How to Multiply Your Savings Rate

Early on in my financial journey I heard the term “Super Saver” and was enthralled. The term refers to those who religiously save and have savings rates in the double digits, often in the high double digits savings rate – we’re talking 25%+ or more. The goals of all this savings of course is essentially the financial freedom to pursue whatever it is you end up wanting to achieve that may be different from what you do now, or in some people’s cases, to support someone else like children or parents.

This quickly led me to ask a question, how can I do what these people are doing? I was early in my 20’s and took a hard look at my finances and saw that I was eating out quite a bit, had some student loans I was paying off at 6.8% interest rates, and was on the market for my first apartment in NYC along with my wife, then girlfriend. I only had a few options, but I noticed a few things at first about myself that were bothering me now that I was actually making a real salary and not just side-hustling as I had done through college.

The strange things that I noticed were that every time I went to save something, I could invest more for it without feeling the hit in my budget. And secondly, I could cut costs whenever I needed to make some student loan payment or to put up enough money for the first and last months rent on an apartment. These two concepts are what drove me to build a little experiment for myself, one which I continue to this day, to invest until it hurts.

What do I mean by this? Saving too much can actually have real consequences on your financials in terms of missed credit card payments, student loan bills, rent, not having enough money for essentials like food, etc. This I knew well, but I hadn’t really forced myself to try and actually hit the bottom-of-the-budget cash-flow issue before. What did I know?

Ignoring savings for a minute, I knew that investing in the stock market is overall a really important long-term financial lever that has paid off huge for the last 100 years or so. But, here I was with only two payments into my 401k, some extra cash going to my Roth IRA, and then minimal cash on the side. Why not push my budget further until cash-flow actually negatively impacted me?

Now, you see where I’m at. I know two things – I could invest more and I could cut costs.

What comes next?

Setting Up the Savings Machine

Before I can even get started talking about saving anything, I have to talk about the savings machine that helped me along with everything.

I was working at a very generous company and had only had my investments automated at 6% of my take-home pay because the match was only 6%. I additionally squirreled away the equivalent of $5,000 a year in my Roth IRA (the federal max at the time. I had no after tax investments automated, but had a few hundred in stocks. So, I decided there were a few goals I wanted to achieve:

  • Save up to the traditional 401k federal max contribution ($17,000/yr at the time)
  • Keep maxing out my Roth IRA
  • Have some cash automated towards after-tax investing

Did I make it to all these goals? No way. I was just out of school and my student loans were still eating me alive and making all three simply wasn’t possible. But, I knew I could stretch and try for the 401k max.

So, to find out I took three not so easy steps to boost my savings rate up and put the savings directly into investments. The first three things I needed were below:

  • Setup automatic savings accounts in your traditional 401k
  • Setup automatic investing in your Roth IRA
  • Setup an after-tax investing account with automated stock purchase capabilities

The action I took to start pushing myself was to increase savings 5% on all contributions each month. I started with my traditional 401k.

Were I to do this today, my list would look slightly different with one added line item to check off:

Why do I like this approach on the automation side?

I setup automation for a bunch of reasons, but the monthly increases were really where the magic of this approach starts to take hold. These include:

  • Get the benefit of automated investing quickly so you can be lazy and not think about saving
  • Ratcheting up your savings rate 5% a paycheck is actually somewhat moderate approach to what I’ve seen others recommend, which sometimes looks like a shock and awe campaign on your financials. You won’t be totally screwed if a big bill comes due with the 5% approach, but you’ll maybe be a few bucks short.
  • Acorns helps ‘punish’ you when you spend by automatically taking more money away from your discretionary pile of cash and puts it toward investments. It’s also a quick way to setup an after-tax investing account that you may not want to actively manage.

For me, Acorns is a rather recent addition to my investing portfolio but I’ve been using it for about 12 months and have piled away a thousand bucks plus pretty quickly.

What do I do once the investing starts to hurt my monthly budgets for spending?

This is the beautiful part of this method. When things start to hurt, you’re going to have two options, roll back the savings gains you’ve made in your automated accounts, or step-up and take on the hard-won battles of cutting costs in your budget. This is really where the hard work comes in. For me, once I saw the amount of cash I had piled up in roughly 2 months, increasing my savings rate by in a really short period on the same costs and 

When it comes to cutting costs, there is a huge amount of content out there to help you do it.

Those are just a few of the few recommendations I’ll make in this post about cutting costs, we just focused on the first couple which are usually quick wins for people and they tackle housing and food costs which are usually a substantial amount of the average Americans budget. There are entire books dedicated to the topic so let’s stop here.

Some Rules

When you’re taking this slash and burn approach to your expenses and increasing your savings rate drastically at the same times, budgeting can become really challenging. For me, there are really two things to remember to basically keep you alive – shelter and food. Budget for those two things, and those two things only:

  • Make sure you set aside enough cash to make your home/rental
  • Make sure you can set aside a minimum of $200 for food for a month

These rules exist so that you don’t totally go broke or can’t feed yourself without accessing your cash from your investment accounts, or even worse, from your retirement accounts. Remember, I’m suggesting something extreme here, because the concept of investing until it hurts is because you need to learn your threshold for budgetary pain before you can efficiently step back and say, “Okay this is too much, it’s time to roll back the savings rates”.

What did I achieve in my journey?

When I first invested until it hurt, I could only get to about $12,000 a year in my 401k (ignoring employee match) and maxing out my Roth IRA at $5,000. I boosted my savings rate from the low 10% to in the 20% range, even while student debts continued to suck me dry.

As I’ve had career successes and paycheck growth, I’ve repeated this experiment several times and am now currently maxing out my Roth IRA, Traditional 401k, my after-tax 401k contributions, and am investing a fair amount into other after accounts through Betterment and Acorns.

Each time I got a raise or moved I ran through this approach again and again. My savings rate was in the low 10% range and now sits in the 70% range as a result of relentless savings increases while applying ruthless cost cuts.

Summary

The quick and dirty recap of this post is the following:

  • Start increasing your savings 5% each month through automated accounts. First in your Roth IRA, then in your Traditional 401k – unless you are not maxing out your companies match (if you’re lucky enough to have one), then do the same on your after-tax savings accounts.
  • Once you see that your savings is actually hurting your current budget, start slashing costs where ever you can – ideally with the highest cost expenses first

This is the simple approach I’ve used at every step of my financial journey to maintain not just a high savings rate, but a high investment rate where my money is working for me in the stock market at a much better long-run average return than just saving cash in the bank. This has had huge growth for my net worth as a result of compounding interest.

I hope that this approach inspires you to take on what can be a challenging but hugely beneficial endeavor. If you have any questions on the what, how, when of this post or just have criticisms of this approach, please feel free to post below.