What caught my eye this week.
The ‘proper’ savings rate for a pursuer of financial freedom is one of those perennial hand grenades lobbed into the otherwise cozy and supportive world of personal finance blogging.
Partly that’s because of fundamental differences in philosophy when it comes to how many fingers to raise – and how vigorously – when faced with the endless temptations of consumer culture.
But mostly it’s because we all have different values and financial situations. We’re at different stages in our journeys, too.
Hence we see the spectacle of comfortably retired Boomers berating 20-somethings for ordering a bit of avocado on toast, while other 20-somethings shame their own for getting a latte from Starbucks (shameful, true, but not for financial reasons) – and everything in-between.
When I bought my flat, I also bought a fancy coffee machine. I’d wanted one for at least a decade and for me it was part of the home ownership dream.
But to some readers it was akin to Bob Dylan going electric at the Newport Folk Festival.
Never mind that I could easily afford it – and I’d waited until I could, too – or that my savings rate had been 20-50% for 20 years. That I’ve never bought a car, let alone several cars, in my life. Or that a good coffee is one of my top ten hedonistic pleasures.
They didn’t like it – and yet other readers slapped me on the back.
Enjoy yourself, they smiled. Ignore the haters!
Funnily enough I didn’t feel massively more kinship with the latter than the former.
That’s because we all had – and have – a lot more in common with each other than could be divided by a homemade espresso.
While others read the footie results or catch up on Love Island, here we find ourselves on a pretty niche money and investing blog. We’re all looking to put or keep our finances on a decent footing. And making our own decisions daily about what to splurge on and what to eschew.
The only contention is that one person’s luxury treat is another person’s wasteful squandering. That his cost-saving gambit is her unthinkable sacrifice.
A luxury you just can’t forfeit might not even register for me.
You drive a BMW Coupe 343 B-Liner Sedan Thingywotsit? Really?!
At least I think that’s what you said. Knock yourself out.
I don’t do cars. Maybe you don’t do espresso machines. It’s silly arguing over the specifics.
The big picture – money in, money out, investing the rest – is what matters.
Better latte than never
It’s a similar story with savings rates.
If you’ve no money socked away at 50 and you tell me you’re going to start saving 5% of your salary into a SIPP, then I’m going to tell you it’s not enough.
Until, that is, you tell me you’re earning £500,000 a year…
At the same time a 22-year old saving 5% of their fairly ordinary professional salary – topped up by the company and the government – may well be on their way to become a millionaire by the usual retirement age without ever feeling they sacrificed anything.
Which in turn leads to those circular arguments about whether compound interest matters or not.
If you only start saving properly when you’re a decade away from retiring, I agree it’s not going to do much for you.
If you began in your early 20s and now you’re in your 50s – seeing a good year in the stock market bolt more than your annual salary onto your portfolio – well, it’s hard to know where to begin.
It all adds up
Nick Maggiulli over at Of Dollars and Data therefore did everyone a great favour this week by pinning some numbers onto this age-old drama.
By showing how the impact of saving a bit extra varies depending on how much you’re already saving – and for how long you intend to keep at it – Nick has revealed the mathematics behind the emotions in these debates.
For example, let’s say you are currently on-track to retire in 20 years. Nick’s table below shows how many years of work you could avoid if you increase your savings rate by three different amounts:
So if you’re already saving 20% of your salary, for instance, then save 5% more for the rest of your working years and you could actually retire three years and a bit earlier.
What’s striking about this table is actually how little difference saving even more money makes once you’re already putting away a healthy 20% or more of your income. That’s given the long time horizon at work.
Have all the avocados and lattes you like, my young and disciplined friends!
In contrast, if you’re only currently saving 5% to be on-target to retire in 30 years, then tripling your saving rate could nearly halve your remaining years in the office.
There’s plenty more insights unearthed by Nick’s tables and graphs, so go read it.
And have a great weekend!
p.s. Thank you to everyone who has already signed up to become a Monevator member. It’s truly gratifying and the strong start has encouraged us to think we can eventually become a sustainable operation. What’s more, many of you shared some generous words, too. If you haven’t already read the more than 130 comments from readers on last Saturday’s post, please do! And thanks again.
