Why you should have a high savings rate?

Here’s why!

Your Savings is the only thing you can fully control
  • You can’t fully control your income because it is based on a lot of external factors. You can have some autonomy but you really can’t control it.
  • You can’t control your investments, and the first half of this year has shown us a lot of that.
  • You can’t also fully control your expenses because life happens and emergencies come up. You definitely have a lot of autonomy with this though!

Also remember, it’s only what you save that you can invest, therefore we need more emphasis on saving.

You do not need a reason/goal to save

This is another argument on why you should have a high savings rate. You do not have to save for something, just save! A lot of people always ask “ what am I saving for” and I always struggled with how to answer this question. I knew it was important to save but when people say “I can’t save if i’m not saving for a goal”, it always threw me off. Which was why I was so happy when Morgan mentioned this in his book The Psychology of money;

  • You do not have to save for something, just save because…
  1. You can buy freedom with your money, you can buy your time, you can have access to opportunities which only having money at that point in time will afford you.
  2. You hear stories of people leaving their jobs to do what they love especially during the “GREAT Resignation” and they can only do that because they have money saved up!

Always remember cash is always king!

How to save

Now let’s back to how Sarah can increase her savings rate, please check the last blog post on where we left off!

Sarah was able to save $1500 comfortably, which is a 28% savings rate which is great! However, she wants to increase that to around 40% so what does she need to do?

There are two major ways to do this;

Increase your income while keeping your expenses the same

In this scenario, if Sarah gets a side gig that brings in an additional $500 per month, which is great. That would put her at a 35% savings rate by saving $2,000 monthly with a total income of $5700.

This is a winner!!!

However, the reality is it’s not easy to get a side hustle that’s immediately going to give you that additional payout per month, and so that leads to the second way.

Evaluate your expenses and reduce them where its possible

Firstly, evaluate where you can reduce some money from your needs/bills. For instance, can you get a cheaper phone bill or does it make sense for you to get a roommate? Can you get a better deal on your insurance, always ask for better deals anyways. However, if you’re not in the position to do that, look for ways to reduce the expenses.

Let’s evaluates Sarah’s expenses starting from her needs and bills

Rent and Hydro bill: We may not be able to adjust anything here because Sarah loves her place and she is not looking to downgrade to something cheaper.

Phone bill: Sarah agrees that this is fairly high and is looking for ways to reduce this closer to $80 per month.

The rest of her bills are reasonable, and she doesn’t think she needs to reduce any of those, which is perfectly fine!

This might look different for you, you might be fine with looking for an apartment that’s cheaper or even reducing your food budget.

High Saving Rate

Don’t aim to have a stellar budget, focus on what works for you towards achieving your financial goals!

Next up we evaluate expenses that are important to her

Her expenses are self-care;$200, Eating out; $200, Retail therapy; $150. Self care is important to her and she’s not willing to negotiate on those. Remember she already spends $200 for food and she uses an additional $200 for eating out. She believes she can reduce this to $100 per month and reduce retail therapy which is $150 to $90 monthly. This leaves us with an additional saving of $220, which is a great start. Sarah also says she can get an additional $150 to $200 per week by working on a side gig.

High Saving Rate

So we finally arrive at a possible total additional savings of $1920 which is 34% and is great.

We see that she didn’t exactly get a 40% savings rate but she has the right mindset to achieve that. I wrote Sarah’s story this way so you understand that you have to do what makes sense to you. This is why personal finance is personal to you but ensuring you have the right mindsets and goal is important to becoming wealthy!

I hope i’ve been able to convince you to save more and increase your savings rate.

To my Nigerian readers, here are some great high-interest savings accounts and ways to save money considering how Naira constantly depreciates

Looking to create wealth the Halal way? Click here to get started with a LOTUS Tribe Investment Account.

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