By Priya

May 10, 2021


Show notes

🎙 Savings rate calculation — the #1 factor that determine when you'll reach financial independence is your savings rate, learn how to calculate it and retire earlier than you every thought possible! 🤔

This episode discusses topics like:

  • Why your savings rate is the #1 factor that will determine when you’re able to retire;
  • How to calculate your savings rate and what it means for your financial independence; and
  • What your savings rate should be if you want to retire early.

Links from this episode:


Hello, friends! And welcome back to Girl on FIRE, the financial independence podcast for independent women. 

My name is Priya, I’m a Chartered Accountant, an analyst and the creator of Paper Money Co. 

I’m also a fierce financial feminist and the host of this podcast. I believe that a woman who is in control of her money, is in control of her life.

This week we’re talking about your savings rate and why it’s the #1 factor you need to focus on for FIRE or early retirement.

Trust me, once you understand what your savings rate means and how it works, it’s really going to open your eyes to just how simple early retirement can be.

Not only that, but it’ll show you that FIRE isn’t just something for the uber rich. It’s for regular peeps like you and me and we can absolutely make it happen for ourselves.

We’re going to talk about what it is, how the savings rate calculation works and what it means for your retirement.

Like a lot of people in the FIRE community, I discovered the magic of savings rates through Mr Money Moustache, who’s a very prominent blogger in the FIRE space. 

So, I’ll leave that blog post linked in the show notes if you want to check it out. I only wish they taught us that in school. 

You know, instead of teaching us to be on time, be good employees who listen to their bosses, work for 40 years and then stumble into retirement with zero energy and only 15-20 years left.

But before we get started, I want to remind you to head to my website — — to sign up and receive your free copy of my Investing Starter Guide.

It’s totally free, you just need to enter in your email address and I’ll send it straight to your inbox. And then I want you to start working through it. 

It gives you a plan to follow, step-by-step instructions to get ready to start investing and building real wealth.

If you’re really serious about learning to master your money, then it’s the perfect guide for you, and I’d hate for you to miss out on it. 

As always, Girl on FIRE is about learning, so whip out your favourite notebook or journal and get ready to take some notes. 

If that’s not your thing, you can always find the transcript on my website —

Okay, let’s dive in and talk about your savings rate!

What is your savings rate & why is it important?

So, first of all, what is your savings rate? It’s a term you’ll hear thrown around a lot in the FIRE community because it’s kind of a big deal.

But what does it mean? In it’s simplest form, your savings rate is the percentage of your take home pay that you save.

So, for example, if you receive a paycheck of $5,000 this month, and you save $1,000, then your savings rate for the month is 20%.

Now, like I said, that’s a simple example. There are a few important things you need to consider in the savings rate calculation.

And we’ll dive a little deeper into those a bit later on in this episode. But for now, I want to take some time to highlight why your savings rate is so important. 

Why do you need to calculate your savings rate?

So, your savings rate is showing you how much of your income you’re saving. But that’s not all — it’s also showing you how much it costs to fund your lifestyle. 

And that’s just maths — if you save 20% of your income that means you’re also spending 80% of your income.

Now, why is it important to know your savings rate for financial independence? Well, the answer to that is twofold. There’s a big fancy word I don’t use very often.

First, your savings rate shows you how much of your income can be invested to grow your wealth.

Because if you remember way back to episode 1, we talked about what FIRE is. And it involves having enough wealth that generates enough income to cover your expenses. 

And the more you can save from your income now, the more you can invest to build your wealth. 

And second, your savings rate also shows you how much it costs to fund your lifestyle. It tells you what return your investments need to generate in order to cover your expenses.

So, assuming that your income stays the same, as your savings rate increases, it means you’re saving more money every month.

But it also means that it’s costing you less and less to fund your lifestyle. And the cheaper your lifestyle is, the faster you’re going to reach financial independence.

How your savings rate can predict financial independence

So, let’s go through an example. Let’s say your monthly income is $5,000 and your savings rate is 20%. So, you’re saving $1,000 every month and spending $4,000 every month.

Now, we have to use some assumptions at this point. So, we’re going to assume that your returns after inflation are 5%.

And we’re also going to assume that you’ll be using a 4% withdrawal rate. So during retirement, you’ll be withdrawing 4% of your portfolio to live on. 

We’re also going to assume that your current net worth is zero. And that your income doesn’t change.

By using those 5% and 4% assumptions, we’re saying that you’ll be taking money out to live on but your investment can still grow over time. So, you won’t run out of money.

Now, if we apply all those assumptions to our savings rate of 20%, that means you’ll reach financial independence in about 34 years.

In other words, after saving and investing 20% of your income for 34 years, you’ll have amassed enough wealth that your returns will cover your expenses.

Now, of course, this is just a model so it’s not going to be perfect. But it shows you how the concept of the savings rate works.

