Early Retirement Strategy #3 – Maximise Your Savings Rate

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What is a savings rate?

Your savings rate is the percentage of your take-home pay that you save every month.

It’s that simple.

Lets break this out into an example.

Say you earn an average UK salary of £36,000, that you have student loan debt, and that you’re enrolled in your company pension plan which matches your contributions up to 5%, which you went ahead and maxed out after reading my last post. This is what your pay slip would look like:

Your take-home each month is £2,119.56.

Although your pension is taken before tax, we calculate your savings rate by working out what your contribution is as a percentage of your take home pay, because this is the amount you have control over and choose how to distribute.

So, with this in mind, and based on the above example, you’re saving roughly 5.85%. However, your employer is matching your contribution.

They’re likely to be topping that up with the national insurance relief they receive from the government as well. This will be about £15 or thereabouts.

So, £124 (your contribution) x 2 (your employers contribution) = £248 + £15 (NI relief) = £263. £263 / £2119.56 x 100 gives you a savings rate of 12%.

Not bad!

Could it be better? Definitely.

Although, that also depends on your FI number – the lump of cash you need to retire on.

My FI number, as you’ll remember from my second post, is just under £700k. To achieve this in my 40’s, my current savings rate is around 35%. This is made up of: my company pension scheme contribution of 6%, my employers contribution of 4%, their NI relief top-up, my personal monthly investments of £300, and our rainy day savings fund.

I’m also lucky enough to receive bonuses at three points throughout the year: one is performance based, at around 5% of my gross salary in March, another long-service bonus of an additional week’s pay in August, and a Christmas box bonus of about £250. I save 100% of these also. This probably adds a couple of percentage points to my yearly savings rate.

Now, it sounds obvious, but the trick with this percentage number is to increase it as much as practicably possible.

I say this, because there will be periods of your life when you can save less and periods when you can save more.

Right now, we have a 16-month-old in the house burning through clothes, nappies and toys like there’s no tomorrow.

This is set to continue for about 17 years, minus the nappies, I hope.

But then, my salary will more than likely be increasing along the way too. And, as your salary inevitably increases with promotions and performance reviews over the years, you increase your savings in line with this, like I have, so that your savings rate as a percentage of your increased take-home pay does not go down.

Some people find it easier than others to save. But, essentially your savings rate will be hindered by any number of a few things. These could be:

  • Consumer debt – Credit card repayments, personal loan repayments etc.
  • Student loan repayments – eurgh.
  • Lifestyle inflation – buckling to the pressures of society to buy the latest version of everything: cars, phones, technology, expensive clothes, a bigger house than you’ll ever need… the list goes on.

Pay off all your consumer debt

Consumer debt is something that probably applies to most of us and is the single greatest hurdle to enabling us to save enough to do anything we want.

Sadly, this often leads to us taking on more debt to do or have those things from the third bullet above. Consumer debt enslaves us.

However, not all debt is bad. I’ll go into this in a separate post, as it deserves more attention. But basically, if you can achieve a low interest rate, below 3% and the loan is for something essential that cannot be saved for in a reasonable amount of time then it’s okay, in my opinion.

I would still avoid it wherever possible though!

Also, credit cards.

Many people see these as the root of all evil. However, when managed properly – used for every day essentials and then paid off in full at the end of each month, they’e an incredible way of earning rewards points that can be redeemed for things like travel vouchers.

The problem is, most of us have debt that is hindering us rather than helping us and often leads to vicious cycles of further borrowing down the road.

My advice?

Take time to focus on paying off all of your consumer debt.

Yes, all of it.

It might seem impossible at this point, especially if you have loans with repayment terms stretching 3, 5 or 10 years down the line. But, trust me. Take a year, or two, whatever is feasible to overpay these and get rid!

Start with the higher interest loans first and, once one is paid off, use what you were spending out each month on that loan to overpay the next.

Before you know it, this will snowball and you’ll be consumer debt-free in no time! Once this is done, you’ll realise just how much additional income you have at your disposal to start ramping up that savings rate and bring forward your early retirement.

