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HOW MUCH I SAVE EVERY YEAR - How to increase your savings rate for early retirement - YouTube
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- As a young professional,
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after a couple of years in your job,
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you're hopefully in the position
to earn a decent salary,
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and of course, in order to be able
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to finance your investments.
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Usually saving your income,
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saving a significant
portion of your income
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is the most important thing,
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the biggest lever that you
have to make that work.
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In today's video, I'm going to show you
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the shockingly simple math
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how your savings rate is directly related
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to your long-term financial health.
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I'm going to talk about the top tips
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that I implemented in my life
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to keep my savings rate at
50% over the last years.
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And I'm going to show
you why this also means
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that you do not need to live a frugal,
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and minimalistic life
to make all this work.
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You can still spend lots of
money on all your pleasure,
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so no worries about that,
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I'm going to exactly show
you how to make that work.
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So welcome to another coffee
break here on my channel.
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My name is Heinrich and
here on Firm Learning
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I want to help you to become successful
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in the first years of your career.
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And yes, I do believe
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that in order for you to be you
successful in the long-term,
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it's not only about you
getting your career, right,
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but you need to get your
money right as well.
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And this is all about
developing the right habits
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to do the right things
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without even thinking too much about it.
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So now before we jump into today's video,
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I just wanna take a moment
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to thank the sponsors of this channel.
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Very happy to see this list of members
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grow even added new persons last week,
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so check it out.
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So let's check out the math
behind the savings rate,
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why the savings rate is so important?
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And why the math itself
is not too complicated?
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I did find it quite powerful,
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the first time I saw these
kinds of calculations.
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So here I'm using this calculator
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from the page networthify.com.
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So check that out as well,
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if you wanna play around with
the numbers for yourself.
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And let's not put in
the savings rate of 6%.
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So let's assume that you
are able to save 6% of that
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and why 6%?
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So here is a chart and
interestingly enough,
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here there not inserted already some data,
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what by country now, typical
savings rates would be.
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So to be fair the data is a bit old,
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but let's just assume that
this is indicatively right
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until the numbers are quite low, right?
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So for the UK, the average guy apparently
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saves only 2% of his income.
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For the US it's 6, for
Germany 12, France 16,
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interestingly enough in
China 28 and in India 32.
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So 6% would be what the
typical guy in the US saves.
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So this would mean that every year
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the person saves 2,400 Euros,
probably dollar in this case.
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So this mode calculates with
some returns of 5% every year,
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which seems fair, like a
long-term rate of return
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if you're assuming that
the majority of the funds
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is invested in the stock market.
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And then in the end,
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it's assumed that there
was the raw rate is 4%.
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So what these values not
tell you is that assuming,
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that your income remains
stable in the future.
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And assuming that are your
saving rate remain stable,
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so you save these 2,400.
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And assuming that your
expenses remain stable,
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that you will always
expand exactly this amount,
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not more, not less, then
it will take you 62 years.
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Until your income from your investments
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exceeds your expenses.
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So in 62 years, you will be in a position
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where in perpetuity your income
from your investments alone
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will exceed your expenses
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and you do not need to work anymore.
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Of course, the problem with those numbers
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that 62 years is longer
than the professional life
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of the normal person.
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So you will never reach
financial independence
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with this saving rates.
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So you need to rely that you
have some other type of income,
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some other type of rent when you're old,
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or you might need to then
really spend all your savings
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if you retire.
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And then of course you will not be able
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to pass anything on to your children.
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Which you might, or maybe also of course
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might not wanna do any way in the future.
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So let's look like how
these numbers change
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if we inserting now the typical
German savings rate of 12%.
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We assume that people save 12%,
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then this number is already
decreasing to 47.5 years.
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So this is the number which
more or less corresponds
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to the average professional
life of a person.
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But this of course means that
then you will only be able
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to reach financial independence
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as per the definition that I
just gave you once you retire.
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What happens now, though,
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if actually able to save
50% of your net income,
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this will then leave you with 20,000 euros
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in savings every year
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and also 20,000 euros in expenses.
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Now, of course 20,000 euros in expenses
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is not a huge amount,
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but this is for sure
significantly more to spend
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than I had when I was a student.
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And frankly, I had a pretty good life
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when I was a student right?
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What you see here is that
if you're indeed able
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to save 50% of your income,
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then you are able to reach
financial independence
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or you're able to retire,
if you wanna read the space
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on the definition that
your investment returns
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cover all your living
expenses in only 16 years.
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And this might enable you,
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if this is what you wanna do after all
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to potentially retire in your late 30s,
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if you started working early enough.
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Now all of this is of course not to say
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that I would recommend
you to start working
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in your early 30s or anything like that.
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And for sure, I know for myself
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that even if I had the money,
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I would probably continue working,
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but it's fair to assume as well,
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that most people probably
would be much more selective
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in the type of work they accept.
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They would think much more
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about what they actually wanted to do,
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what their passion really would be.
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If you would know that actually
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you do not really need to work anymore,
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but it's rather because
you really want to.
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And this at least for me
was always motivation enough
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to keep my savings rate high.
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I started doing that pretty
much since the very beginning,
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once I started working in Germany.
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And indeed I was able to
keep my savings rate at 50%
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pretty consistently over the last years.
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And I do think that there are a couple
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of key lifestyle decisions
that I made for myself,
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that really enabled me to do that.
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First of all, neither me
nor my wife has a car.
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During my professional life
I lived in Berlin, in Munich,
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in a small city, in the West of Germany
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and a none of these places I owned a car
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since I started working.
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Here would have had the
opportunity to get a company car
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and a quite nice one, frankly.
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But in Germany, you need
to pay income tax on that
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because cars are considered
as an income equivalent,
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if you get company cars
from your employer.
