March 1, 2021

How We Achieve A 42% Savings Rate

The Path To Financial Independence Starts With Saving Money

Make Work Optional

My wife and I have a goal to make work optional by the time we are 50 years old. After years of mistakes and lack of direction, we are on the same page and path regarding our money journey. As part of this process, we have worked diligently to improve our savings rate over the past few years. As of today, we are at a 42% savings rate. What this means is that we are saving 42% of our gross income. I will explain our strategy and the math in the sections to follow.


Before finding the FIRE (Financial Independence Retire Early) community, we followed the traditional advice of saving 10-20% of our income. This is excellent advice, and the traditional path to retirement will most likely work well for most people. But for us, we decided we did not want to follow the traditional path. We are both Physical Therapists, and most days, we love our work. But neither of us wants to work in our current capacity until we are 65 or older. Working in healthcare is mentally grinding. Especially in 2020! Both of us have been doing this for twenty years, and each has maybe five or so good ones to go. After 25+ years, it will be time for us to go for ourselves and our patients.

Knowing this, we started down the path of pursuing financial independence. What we want more than anything is to make work optional. We want choices. Maybe I become a blogger and podcaster full-time (LOL), or maybe I find another passion for pursuing. I think my wife plans to lay somewhere warm and stay there! We plan to retire TO something and not FROM something. We will be active and most likely work in some capacity, but we will be doing it by choice and will have the freedom to walk away at any moment. To get to the point where we wanted to be, we needed to save more money, so we started.

Our Approach To Saving Money

Our approach is simple:

  • Save First
  • Build A Bigger Gap
  • Automate Everything
  • Minimize Taxable Income
  • Maximize All Investment/Savings Vehicles Available To Us
Save First

We don’t really use the B-word in our house. Occasionally I throw it out there to make my wife mad. I wouldn’t call our system a budget. Some experts call our plan a reverse budget or the pay yourself first budget. But for me, it’s not really a budget because, in my mind, budgets feel overly restrictive and create a deprivation mindset that neither of us likes. Our approach is more simple than a traditional budget. We figure out how much we can save and where we want to save it. When our checks arrive, that money goes to its assigned spot right away. We never see it so we can’t spend it.

Build A Bigger Gap

This is simply a more fun way of saying spend less. Over the past two years, we have become very intentional with our spending. We now try and spend only on things and experiences that give us true value, like our kids playing hockey. We are always looking for ways to optimize our spending in big areas like food, housing, auto, and Amazon! Our focus is finding those areas that can make the greatest impact while avoiding trying to optimize everything, as that can be exhausting.

Automate Everything

I love Fin-Tech for our finances. I use our bank, Mint, Marcus, and Fidelity, to automate our savings and invest. This technology removes the barriers to achieving our goals by making things really easy. By putting in a little time upfront to automate our process, we save hours and hours on the back end while also removing our brains from the process. If I had to sit multiple times each month to transfer money to savings/investing accounts, I would either not do it or most likely find another way to spend the money. Automation removes ME from the process, which is why it works. Besides my habitual 5 min daily check-in as part of my morning routine, I spend almost zero time on our finances.

Minimize Taxable Income

Paying our fair share of taxes is certainly something we believe in, but I don’t believe in paying more than we have to. If the government gives us tools to lower the amount we have to pay, it makes sense to use them to the fullest. Some of these tools include 401K, 403B, 457, FSA, and HSA. There are more out there, but the few I mentioned are probably the most prevalent for the typical W2 employee. My wife and I have access to a 401K/403B, 529, and FSA, so we use them all to lower our taxable income each year. Rather than giving our money back to the government, we can invest it in our future and health. That’s a no-brainer! Unfortunately, we do not have access to a 457 or HSA, but I would absolutely use them if we did. If you have access to those, please look into the advantages they can provide you.

Maximize All Investment/Savings Vehicles Available To Us

There are a lot of tools available to help you save and grow your money. It bothers me to know that so many people stash their money in a regular bank savings account and let it sit there doing nothing for them. This is an OK place for emergency money to sit or money you will need in the next 1-2 years, but it’s not where your future money should be.

We use the following tools for our savings and investments. When we maximize one the way we want to, we move down the line and put whatever money is left into the next one:

  • 401K–(Maximum contribution of $19,500)
  • 403B–(Maximum contribution of $19,500)
  • Roth IRA (x2)–(Maximum contribution of $6000 to each)
  • 529 (x2)–($2000 in total to get the MA state tax deduction)
  • Brokerage Account–(This amount varies but is usually $500-$700 each month)
  • Custodial Accounts–(Using these to teach my kids about investing. $100 a month)
  • High-Interest Savings Account–(This is where we house accounts for emergencies and big purchases. $800/mo)
  • General Savings/Checking Account–(The Rest)

How I Calculate Our Savings Rate

The way I do this is to keep it relatively simple. I base our rate off of our gross income. Some people will exclude taxes and healthcare premiums from this number. I do not because I view those things as an expense. I also include the following two items as “savings” in addition to the list above:

  • Employer Match (401K/403B): This is free money, and it counts. My wife and I are both fortunate enough to have a match program.
  • Mortgage Principle Payments: Each payment you make for your mortgage has multiple parts to it. One of those parts is the principal portion of the payment. By paying this, you increase your equity in the home, and you guarantee a rate of return on that money equal to your mortgage interest rate. I count this as an investment.

OK, from here, it is simple. Add up all of the items I listed above and call that “Savings.” Divide that by your total gross income:

Total Savings/Total Gross Income = Savings Rate

Where Do We Go From Here?

A 42% savings rate is awesome, and if we did nothing else from here, we would be fine. Our kids are getting older, so we will have to deal with driving, college, and other expenses as they come up. This may affect our rate depending on how we approach those big life events. But because we are at such a high number now, we are in a good position to withstand a dip for a brief period if we need to.

More importantly, for me is that we live a full life. The last thing we want is for our kids and us to have a deprivation mindset and a fear of money. I think we live a life of abundance. We do it with more intention than we did before. When you make intentional decisions about your money and your time, you will soon realize you have more of it than you thought.

Try calculating your savings rate, and let me know what you think. Feel free to modify the equation to fit your situation what makes you feel comfortable.

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