REALLY? 50%?
Yep, and the most committed among us shoot for 70%, or even 80%.
You might think that, say, 24% is a strong savings rate, and you’d be right: By the average American’s standards, that’s way ahead of the game. The average as of February 2025 is 4.6%,
according to the U.S. Bureau of Economic Analysis, which is actually up a bit from the 3.3% that prevailed in December 2024.
But let’s take a closer look at that 24% as opposed to 50%. Because over time — through the miracles of compound interest — they start to look very, very different indeed.
THE COMPOUND DIFFERENCE
Let’s say you make $70,000 a year. At 24%, you’ll save $16,800 to invest each year. For simplicity’s sake, we’ll take out taxes and fees, particularly since the kind of index funds JL recommends have very low expense ratios.
If you put that $16,800 into an S&P 500 index fund like VOO from Vanguard, historical trends suggest you can expect an annual return between 8% and 12%. If we call it 10%, and you contribute your $16,800 every year, you’ll have $311,324 after a decade. After 30 years, it will be just over $3 million.
Now let’s take that 50% rate. Now you’re investing $35,000 each year with that average 10% return. After a decade, you’re at $648,591. After 30 years, it’s $6,368,020.
Now, real life is more complicated. You’ve got taxes to pay, plus a small drag on your portfolio from your index fund’s expense ratio (fees). But also, the returns above are based on the notion that you’ll never get a raise at work — that you’ll make that same $70,000 for the next 30 years. That’s highly unlikely, and with those raises, your 50% will get turbocharged. Play around with
an investment return calculator to see for yourself.
THE COMPROMISE
It’s not hard to see how much more powerfully your wealth will grow when you set aside more of your income to invest. That money will yield more money, and all that money will spawn still more money. With benefits like employer matching for your 401(k) and other tax-advantaged retirement plans, maxing out your contributions each year is even more (less?) of a no-brainer.
But all of this does require that you organize your life in a different kind of way. If indeed you want to save half of a $70,000 salary, it may be challenging depending on where you live. Rents in your area and other cost-of-living metrics could be prohibitive, which leaves you the choices of moving, finding a different job, or slowing your path to F-You Money with smaller investment contributions in your early days.
If 50% is within your power, however, and simply a matter of cutting out optional expenses like vacations in the Maldives, dining out all the time, or collecting fine silks, consider whether any of the above are worth more to you than true financial freedom. If they aren’t, you know what to do: scale back that lifestyle and run that money into investments. Think of it as selling off some of that stuff now to buy a different kind of life for Future You.