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This would have meant an
expense of 700 Euro every month,
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so I declined the car,
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did not take the company
car to avoid the taxes
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that I would have needed to pay.
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Instead, I love taking my bicycle,
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if I need to go somewhere,
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I usually take public transport
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when I really need a
car for a day trip or so
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I usually just pick one up
in the city for car sharing,
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which I find are highly comfortable
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and super cost effective solution as well.
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Now I do believe that depending
on your life situation,
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where you live and also what
your responsibilities are,
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sometimes you just need a car
and I fully understand that,
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and maybe also in the future,
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I might be in a position
where I will get myself a car.
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But over the last 10
years, at least for me,
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I didn't see the necessity so far.
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Next are the housing expenses.
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In here what I saw many people do
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whom I started working with,
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and also some other friends of mine
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who are privileged enough
to earn decent salaries.
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I saw these people are
moving into larger flats,
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moving into really great
and comfortable places
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because they could afford it.
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This is not what my wife
and I decided to do.
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We decided to rather choose
a bit of a smaller one.
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So for sure we already
feel super privileged
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to live in our current flat,
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and we do not really feel
restricted by it at all.
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But still our housing expenses
relative to our income
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are probably significantly less
than many, many of my peers.
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And this is of course, a huge factor
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for your savings rate as well.
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Next is just your overall
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generally consumer spending behavior.
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And again, I have many
friends where sometimes
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I have the impression they are just bored
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and they sit on their
sofa, they take the laptop
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and just browse Amazon and just buy stuff
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because they are bored.
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And this is something that
I really try to avoid.
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So whenever there's something
that I really, really crave,
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I don't think about it for quite some time
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and if then I still really wanted then,
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yes, I will get it, but I will
not just browse the internet,
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randomly looking for stuff
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that maybe I couldn't be interested in.
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Next then closely related to
that is the tech equipment
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that many people buy and
upgrade all the time.
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I know many people who
constantly upgrade their phones,
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their Apple watches,
their laptops and so on.
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My phone is several years old
and it works perfectly fine.
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I use an iMac, which I bought in 2013,
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it's still doing a wonderful job.
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So I don't try to always get
the newest stuff all the time,
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and this for sure saves
me a lot of money as well.
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And indeed I do not think
that all these things
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really make you happy.
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And there's also a concept
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for that called hedonic adaptation.
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What does hedonic adaptation mean?
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Well, if you get yourself a nice new car,
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if you get yourself a nice new laptop
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or some other great things,
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then for a certain amount of time,
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you will feel a rush of
endorphins, you will be very happy.
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This will bring you joy for some time,
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but the truth is you will
not stay at this level of joy
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and happiness in the long-term.
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Over a certain amount of time,
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usually only days,
sometimes even only hours,
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your happiness level when
then start to decrease again.
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And indeed in the long-term,
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it will always come down to
some kind of average level
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of happiness that you have in your life,
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will just constitutes
the baseline for you.
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And if you condition
yourself to think this way,
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then the only thing that can
really bring you up again,
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it's the newer larger
cars, the newer nicer flat,
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but the problem is it never ends.
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It doesn't matter what you own,
you will always in the end,
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come down to this level.
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So these kind of things, while I know
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and while I understand
that these are great,
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and of course I'm guilty
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of all these pleasures as well.
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These do not really bring you
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sustainable happiness in the long-term.
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And for me, once I understood
this, this really clicked,
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this somehow made sense to me.
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And while again, I do
not want to claim it all
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that I'm perfect here
while I waste lots of money
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on useless stuff all the time as well.
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Though for me personally,
this is also about priorities
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about doing the right
things in the right order.
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I could very much see myself
in the future getting a car.
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In the future maybe
moving into a larger flat.
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Maybe buying myself more
of this great new stuff,
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but I do not want to be dependent
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on my monthly salary to
finance this lifestyle.
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I do not want to have the feeling
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that if I would lose my job,
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I wouldn't be able to do
my car payments anymore.
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I wouldn't be able to pay
my monthly rent anymore.
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I wouldn't be able to
finance my lifestyle anymore.
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This would just make me feel
so dependent on my current job
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on my current salary.
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And I do not want to do that
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I'd rather now focus
on investing the money
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on building the financial independence.
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And then rather once I've hopefully reach
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that in the future, then think more about
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where I could maybe spend the money.
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So guys pay the price today
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so you can pay any price tomorrow.
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And if you're not asking
yourself will highly,
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how do I need to invest?
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Where do you want me to put my money in?
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Then of course, besides becoming
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a member of this channel, obviously
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sign up via the join button below.
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Check out the other video that
I did a couple of months ago
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on investing as a young professional.
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I will link it somewhere above
here for you to check it out.
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In this video, I explained
my personal strategy,
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how I approach my investments
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though, of course, I
wanna also make it clear
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that I'm no financial advisor.
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So always do your own research
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before putting your money somewhere.
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Hope this was helpful.
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And if you have any questions at all,
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please leave me a comment
below in the common section.
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And as you know, I will do my very best
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to answer every single one.
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And if you took any value
out of this video at all,
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please hit the like button
for the YouTube algorithm
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and also subscribe to my
channel for even more content.
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And you can also turn
the notification bell on
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to receive notifications
whenever I release a new video,
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because otherwise YouTube
might not show you the videos,
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even if you subscribe to me.
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If you wanna see even more
also follow me on my Instagram,
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my handle is @firmlearning,
I upload posts almost daily.
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And I also have a mailing
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via the link in the video description.
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Again, if you want to
support me and my work
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please become a member of this
channel via the join button,
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or there's also link in
the video description.
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This would mean the world for me.
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So big thank you for everybody
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who just considers joining.
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I'm going to be back next week.
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I released weekly videos every Saturday,
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so look forward to next week
and until then, bye bye.
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