,000, which he uses to pay in cash for college.
      Jill takes out a $30,000 student loan, and later repays it at a rate of $500/month for 5 years (plus interest).

      If Jack is “saving,” then Jill would also be saving.

      You could make the argument that a college education is an “investment” in your earnings potential. But that quickly gets hazy, given the number of people (including myself) who have never/rarely used their degree.

  11. says

    Love this. Never thought of it this way exactly, but it couldn’t be said any better…

    “Savings” is money that you’re setting aside for the future. Which means that “savings” is deferred spending.

    When you save money, you’re saying: “I’ll spend this later.”

    But spending later won’t get you closer to financial freedom.

  12. says

    I agree that investing is really the road to wealth and retirement savings, but saving for big purchases is also important. I still think it is awesome that you are investing 45% of your income! Way to go! Hubby and I are currently paying off our last debt, but once that is gone, we will become savings/investing machines! Thanks for the breakdown, I may need to save this for when I am ready to determine my investing & savings amounts.

  13. says

    I don’t know about the distinction between savings and investments. Really, what you are looking for is a measure of financial independence.
    I would say a per year savings would be
    $ put into savings – $ removed from savings
    Investments would be similar, if not the same.
    Measure of financial independence would be more along the lines of what you ended with as being important. But, it might be different for people in different circumstances. If you are counting on the investment properties as reaching that goal, then those would definitely be part of that.
    But, I may just be talking about jargon, what you call something. So, if you keep the part of the investments definition as what gives you financial freedom, then that would be the same thing.
    To figure out what that would be, then, you’d have to define what your financial freedom goals were.

  14. says

    Great article, Paula, and thank you very much for the mention!

    Glad to hear you’ve mentally converted your HSA into a retirement account. I actually had an emergency appendectomy at the end of last year so in my mind, it was like I was able to make a $2,500 tax-free conversion from a Traditional IRA over to a Roth IRA (since I can now withdraw that $2,500 from my HSA at any time)! It was the silver lining of a crappy situation :)

    Thanks again and I look forward to seeing you in New Orleans this fall!

    • says

      Thanks to you, I now conceptualize my HSA as a “bonus” retirement account. (And I LOVE getting a bonus retirement account.) So thank you!!

      Sorry to hear about the appendectomy … that sounds like the opposite of fun. (To put it mildly). But at least there’s a silver lining.

      See you in New Orleans!!

  15. says

    I always enjoy reading your posts. Your savings and investing rates are so high. It is very commendable. I save quite a bit, but nowhere near these percentages. Still, I’m making major progress and focused on creating new revenue streams and whittling down my Top 10 Expenses to make the most impact.

  16. says

    Kudos on the high ‘investing rate!’ It took me YEARS of money blogging and financial obsession to realize what you explain in this post.

    I reconfigured my entire budget once I did. Savings for long term goals (eg retirement) are a mandatory part of my budget. Once it hits a certain mark, it gets invested and locked away.

    Whatever is left over at the end of the month goes to short term goals, which, yes, will be spent later that year or next.

  17. says

    Very true. I haven’t worked in a while (a year and a half so far), nor have I made any significant income to even cover my monthly expenses (made around $360 this month, spent $900 as an example).

    Yet my net worth has hit its highest level to date, around $222K.

    Why? I INVESTED the money, I didn’t just leave it lying there in cash.

    Of course I have an emergency fund as a freelancer of around $10K – $20K at any given time to see me through.

  18. says

    Along the lines of what you highlighted, I have 2 important monthly metrics:

    1)Additions to Net Worth.

    This means principal payments on debt and investment accounts (whether they are retirement accounts or not). It does not including any savings that is earmarked for future spending.

    2) Investment Income.

    This is dividends, interest, net rent, from investments that is relatively stable.

    Each month I have targets for both and continually ratchet them upward.

  19. says

    I have to admit that I do really like to see a nice, high savings rate, but you are right – it doesn’t really mean anything unless you are saving in investment accounts. My retirement savings, tax free savings accounts and some of my emergency fund are invested, and that is where I am really interested. I have told my fiance before that I don’t consider our other savings account as meaningful because we plan to spend the money in there on either a vehicle (depending on when his dies) or travel.

  20. says

    L-O-V-E it!

    I can’t stand people talking about “savings” when they are just talking about deferred spending (non-retirement) to purchase goods and services at a later date.

    Accumulating cash to address planned and unplanned events and opportunities is just a way to stay out of debt. That’s step #1. It’s a good step, but just a step.

