I’ve previously talked about the importance of savings rates – the difference between what you earn and what you spend. It is the most important metric in determining how quickly you can achieve financial independence.

WE ARE SPENDING MORE THAN WE EARN

Last year, New Zealand’s household savings rate was an abysmal minus 0.2%. We are bad savers.

No one is achieving financial independence at that rate. In fact, no savings is the definition of the exact opposite. Financial dependence.

Dependence on your employer. Dependence on your bank. Dependence on your health remaining to allow you to continue to earn income. Dependence on the government to provide.

It turns out that the 2019 figures have recently been released. Surely we must be in better shape now? Mortgage interest rates are lower, unemployment was at an all time low, there has been a proliferation of low cost index funds, inflation has remained low.

We are not in better shape. We have become even worse savers, albeit only slightly. We are now saving minus 0.3% of our income. Link to the data can be found here.

We are spending more than we earn.

Is it because people are feeling rich? I’m not sure. But this is a common explanation for why we spend so much. Because we feel wealthy. Over the last 20 years, house prices have increased at astronomical and abnormal rates leaving many people feeling wealthy. Even if only on paper.

Especially since 2001 when the property market was really taking off.

With interest rates low, it appears we are borrowing more in the hope that asset prices will continue to soar.

Time to financial independence

For those who haven’t used my publicly available calculators, there is one in particular that gives a rough approximation of how long it would take you to reach financial independence based on your savings rate.

I can tell you now that a minus 0.3% savings rate will never get you to financial independence.

As you can see we are well off the mark. Most people will typically work about 40 years. A financially successful retirement would then require a savings rate of approximately 20%.

Final thoughts

As always, averages are to be taken with a grain of salt, but they do give a good general representation of where we are at.

Everyone also has differing ideas on their retirement. Some will spend much less than they did while working. Others will downsize house. Some may receive an inheritance. Plus many other factors.

So the savings rate calculations are really only a guideline if you are to continue your current standard of living.

Either way, with such a low savings rate, it seems many of us are putting a lot of money down on houses hoping that this will fund our retirement. Relying on house price increases to continue at recent levels will be a dangerous plan. You can’t eat your house.

Being wealthy on paper is definitely not the same as actually being wealthy. We all need somewhere to live so it’s essential to have savings outside of our houses.

Ironically, it takes the economy to get worse before we become better savers, like we are seeing in people’s response to the Covid outbreak. People are being more frugal. But the best time to save is when the sun is shining.

It’s more than possible to both a grasshopper and an ant.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.