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One of the easiest ways to increase your household savings rate is to take advantage of raises at your job. Actually any type of raise or increase to your income can be used to quickly accelerate your savings rate.
For example, I was recently notified that I was getting a market increase at my job. This small increase to my salary was the perfect opportunity to bump up our household savings rate.
After running a few calculations, I made the decision to increase our 457(b) contributions (pre-tax) by exactly the same amount of my raise for the remainder of the year.
The end result was that my take home pay was almost the same as it was before the market increase. But more importantly … we just bumped our retirement contributions up by over $1,000 annually.
This move will save on our current tax liability while at the same time increase our household savings rate.
Try and Avoid Lifestyle Inflation
This latest raise isn’t the first time we have increase our retirement contributions. Usually once per year, I get a cost of living adjustment. Most times it is $500 to $1,500 of additional annual salary.
So for the past several years, we took each of these increases and immediately adjusted our pre-tax retirement contributions higher.
The end result is basically the same amount of money coming back in our paycheck and an increase in our retirement savings.
We don’t fall victim to lifestyle inflation and use the funds to take a trip or buy something we don’t necessarily need. Instead … we act is like the additional income never even happened.
We have started doing the same each year with our federal tax refund (usually between $4,000 and $5,000). Instead of using our refund to take a cruise or buy a new television … we immediately invest it into our taxable brokerage account. This is another instance of not really knowing that money is out there.
Note – recently we have been trying to optimize our income as to pay $0 in taxes and have less taken out from each paycheck. This is an ongoing process of tweaking our paychecks month to month.
So what does our actual savings rate look like?
With the most recent raise I received and a few other changes to our budget, we were able to push our household savings rate to almost 80%. Let’s look at the numbers compared to last month and where we made improvements.
How We Almost Hit an 80% Savings Rate Last Month!
We started to track our savings rate last month (January 2019) as a way to push ourselves to do better.
After just one month, we were able to make some nice improvements and increase our savings rate by just over 12% compared to the prior month. And just like last month … we increased our savings rate by first saving more and second by lowering the liabilities (or paying down our principal balances on loans).
Some of the increase in savings rate was a result of the raise I received at work. My pension contributions automatically increased because of the 6% mandatory contribution based on salary.
In addition, our 457(b) contributions increased as a result of our manual adjustments I made after being notified of my raise.
The remainder of our savings increases were from additional money we put into our high yield savings account. We had fewer bills to pay which means more savings!
And I should mention that we added an extra $50 to our monthly stock purchases from our taxable brokerage account.
In regards to paying down our loans, we stayed consistent month to month with a few slight differences. The only big difference was the $85 extra we paid on the principal of our van payment in January that we didn’t make in February.
Below is a table that shows a comparison of our savings between January and February (2019).
| Type of Savings | January 2019 | February 2019 |
|---|---|---|
| Pension | $517.58 | $523.02 |
| 457(b) | $1,365.00 | $1,600.00 |
| Spousal Roth IRA | $241.03 | $241.05 |
| Stock Investments | $50.00 | $100.00 |
| High Yield Savings | $0.00 | $335.15 |
| Van Principal | $345.05 | $348.73 |
| Van Extra | $85.00 | $0.00 |
| Car Principal | $245.97 | $245.97 |
| Mortgage Principal | $446.53 | $448.21 |
| Mortgage Extra | $21.79 | $21.79 |
| Total Savings | $3,317.95 | $3,853.92 |
| Income | $4,907.84 | $4,820.90 |
| Savings Rate | 67.6% | 79.9% |
You may notice from the results that our income dropped by a little bit between the two months. This is a result of increasing our 457(b) contributions past the amount of my raise. Our goal is to max out the plan this year at $19,000 and this move will allow us to hit that goal.
Reviewing all these changes and the end result of almost an 80% savings rate is an awesome feeling.
We hope to continue this trend and are planning to shoot for a 70% to 80% savings rate for the remainder of the year.
The Best Way to Calculate Your Savings Rate
I wanted to finish up this conversation about the best way to calculate your savings rate.
The best and honest answer I can give is that there is no real best way. It should be calculated based on your individual needs and views on calculating savings rates.
For example, you may notice that I include the principal payments we are making on our mortgage, and car loans as part of our savings. The reason behind this is that my wife and I are increasing our net worth every time we pay on our principal for these loans.
You may not agree with this approach … and that’s okay. It’s just important to decide how you want to calculate your savings rate and stay consistent with it.
We also use our after-tax pay for our income figures. Some people may disagree with this approach as well. But this is the process that works well for our family. And it let’s us compare month to month … like we shared above.
Do you use a raise or increase of your income to accelerate your household savings rate? What steps to you take to calculate your rate?
