If you want to retire, double your savings rate!

Everyone’s situation is different. The data from World Bank shows that Singapore has a gross savings rate of 47%, one of the highest in the world. Gross savings are calculated as gross national income less total consumption, plus net transfers.

Considering that the average working Singaporeans before the age of 50 contributes 37% of their monthly salary to their CPF account, it means only 10% of their disposable account is allocated to savings. That’s just not good enough if you are planning to retire earlier than the retirement age set by our government.

How to calculate your Personal Savings Rate

Here are the standard steps to calculate your personal savings rate:

Step 1: Add up your net savings (or losses) by adding both your non-retirement savings and your retirement savings for the year (all personal retirement contributions + all employer retirement contributions). I would not factor in capital gains or losses unless it is something that you can replicate every year. This number could end up being negative as well, if you had net debt for the time period, instead of savings.Step 2: Calculate your total total income by adding your total take home income (after tax income) to your employer retirement savings.Step 3: Find your Personal Savings Rate by dividing your total savings/debt (in Step 1) with your total income (Step 2).

Personally, I don’t include my retirement contributions to CPF when calculating my Personal Savings Rate because:

1. The retirement contributions in my CPF accounts can only be unlocked at the age of 65. I want to retire before that so I need to build a retirement nest on top of the money in my CPF accounts.
2. A significant portion of my retirement contributions is used to pay for my mortgage so I work on the assumption that they cancel out each other when I calculate both my savings and expenses.

Making small sacrifices will reap huge rewards

If you save 5% of your income, you can take 1 year off every time you work 19 years. On the flip side, if you save 90% of your income, you can take 9 years off every time you work 1 year! Here’s a chart from Go Curry Cracker that shows how many working years you would need, based on your savings rate.

Your money needs to work for you

After saving a large sum of your monthly salary, it’s time to make your money work for you. In order to retire early, you need to improve your financial status. If you currently have a credit card debt to clear, keep hacking at it by paying it off every month till it’s gone. If you are clear of high interest debts, build your investment portfolio by increasing your holdings every month.

Your money is no good sitting in the bank, earning a pathetic interest rate. The first rule of cash flow in cloud-based personal budgeting software, You Need A Budget is to give every dollar a job. Each dollar in your savings need a clear purpose and rolex. For example, 20% of your savings could go into an emergency fund in a bank account and the remaining 80% would be injected into your investment capital.

Increasing my Personal Savings Rate in 2015

Last year, I achieved a monthly Personal Savings Rate of 72.59% although most of that going into my real estate investment in Cambodia. With a small salary bump this year and a reduction in personal income tax, I increased my Personal Savings Rate to 81% because all the salary increase and tax savings is going into savings instead of adding new debts like buying a new car. As you work hard to grow your income, there’s no reason for your expenses to increase in proportionally to negate your income growth.

What is your personal savings rate?