If you start looking into the topic of personal finance and the savings rate that we discussed you might question how all of this can work. How is it possible to become financially free? Isn’t this concept based on the assumption that nobody else or almost nobody else saves a high percentage of their income?
You are absolutely correct. Becoming financially free, with a rather average income, is only possible if most people do not save lots of money. In fact, if you save only 10% of your income, you will have to work 50 years or more to become financially free. Okay, but do people really only save 10% on average? After all, saving 10% is rather simple even if you do not have an insanely high income. So don’t most people save more than 10% of their income?
The truth is that, at least in Germany, the average savings rate of private households was between 9% and 13% between 1991 and 2017 and the tendency is rather decreasing. That means, yes it is true that having a high savings rate and living from dividends is something that most people in our society do not do. And the few people that do save more than 10% usually save about 20% following the advice of financial advisors that tell them what to do but not more than 50%. Financial unicorns aiming at saving more than 50% of their income are a rare breed and will stay a rare breed.
Even if the average savings rate in Germany or your country would increase in the future, until then, you already had a time advantage.
So how come that people do not save their money. I guess there is a combination of reasons that cause this. For one, there is no incentive to save money if you just keep cash on your bank account which deprecates in value due to inflation. There is also no element of school education that tells average people what to do with money that they saved and that you can invest in the stock market. Of course it is often discussed in German families that one should buy a house or apartment and save money doing that. But as we already discussed in an earlier blog post, buying a house or apartment that is used by oneself is not an investment but a luxury expense. Furthermore, it looks like most people do not want to care or do not care about their personal finances because it is not a nice topic. Looking into your own financial situation takes a lot of courage and you, reader of this blog post, have more courage than most people in our society. This is even more true if you do not earn a lot of money.
So savings rates of more than 50% are not only awesome, but they are magic. And given that most people will not save that much money, they do still guarantee financial freedom in the long run for you.
Being aware of one’s own savings rate is pretty awesome. You can use your newly gained knowledge to evaluate your financial situation and calculate when you most likely will be financially free. Knowing your savings rate gives you a tool to move from an aim-oriented to a path-oriented way of dealing with your personal finances and guides you on your way to your personal financial freedom.