    Step #2 is where the magic happens. The snowball effect ONLY happens when you hone in on your investment rate. Period!

    Thank you for making it clear and simple for everyone.

  21. says

    Okay, I don’t get it. Every dollar you take in and don’t immediately spend is an investment.

    The dollars I take in and purchase VTSMX are invested in that particular ETF.

    The dollars sitting in my pocket are invested in Federal Reserve Notes. (A fairly sucky but highly liquid instrument.)

    The dollars in my primary checking are invested in a demand account paying 0.02% APR. (Also fairly sucky, also highly liquid.)

    The dollars in my Ally MM checking are invested in a demand account paying 0.85% APR. (Less sucky, also slightly less liquid.)

    The mortgage payment is an investment transfer from the demand account to cover the sale of a tax deferred 2.875% fixed-income instrument (the proceeds of which sale I invested in real estate.)

    I think you’re overthinking it, and drawing a distinction where there isn’t one.

    (For that matter, you can think of the car as an investment in an asset with negative real financial return and certain other intangible returns — but that’s overcomplicating things the other way.)

  22. says

    Unless you are saving for Early Retirement / FI I have no idea why you would be interested in your savings percentage in the first place?

    Do people really track how much (in percentage terms) they are “saving” only to blow that on a big holiday or a car shortly down the line? I think “normal” people with standard financial goals are concerned about absolute numbers when saving for stuff like that, i.e. I saved $1000 this month towards my $5000 holiday so now I have only $4000 left to go (which may happen to be 20% of their target, so in that sense they may use a percentage, however this is clearly not their savings rate)

  23. says

    What is your take on 529b plans for college? We have a 9 and 7 year old, opened an account for each when they were born They each have approximately 25 to 30K in them now. We put in $300 a month each ($600 total). However, if we stopped doing this and started saing that $600 a month to put towards a rental property downpayment, would that be a better investment use of our money?

  24. says

    Interesting post. Last month, my ‘savings rate’ was 52% of my net salary but thanks to you, I’ve just worked out that my ‘investment rate’ was only 32%, the rest was cash savings. I could do with upping this to at least 40%.

    However, I do think that cash savings still play an important role when you’re aiming for FI.

    For example, if something were to happen to your passive income, you would much rather rely on using some cash sitting in a savings account to get by, than sell investments to get the cash? Inevitably, selling because you need the money will undoubtedly be selling at the wrong time.

    Great blog btw, lots for me to do some catch up reading.

  25. says

    Love This site!

    I particularly like the articles about investing since I am at the “Investing” stage – everything is paid off, including the house. I no longer worry too much about “savings” or even “net worth” (I actually got myself into a big pickle in 2008 by using net worth), and I don’t think any tax deferred account (meaning 401k’s or IRA’s) should be used in calculations unless it’s within 5 years of being used without penalties (again, my big pickle). After being at zero more times than I care to remember I bring up these thoughts as a caution in our thought processes as financial rebels!

    I base all of my thoughts around ROI/ROCE or cash flow. As we all know there is good debt, and there is bad debt, and this is why I bring ROCE (Return on Capital Employed) into the mix. A perfect example of ROCE is real estate – borrow the money at say 5% and as long as the rental/farm/minerals bring in a return greater than the borrowed money there is a positive ROCE. I’m currently in the process of investing in such a way that I have positive ROI/ROCE, and am actively investing in things that have at least 20% ROI (payout in 5 years).

    Every day is one step closer to being a true rebel, and achieving full financial independence!

  26. says

    The more of your site I read, the happier I am. I’ve had the savings concept down for a few years now, but didn’t really get into how to invest it properly. Now I’m discussing selling a low-rent apartment in my wife’s hometown and using that plus some of our cash savings to buy something nearby with much greater income potential.

  27. says

    Nice write-up Paula!

    Savings is definitely one part of the picture but not all. Earning an income is the other whether it be passive, active, or both! On the other side of the spectrum, I know of many high income professionals who earn a lot but spend beyond their means. I think the key is to find balance and remain in control of your finances.

    I really enjoy reading your blog; you have a great writing style! :)

  28. Wakaaaa says

    Hello! I’ve been reading many of your articles for the last few weeks. I love your blog!
    I have a question on how to calculate the saving rate, especially when contribution to pre-tax 401k and also a taxable investment account are involved. Should I divide them by the after-tax pay?
    I did a google search and there seems to be lots of different ways of calculating, but I wanted to know what you recommend. Thank you!

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