If you saw our post a couple of weeks ago on our savings, you’d know that we saved over $135,000 or 86.5% of our post-tax income in 2018. Needless to say, we’re pretty chuffed.
However, today’s question is: can we go further? Anything over 80% is already pretty intense, but a head-spinning 90% savings rate is almost mythical.
90% is in the realms of the most extreme savers who cut every expense right down to the bone… Or ultra high earners who make so much money that they can still live comfortably, but their income exceeds their expenses so significantly.
There’s no way we can cry poor. We’re both full time workers on combined pre-tax work salaries of $210,000. But the average full time worker in Australia is earning $82,436, so we’re not absolutely rolling in income either.
So hitting a savings rate of 86.5% means we’ve already tightened our belts pretty significantly. But is there still an extra notch or two in that belt to get us to 90%?
Where can we still save?
In a scenario where we don’t make any extra money in 2018, to save that final 3.5% we’ll need to cut our expenses. A lot.
With a post tax income of $156,520, we’d need our annual expenses to drop to $15,652. Given that we spent $21,135 last year, that’s a massive ask. That would be a 26% drop in our expenses.
As a reminder, these were our expenses last year:
Put simply, I don’t think we can find some $5,483 in extra savings in there.
We won’t have any holiday expenses in 2019. That’s $367 saved. (That said, if we pre-book anything for 2020, that’ll totally sink that idea.) Fingers crossed there are no dental fees — but if so, that’s only $112 saved. I’m pretty confident we’ll save about $150-$200 on our phone bills. We’re already big enough cheapskates that our gift expenses can’t drop any further…
We might save $100 on our electricity after switching suppliers around mid-2018. We might also save $200 in the first 3 months of the year for our groceries compared to last year. But there is a horrible drought going on currently, and food prices have been going up. So in the end, we might be lucky to actually just tread water with our food costs.
We could save a $100 or so on car maintenance after ending scheduled servicing on the car because it’s no longer under warranty. But that also means it’s more likely to incur big expenses as well.
The big thing that could save us money is our hobbies and sports expenses. Setting up this site was a $500 hit (six years of hosting and the theme — we’re not going anywhere!), and going to the football costs almost $300. The site will have lower fees to maintain it, and I can cut back on my membership. Let’s say we can save $400 here.
So the savings won’t go far enough?
Adding up those expenses savings might at best save us some $1,400. That’s nowhere near enough.
We’ve also been pretty lucky the last three years with our expenses. When we moved in together in 2015 we had a few new appliances. We know it’s only a matter of time until something like the fridge goes bang, or the hot water system carks it and throws in the towel.
If you look again at the expense table, you’ll see that we’ve swum against the inflation tide and dropped our expenses overall for last couple of years. But that can only continue for so long. It’ll catch up to us eventually.
That said, our first quarter water bill came in recently. Check out this post on our Instagram page. You’ll see that we actually managed to once again beat inflation and lower our bill! Really, it’s a tiny drop (ba-dum tish!) — but it beats a rise.
However, the fact is we’ll also face some rising fixed costs — council rates, car registration, car insurance. Health insurance will go up about 4% in April. Home insurance will probably go up after we managed to trim a tiny amount in 2018.
In a few years time we can get rid of Ellie’s professional fees ($853 last year). But unfortunately that’s not possible yet. We’ll cut them out only when we’re closer to retirement. Until then, it could sadly be a career-limiting move if she needed to change jobs
After that, looking at the numbers leaves only one conclusion: It’s a very hard, if not impossible slog from a practical sense to hit a 90% savings rate. Short of selling the car, there’s no way I can see expenses dropping enough. And we’re not selling the car — we really do need it! Besides, selling it would only save $2,173 in annual expenses — still not enough anyway! We’d be some $2,000 short.
After all that, we really only have one option — increase our income.
How high can you go?
Sadly, this is a very hard numbers game. Without dropping expenses, this is really a game of diminishing returns.
Let’s say that we don’t drop our expenses at all this year. To hit 90%, we’d actually need to increase our post-tax income to $211,350! That’s a head-spinning increase of $54,830 or 35%! All to get to that final, tiny, measly extra 3.5% savings rate. Crazy, right? 3.5% never seemed so large!
Well, our combined wages are going up about $7,000 after tax this year, so not much help there (but we’ll gladly take it, thank you). I’ve also had a one-off side hustle worth $3,000 (pre-tax) come in already in January. But that’s still nowhere near enough.
And that really is the end of that story. We can’t go any higher with our salary income.
So, going back to the big question: can we make our savings reach 90%? Honestly, I just don’t think it’s possible with the way we calculate things.
Absolute best case scenario, I think we could reach a 88% savings rate. But that’s only if our expenses drop a fraction, while our wages go up.
So it’ll be a bridge too far. We’ve already cut back our expenses so much, and inflation and maintenance costs will hit us eventually.
We’d simply need higher paying jobs. But with the work-life balance we currently get to keep us relatively sane until retirement, maybe that wouldn’t be a good idea.
What’s that? A twist in the financial tale?
Nope, it looks like the only way we could make it to 90% would be to change our accounting practices.
One reader on Reddit made the point that we’re short-changing ourselves by including the extra $3,000+ tax element in our expenses. I certainly see their point — our income isn’t truly ‘post-tax’ if we then pay extra tax.
But I’m slightly hesitant to remove it from our expenses, since it’s an extra ‘out of pocket’ expense we pay (beyond the tax that is automatically deducted by our employers). It is an expense we have to budget for, since we know we need to set aside money in October. And over time that bill will only go up as our dividends continue to grow. We also recently got a nice little injection from a side-hustle, so that’ll blow out this year’s budget from a tax perspective.
So should we include tax as a “post tax” expense? Including or subtracting extra tax wouldn’t impact the amount of money we save, but it would change our savings rate.
Additionally, rather than just use our salaries and side hustles, we’d need to also throw our reinvested share income in there as well. We are, after all, including non-DRP share dividends into our income… That would add tens of thousands of dollars extra in the mix.
On the flip side, the extra tax we incur is largely due to the dividend income we do receive. So it’s arguably already partly included within our budgeting. So what do you think? Should we include this as an expense? This would both impact our savings rate and the amount of money we say we earn.
We haven’t included the 15% superannuation we get either — but I’m against including that since it’s money we cannot touch until we’re 60.
So, I’ll throw the questions out to you, the readers.
Should we include share dividends that have in dividend reinvestment programs into your post-tax income? What about superannuation income?
Ultimately, this will impact how we report our progress to you in the future.
Like a ‘choose your own adventure’ novel, the end to this tale is undecided, for now. The results are in your hands!
Originally published at hishermoneyguide.com on February 12, 2019.