Student Loans

Student loans are a tricky one, as there are several repayment plans, varying levels of debt depending on when you went to University and varying levels of interest for that same reason.

So, whether you work on repaying these early fully depends on your specific circumstances.

I’ll use myself as an example. I do not make over payments on my student loan.


Well, for starters, I was lucky enough to begin my University degree in the UK before they hiked the price from a little over £3,000 to over £9,000 per year.

And because I started my course before September 2011, I’m on repayment plan 1. For me, this means I started paying my loan off once I earned above £18,924 per year. I then pay 9% of everything I earn above this threshold.

Finally, and most importantly, I pay an interest rate of 1.75% on the balance of my loan. My loan also gets written off if not paid off after 25 years from the first April I was eligible to start repaying. This will be when I’m 48.

The reason I don’t make over payments is mainly down to the fact that the interest rate is so low.

I’d only be saving myself 1.75% on everything I overpay.

And when you consider that the money I invest in the stock market is yielding returns of around 80% per year, and the amount I have invested is similar in value at this point to the amount of student debt I have, it’s clear that my money is better put to use in my investment portfolio than it is repaying a super low-interest loan like that.

Your circumstances could be completely different. So, better to look at this on a case-by-case basis.

Also, some people just want to have all their debt gone. Which is fair enough. I completely get the appeal.

I’m just all about making my money work for me in the most efficient and effective way possible. Let me know your situation in the comments below, or DM me on Twitter if you want my opinion @FISavvyDad.

Lifestyle Inflation

“Keeping up with the Jones’s”

Lifestyle inflation is a savings and future wealth vacuum.

One of the ways I ensure that my savings rate keeps up with my growing income, is by limiting lifestyle inflation.

Getting out of the all-too-often adopted mindset of ‘keeping up with the Jones’s’. If you’ve not heard this expression before, it means buying things because other people do, or because society says you should.

Seeing your neighbours shiny-new car with this years registration plate and feeling like you should do the same so society recognises that you’re ‘successful’.

The thing is, most of the people driving these brand new cars aren’t as ‘successful’ as you might think.

In fact, the only thing most of them have ‘succeeded’ at, is falling for a clever marketing gimmick, thinking it’s a good deal getting the latest Audi or Mercedes because they can get one of those higher purchase plans where they give you a brand new car every 3 years that you’ll never actually own and can never afford the final payment on if you did ever want to get off the plan, so end up giving the severely depreciated car back to the dealership, simply to pay off your remaining debt only to find yourself with no car, or having to get on a similar deal elsewhere so you have some means of transport.

So many people do this now that it’s thought of as good value. Which is mental.

Don’t fall victim to these deals.

Be financially savvy when it comes to buying cars: Buy something reliable, cheap to run, and buy second-hand – cars that are a year, or two old tend to yield the most value.

New cars depreciate, on average, 30% in the first year.

I bought mine when it was 13 months old.

Dealership price brand new: £16,500.

Price I paid after 13 months and only 5350 miles on the clock? £8,000.

50% less!

In the UK, new cars don’t need to be road-safety tested (MOT’d) for the first three years of use, too!

I did need to take out a loan to pay for it though, and as this was in my pre-financially savvy days, I stupidly took out a 5 year term 🤦‍♂️. I was half-way there at least!

Needless to say, I overpaid as soon as I recognised the value in doing so, and We now both drive cars that cost nothing but running costs! This means We have >£400/month more every month to deploy into paying off other debt, or distributing between my various savings and investments.

This prospect of limiting lifestyle inflation, also referred to as ‘frugality’ – being economical with money, should be applied to everything in your life that costs money!

Do you need to have the latest iPhone every year, or even every two years?

How much are you spending on coffee from the coffee store near your work?

Add it up, cry for a little when you see the damage, and then stop it.

Buy coffee from the supermarket and take it to work with you.