And I calculated those 34 years using my FIRE and investment spreadsheet which I’ll tell you how you can get for free a bit later in this episode.

Now, let’s see what happens when we change your savings rate. We’re not going to change any other assumptions, just the savings rate.

So, your income stays the same, the return on your investment stays the same, inflation stays the same and your withdrawal rate stays the same.

Okay? We’re only changing your savings rate. So, let’s increase it to 40% and see what happens. 

Now, if I plug that into my model, the spreadsheet now tells me that it’ll take only 20 years to reach financial independence. 

That’s a massive difference — you just bought 14 years of your life back. You get to tell your boss to F off 14 years earlier. 

Now, let’s play with it some more and go the other way. I’m going to change your savings rate to 10% since you’ll hear a lot of financial experts tell you to save 10% if your income.

With a savings rate of 10%, you’re now looking at 48 years until financial independence. It’ll take you 48 years for the return on your investments to cover your living expenses.

Remember, we didn’t change anything else. Your income stays the same. We’re only changing your savings rate.

Based on that calculation, you may never be able to retire. Let that sink in for a minute. All those years of education and hard work and you might never be able to retire.

What this model shows you very clearly is that it’s not your income that matters. It’s how much of your income you can save and invest.

That’s what makes the difference between retiring at 60, or retiring early, and working until the day you die.

Think of it like a spectrum. On one hand, you could have a savings rate of 0%, which means you have no money to save and invest. 

That means you’ll never have an investment portfolio that generates the income you need to cover your expenses. You’ll be working until the day you die because the bills still need to be paid.

On the other hand, if your savings rate is 100%, you’re somehow able to live for free, right? Because you’re saving all your income. 

And in that case, you can retire right this second. Because you don’t need that income to cover your expenses. 

Now, that’s an extreme example but it shows you that the closer your savings rate moves towards 100%, the more financially independent you become. 

And when your investments can generate enough income to cover 100% of your expenses, that’s when you can tell your boss to suck it. 

So, the higher your savings rate is, the more years you can shave off your working career.

And the way you increase your savings rate without increasing your income is to cut your expenses.

That’s just another one of the reasons why having a solid and successful budget is the foundation to financial independence.

That’s why this investing podcast also talks so much about budgeting. Because that’s the foundation you need.

And if you have a solid budget, you can find ways to increase your savings rate and invest more money without having to increase your income.

How do you calculate your savings rate

FIRE & investment calculation spreadsheet

Before we move on, I want to ask my Girls on FIRE for a favour. If you’ve listened this far into the episode then you’re probably enjoying it, right?

So, here’s what I’d like you to do next. Pause this episode for a few seconds and head on over to Apple Podcasts. There’s a link right at the bottom of the show notes that’ll take you straight there. 

I want you to leave a rating and a review because that helps me provide better content and helps other Girls on FIRE in the internet wilderness come and find us.

It’s also a great way to support this show for free. And I’d also love to send you a little something to say thank you.

So, take a screenshot of your rating and review and email it to me at or share it on Instagram and tag me @papermoneyco

If you do that, I’ll send you a copy of my FIRE and investment calculator. Which, if I do say so myself, is pretty damn amazing.

It’s how I plan for my early retirement and my wealth. It shows me how my wealth is going to grow, when I can retire and how long my money will last.

And it also has a separate tab that takes Australia’s superannuation into account as well. 

And you can use it to analyse companies and different investment options when you’re picking stocks too. 

I’ve never actually seen anything like it before, so it’s pretty special. And I’m currently not offering that spreadsheet anywhere else except on Patreon. 

Not in my shop, not to my email list — it’s a ghost. So, this is kind of a money-can’t-buy type deal.

The only way to get your hot little hands on that spreadsheet is by leaving a rating and a review, taking a screenshot and tagging me in it.

So, go hit pause and do that right now. It’s okay, I’ll wait.

How to define income when calculating your savings rate

Okay, so far we’ve covered what your savings rate is, how it determines when you’ll be financially independent and a basic overview of how to calculate it. 

In this next part of the episode, we’re going to cover the calculation in a bit more detail because it’s not as simple as your savings divided by your income. 

Let’s look at the income part of your calculation first. You need to use your net income here. Your net take home pay, money in the bank income.

Don’t ever use your gross income. Your taxes are not your money. You may have earned it, but unless you want to go to gaol, it belongs to the government. 

Fun fact — the mobster Al Capone was actually caught because an accountant nailed him for tax evasion. 

It wasn’t the smuggling or the organised crime or the killing. And it wasn’t some hotshot detective. It was a nerdy little accountant and they caught him on tax evasion. 

So, we accountants aren’t as boring as everyone thinks. I mean, how many other professions have caught mob bosses?

But anyway, back to more important things. The income you use for your savings rate calculation must be your net take home pay. 

Now, what do you do with mandatory retirement deductions like your superannuation? 

