How I Plan on Saving 83% of My Income In 2021
Without making any drastic changes to my lifestyle
In 2020, I wrote quite a bit about the importance of saving more of the money you already have and finding ways to make more money.
Today, I want to go deeper on these concepts and take them from the hypothetical to the real world and detail my plan to save 83% of my income in 2021.
Calculating my savings rate
We need to start by establishing a shared understanding of what I mean when I say I plan on saving “83% of my income in 2021.” To do that, you’ll need to know the difference between gross and take-home pay.
- Gross pay= The total amount you make before any taxes or deductions are considered.
- Take-home pay= The total amount you make after taxes or deductions. This is the amount that hits your checking account on payday.
If my monthly take-home pay was $10,000, I would need to be saving $8,300 per month to reach my goal.
What I consider “savings”
Some people overthink their savings rate by only including money that is invested or other arbitrary rules. I consider savings to be any use of money that will increase my net worth.
For me, that includes the principal portion of my mortgage, as every dollar of principal paid increases my net worth by a dollar.
However, I do not include savings that are intended for future consumption. For example, I have a savings account I use as a vacation fund. It’s been accumulating a decent balance in 2020 because I have not had the opportunity to travel. I don’t consider it as savings because the purpose of this money is to be spent in the near term.
My three sources of income in 2021
- My day job.
- My business.
- Portfolio income.
The paycheck from my day job
This still accounts for the largest proportion of my total income. A few years ago, this would have accounted for 100% of my income; in 2021, it will account for roughly 47% of my income.
This is also the income source I use to cover just about every living expense.
However, I still manage to save quite a bit of money from my paycheck, even after paying for all my living expenses.
- Mortgage principal.
- Contributions to my workplace retirement plan (matched by my employer.)
- Contributions to individual retirement accounts.
- Savings into my Son's college fund.
- Cash into an emergency fund.
I recently added it all up and found that I am saving approximately 60% of my take-home pay from my day job. Since that accounts for roughly 47% of my total income, that means I am saving 28% of my total income just from my paycheck.
The net income from my business
In 2020, the net income from my business after expenses and taxes was just over half of the take-home pay I earned from my day job. In 2021, my goal is for my business income to equal my take-home pay from my job.
I don’t write this to boast, but to highlight what I think is the most important personal finance concept I wrote about in 2020, which is the power of adding scalable income to the income you earn from a 9–5 job.
As I already mentioned, all of my living expenses are paid for using the income from my 9–5. That allows me to invest 100% of the profits from my business.
It has been a lot of work building a business while working full time, but if you can make it work, you get the best of both worlds; stability and reliability from your paycheck and upside potential from the business.
In my opinion, a digital business with a limited need for customer service is the best bet for someone looking to start a business on the side. It allows you to be completely flexible when you work, which is crucial if you are holding down a traditional 9–5 job.
Since I save 100% of the income from my business and I project it to make up 47% of my total income in 2021, that increases my savings rate by 47% and adding in my savings from my paycheck brings total savings up to 75%.
Portfolio income
As a first-generation wealth builder in my early 30’s, the income generated by investments is by far my smallest source of income, representing roughly 8% of my income.
This is exactly as it should be; in your 20s, 30s, and 40s, your human capital should account for most if not all of your income.
If you save and invest a healthy percentage of the money you make from work, as you get into your 50s and 60s, the income from your investments should start making up a larger share of your income until it reaches a point where it can convert all of your living expenses.
If you are someone who adheres to the Financial Independence, Retire Early (FIRE) movement, your goal would be to amass a big enough portfolio that your investment income could cover your living expenses by your 30s or 40s.
While I admire and agree with the spirit of the FIRE movement, I think it places too much emphasis on financial capital and not enough emphasis on human capital.
If your goal is to save 25 times your annual living expenses by your 30s or 40s, you are placing immense pressure on yourself. Using the (flawed) math behind FIRE, you would need $1 million invested to sustain a $40,000 per year lifestyle.
In a world where so many are struggling to get by, that seems unrealistic for most.
That’s why I have come up with a personal definition of financial freedom.
You have achieved financial freedom when you can spend your days doing work that you love without worrying about how you will pay the bills.
At first, glance that might seem a lot like the definition of FIRE. But unlike FIRE, using my definition, you don’t need to pay for the bills relying solely on your financial capital. I put much more emphasis on leveraging your human capital.
If you can find a way to make good money doing something you love, that sounds like financial freedom to me. The best part is that you don’t need to have $1 million in the bank to get there.
You can rely on some combination of income from your human capital (work) and financial capital (investments) to pay the bills.
By focusing on increasing my human capital (starting a business), I am on track to save 83% of my income in 2021. This, in turn, allows me to amass more financial capital. As a result, I might be able to write an article in 2022 titled “How I became a full-time entrepreneur.”
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.