This isn’t about cutting back so much that you’re miserable. It’s about being intentional; recognising the difference between ‘wants’ and ‘needs’.

I get excited about the prospect of saving money on the every day costs of life and treat it almost like a game. If we’re ever buying something, whether it’s a want, or a need, I always put some time into making sure we’re getting the best price possible!

I plan to write a series all about my frugal wins, which have saved us multiple thousands of pounds, which you can use yourself to boost your savings rate!

One example though – our mobile phones: we very recently upgraded our phones to the new iPhone 11.

Definitely more of a ‘want’ than a ‘need’. I’m not perfect. Nor do I pretend to be.

The justification: we’d had our previous iPhones (a 6s and a 7) for 3 – 4 years, their memory was always running out and the cameras weren’t great.

Our daughter had just been born and we were planning to splash out on a good quality digital camera to capture all the precious memories we planned to make with her.

Then we saw how good the pictures and video’s were with these new iPhone’s, especially the portrait mode.

So instead, we decided to put the money towards the phones. We’d get new phones with ample memory, good cameras and that nice, temporary feeling you get when you receive something new and shiny.

However, I applied frugality here, too:

  • Discount – Through my company benefits portal, we get access to discounts with hundreds of businesses, services, stores & restaurants. One of which is Apple at 3%. Nothing major, but it’s better than a kick in the nuts! Money saved = £15 per phone (£30)
  • No contract – We bought direct with an interest-free credit card over 22 months. If you take a pay-monthly plan out with a provider like Vodafone or O2, you’re entering into a credit agreement to pay off the phone over the period of your contract. However, they might charge you interest, and might even charge you more for the phone than it would cost to buy direct from the company. Money saved = ~£200
  • Separate sim-only plan – as we didn’t go with a pay monthly contract, we got sim-only contract through virgin media. Costs us £18/month as we get £2 per month family discount for having more than one plan. This gives us ample data that we never come close to using each month. Money saved = £44
  • Trade-in – We traded in our previous phones for £120 off. Money saved = £120

So, basically, our two iPhone 11’s cost us £59/month over 22 months, plus £18 for our network plans. Total = £77.

For comparison, the best 24 month plan I can find is around £48/month per phone. So, £96 total for two. I saved us £20 per month! £240/year and £480 over the term of our ‘self-built’ contract period!

Frugality is fun!

Like I mentioned before, apply this to everything: food, household bills (switching), your choice of gym, discount codes for restaurants and days out. If there’s money to be spent, there’s money to be saved!

Advanced methods

Once you’ve taken care of all of the above and you’re in full-frugality mode, you can consider more advanced methods of maximising your savings rate. Or, simply increasing your income.

However, I can’t stress enough to first take care of everything we’ve discussed above. Otherwise, you’ll find yourself burning out, trying to focus on too many new things all at once.

Take small steps every day. As soon as this is taken care of, you can consider something more advanced, like starting a side hustle – earning money on the side of your main income.

This is usually linked to something you enjoy doing that you can carry on with in retirement to keep you sane and earn yourself some cash on the side.

Vlogging, selling your crafts, or consulting are all good examples. Changing your job role, your employer, asking for a raise or, simply changing your career path entirely are all options too!

One of the things I do to increase my monthly income is flipping – buying in demand product for the lowest price possible and selling them on for a profit.

In my first month I made £722 profit! Check out the blog post on how I did it here

Don’t be a barrier to your own success by hindering your money making potential. I’ll dedicate entire posts to all these things to give you more guidance on how to increase your income, as well as answering questions like ‘should you overpay your mortgage?’.

Hopefully, this information will help you to achieve a greater savings rate and bring forward your retirement.

Let me know in the comments below if I’ve missed any of the strategies you use to maximise your savings rate. Or contact me on twitter @FISavvyDad.

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Published by Finance&Lifestyle

A Dad from the UK documenting his journey to financial freedom. Sharing my lifestyle and finance hacks so more people can find financial independence, retire early and take back control of their future.

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