Because that’s your money but it’s taken out of your pay before your income hits your bank account.

I recommend that you exclude that from your income figure as well, and here’s why. Those mandatory deductions go towards building your retirement nest egg. 

But you can’t touch that money until you’re 60. And at that point, you’re not retiring early. You’re just retiring.

If you want to retire early, you’ll need access to your wealth and the income it generates before you reach traditional retirement age. So, I suggest you leave it out. 

If you do grab my FIRE & investment calculator spreadsheet for free though, you’ll see that I’ve added a separate tab at the end that I use to calculate my own personal FIRE date while taking Australia’s superannuation system into account. 

It works in two phases: one, you need to reach financial independence before you reach traditional retirement, and two, your superannuation needs to last from traditional retirement until the end of your life.

But if you’re calculating your savings rate to determine when you’ll reach financial independence, use your net take home pay.

How to define personal savings when calculating your savings rate

Now, another thing to consider when calculating your savings rate is what savings figure you should use.

And this is super important so pay attention — you should only use the savings that you’re going to invest, okay?

So, not your sinking funds, not your emergency fund, just the money that you’re able to invest.

Because that’s the only money that’s going to be earning you returns out in the market. And that’s a super important distinction that makes a ton of difference.

Your sinking funds are short term savings that you’re setting aside to spend. It’s not being invested.

The same applies with your emergency fund. We talked all about emergency funds in episode 6. It absolutely should not be invested. 

So, your savings rate should only be calculated using money that’s being invested.

Now, if you use my Paycheck Budget workbook, which I’ll leave in the show notes, you’re actually calculating your savings rate every single month.

What should your savings rate be?

Now, I know there’s always going to be questions around what your savings rate should be. People like benchmarks and some financial experts like giving them.

But if you’ve been listening to Girl on FIRE for a while, you’ll know that I hate benchmarks.

I think they often do more harm than good and they don’t take your personal circumstances into account.

So, I’m not going to sit here and tell you exactly what your savings rate should be. But based on what we’ve talked about in this episode so far, this is the advice I will give.

The higher your savings rate, the better. And remember, we’re talking about savings rate based on the money you invest, not the money you put away in savings.

The higher your savings rate is, the more money you’re investing and the lower your expenses are, the better.

Priya’s savings rate

So, what about my savings rate? I actually share how much of my income I save every month on Instagram @papermoneyco, so follow me there if you want to see it.

I created a pretty little graphic that shows how many dollars I’m saving and investing every month. 

Now, I get paid monthly and I calculate my savings rate every month as well. And every month, I invest more money through my brokerage account. 

So far, for 2021, my average monthly savings rate is about 40%.

Remember, my savings rate is based off how much of my net take home pay I’m investing. It doesn’t include money that I set aside in sinking funds or my emergency fund.

My goal is to increase that to 44% over the next couple of months. Because the more I can increase my savings rate, the less money I need to live on, and the more money I can invest for early retirement.

That’s what I’ll need to do if I want to retire at 45 and start sipping mojitos at a tapas bar in Spain.

Now, if you remember back in episode 6, I was sharing some details about the super toxic work environment I was stuck in for a while.

I’m really fortunate to have escaped that prison. And I’m really fortunate that for the first time in my life, I can honestly say that I love my job now.

But that doesn’t change the fact that my job takes up a third of my day, sometimes more. And I’m a morning person, so it takes up the best part of my day, too.

And just like you, I have a whole list of things I want to do and experience and places I want to go. And I just can’t do that if I’m spending a third of my life sitting at a desk.

That’s why I invest every month and that’s why I run the savings rate calculation every month and check to see if I’m on track for early retirement by 45.

And the good news is that so far, I’m still on track.

And I know this because I created a model for myself in my FIRE & investment calculator spreadsheet which I highly recommend you get your hands on.

Every month when I close out my budget and update my net worth, I run my updated numbers through that model again and see if my early retirement is still on track.

And I pay close attention to my savings rate and how to increase it, because it’s the #1 factor that’ll determine when I get to retire.

And to be honest, I was ready to retire like 10 years ago. I’ve been waiting for retirement since I was 18, so it can’t come soon enough, right?

Next weeks’ episode

And that’s all I have for you Girls on FIRE today!

My challenge for you this week is to get your favourite notebook or journal out and calculate your savings rate!

If you have my Paycheck Budget workbook, you’ll actually be calculating your savings rate every single month. 

If you’d like your own copy, just head to and it’ll be there waiting to go home with you!

On next weeks’ episode we’re going to be talking about the chicken and egg problem of personal finances. Which comes first — saving, investing or paying off debt?

It’s going to be a super interesting episode so you’re definitely not going to want to miss it.


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The advice shared on Girl on FIRE is general in nature and does not constitute financial advice. The information shared does not consider your individual circumstances. Girl on FIRE exists purely for educational purposes and should not be relied upon to make an investment or financial decision.

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