As we all know, I’m a reformed Math Critic. After having my self-esteem utterly wrecked in freshman year Honors Calculus I (I still don’t know what a derivative is), it took a few years to build my confidence back up. Thankfully, personal finance math is mostly just addition, subtraction, multiplication, and division, and I can handle that.

One of my favorite things to do on this site is use math to help us think about things differently. And when it comes to things like your “save rate,” math can be very helpful.

Before you dive into this one, if you’re unfamiliar with the concept of financial independence and the math that backs it (basically, that you can retire when you save 25x your annual expenses), check out this article first. It’ll provide a solid foundation on which to build.

Your save rate is the percentage of your income that you’re saving every month. For example, if you make $3,000 per month and save $500, your save rate is 16%. You’re saving 16% of your income.

Conventional wisdom in America (and I’m not sure where this came from) is that you should save 10% of your income. That doesn’t sound too bad, right?

But if you know that you need to have at least 25x your annual expenses (in other words, 25x the amount of money you spend in a year) invested in order to retire, that means – if you’re only saving 10% every year – it’ll take you 9 years of work to save up 1 year of expenses.

Now the math gets fun: If it takes you 9 years to save 1 year of expenses with your “recommended” 10% save rate, then imagine how long you’ll have to save in order to get 25 years of your expenses.

And that, my friends, is why your save rate is a crucial component of personal finance. No matter how much money you make, your save rate will be able to tell you how close you are to retiring. (Again, to retire, you need at least 25x your annual expenses in an investment account.)

Let’s extend the example and see what happens when we increase our save rate:

Remember our $3,000 example? Let’s say your save rate was 25% instead (saving $750 per month instead of $500). Now, it only takes 3 years to save 1 year of expenses, instead of 9. You’ve just trimmed 6 years off your saving timeline by merely saving $250 more per month.

And what if your save rate is 50%? Well, that’s an easy one: If you spend $1,500 and invest $1,500, now it takes you 1 year to save 1 year.

Why this works

The first time I heard about this (reformed Math Critic, remember?), I was like, But wait, someone who makes $100,000 per year and saves half their income is going to be saving WAY more than someone who makes $45,000 per year and saves half their income – how could this “rate” thing be right?

Do you see why I struggled with calculus?

It works because it’s all proportional – if you’re saving half of $100,000, that means you’re SPENDING half of $100,000, too. Save $50,000, spend $50,000. If you’re spending $50,000 per year, that means you need 25x $50,000 to retire ($1.25M). Someone who makes $45,000 and only spends half of it ($22,500) only needs 25x $22,500 to retire ($562,500). It’s all proportional.

Now, the subtext here is obvious: While you might be able to save aggressively now on your $45,000/year income, you probably don’t want to be restricted to $22,500/year budget for the rest of your life – and that’s why this exercise isn’t perfect. Side hustle income in early retirement will help, and so will the fact that your money is compounding in your investment accounts.

The key thing to take away is that your save rate can tell you how many years of your life you have to work in order to buy one year of freedom. A 10% save rate doesn’t sound that bad until you realize it means you have to work for 9 years to buy a single year of your life back.

And what happens if you can get your income high and keep your expenses low?

Let’s say you make $100,000 and you save $75,000 of it (meaning you spend $25,000 per year).

Now, your save rate is 75% – which means it only takes four months of work to save 1 year of your life. You work for 1 year to buy 3 years of freedom. Now that’s a pretty good deal!

Will there be sacrifices? Yes. Obviously. But you’re saying “no” now so you can say “hell yes” in early retirement – if your save rate is 75%, that means you could effectively hit early retirement in a little under 9 years – the same 9 years that your colleague will have spent buying back 1 measly year of freedom.

How do you decide what to cut?

While the “earn” side of the equation is arguably more valuable (because you can only cut back so much), a lot of times the first thing we can affect is how much we’re spending.

When you’re deciding what to cut and what to keep in your habitual spending, you can use an easy equation to figure out how much you’ll have to invest now to support that habit forever.

Since your “retirement number” is 25x your annual expenses, an easy way to determine how much certain habits impact your number is to multiply the monthly cost by 12 (to get the annual cost) then by 25 to get the “retirement cost.”

For example, if I get my nails done once per month and it costs $45, then annually, it costs $540.

$540 * 25 = $13,500.

This means you’d need $13,500 more in your “retirement number” to support this habit in perpetuity (because $13,500 is the additional amount of money you’ll need invested in order to “use” $45/mo. of the interest on your manicures).

The decision is up to you, and how much you value manicures. I don’t think $13,500 sounds that bad in order to sustain a manicure habit until I die, but I also don’t really care about manicures, so I wouldn’t go for it.

Fancy coffee, however, is another story – I love buying a $5 coffee on Mondays and Fridays to bookend my week. That’s $10 per week, or $40 per month.

I’d need $12,000 invested in order to support my $40 monthly coffee habit for the rest of my life. And you know what? That feels like a pretty good deal to me, because I get a lot of joy and productivity out of those coffees. Bitch, it stays!

These are small examples, but it gets more intense when you think about things like cars.

If you have a nice car with a $400/mo. car payment, that’s $4,800 per year. $4,800 * 25 = $120,000.

You’d need an additional $120,000 invested in order to withdraw your $400 monthly car payment forever. Now things start to get a little dicey – it takes awhile to invest $120,000. For example, if you’re making $50,000 per year and have a 50% save rate (a really good one!), you’re saving $25,000/year. It would take about 5 additional years of work to support this “fancy car” habit forever. When you’re talking about the difference between retiring in 10 years and retiring in 5, you might start to think about that car a little differently.

Ultimately, it comes down to the “true” cost

And I’ve found that the more I learn about how my save rate impacts my future, the less I feel tempted to spend my money now. It gives a tangible alternate option: if I can either retire at 35 or 45 based on one recurring decision, my choice becomes pretty obvious.