What do rising rates mean for our portfolios? – Monevator [For members]
Mortgages and emotions: 2022’s interest rate mayhem – Monevator
From the archive-ator: The obvious thing we all forget when we borrow money – Monevator
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Bank of England raises key interest rate by 0.25% to 4.5%… – Sky News
…and warns UK inflation will stay higher for longer it thought – BBC
Meanwhile UK economy expanded by just 0.1% in Q1 2023 – BBC
What do higher interest rates mean for your finances? – Which
Government drops plans to scrap leasehold property system – Guardian
Grocery chiefs warn new Brexit red tape could empty shelves – Independent
London: a “very problematic” stock market – CNBC
Global prime property index falls for the first time since 2009 [PDF] – Knight Frank
Products and services
Cheap and free things to do over the holidays – Which
Skipton launches first 100% mortgage since 2008 – MoneySavingExpert
Blackrock and Vanguard ETFs will dominate for years – ETF.com
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Consumers on ditching gas central heating for heat pumps – Guardian
Backlash grows over new efficiency rules for landlords – This Is Money
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
What are your supermarket loyalty points worth? – Be Clever With Your Cash
‘Reverse ATMs’ at some US stores swap cash for pre-pay cards… – Axios
…while also in the US, a new fintech is targeting the over-60s – TechCrunch
Homes for sale in the super-suburbs, in pictures – Guardian
Comment and opinion
Should you save more to retire earlier? – Of Dollars and Data
Three lessons from the 60/40’s stumble – Morningstar
Defined benefit pensions: not dead yet [Search result] – FT
Asking the wrong questions – Oblivious Investor
The future will be… something – Fortunes & Frictions
Tim Harford: not everyone can substitute away inflation [Search result] – FT
Free to be – Humble Dollar
Revisiting the Permanent Portfolio – DIY Investor UK
The use case for FOMO investing – Think Advisor
Debating nationalizing the UK water companies [Podcast] – ALTIF
“We won’t be able to pay this much”: higher rates hit home – Guardian
Be an emotional person, just not with your money – Darius Foroux
The harvest that matters – Simple Living in Somerset
Pay’s the issue, but don’t forget public sector pensions – David Smith
US recession obsession mini-special
What’s the best asset type to hold during a recession? – Morningstar
Gold versus inflation, stagflation, and recession – Institutional Investor
Swap and credit spreads still say no US recession – Califia Beach Pundit
US interest rate hiking cycles compared [Infographic] – Visual Capitalist
Naughty corner: Active antics
Be glad short sellers exist and [sort of] conspire – Capital Gains
Should investors trust their gut? – Behavioral Investment
Mayday for Interactive Broker margin lending – Fire V London
Boost your returns with a very, very long vacation – Morningstar
Diversification or di-worse-ification? – Verdad
The physical world can affect an investor’s returns – Institutional Investor
Kindle book bargains
The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle
200 Years of Muddling Through: The British Economy by Duncan Weldon – £0.99 on Kindle
A Journey Through Labour’s Lost England by Sebastian Payne – £0.99 on Kindle
Too Big To Jail: The Greatest Banking Scandal of the Century by Chris Blackhurst – £0.99 on Kindle
The people living ultra-low-carbon lifestyles – BBC Future Planet
A patch of seaweed is growing to record size in the Atlantic – Vox
Seaflooding – Uncharted Territories
How wild pigs retook Singapore – Hakai
Why climate change is not an environmental issue – The Walrus
Robot overlord roundup
Schooled – Indeedably
How AI knows things nobody told it – Scientific American
Google reveals AI updates as it vies with Microsoft – BBC
Artificial Intelligence is not going to kill us all – Slate
ChatGPT fever is attracting billions in VC funding – Wall Street Journal [h/t AR]
Will a robot take YOUR job? [Data, US] – Will Robots Take My Job
Off our beat
The star athlete family office – Profluence Sports
Zelda: Tears of the Kingdom is the best Switch game ever made – Inverse
Should we abandon the ‘war’ on cancer? – Aeon
Read The Economist backwards [Podcast, or scroll for text] – Russell Clark
Who better to sing old Brexit tunes than this over-hyped new act? – Marina Hyde
Monkeys and the ‘reverse salient’ – Annie Duke
A 102-year old doctor on letting go to be happier – CNBC
How Russia’s invasion transformed one Ukranian city [With graphics] – Vox
R.I.P. Metaverse – Business Insider
“People will choose unhappiness over uncertainty.”
– Tim Ferris, The 4-Hour Work Week
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The post Weekend reading: It’s savings rates all the way down appeared first on Monevator.