You will be able to explain why raising your savings rate both adds money and lowers the number you need.
Two friends from university both take home S$8,000 a month. One spends about S$3,800 of it and invests the rest. The other spends S$6,400 and invests what is left, which is respectable by most standards. Ask them which matters more for reaching financial independence, their investment returns or how much they save, and they will probably both say returns. For the next decade or two, they would both be wrong.
Modules 1 to 3 gave you a number. This module is about how fast you get there, and the answer turns on one figure.
Your savings rate is the share of your take-home income that you save or invest, over a year. If you take home S$96,000 and save or invest S$50,400 of it, your savings rate is 50,400 divided by 96,000, which is 52.5%.
Take-home income here means what lands in your bank account, after CPF contributions. Many people track CPF separately, and this course does too. Your CPF contributions build your Retirement Account and your CPF LIFE payout, which module 3 already counted in your number. If you also counted them in your savings rate, you would be giving yourself credit twice. Keep the two apart: savings rate on take-home pay, and CPF as its own line.
A savings rate is a measure of behaviour over time, so use at least a full year. One frugal month tells you very little. A bonus that went straight into investments counts. Money moved into a savings account and then spent on a holiday six months later does not.
Most levers in personal finance work in one direction. A savings rate works in two.
First, every dollar you save is added to your portfolio, which everyone already knows.
Second, every dollar you save is a dollar you did not spend. And as lesson 1.1, Your number starts with spending, not a round figure, showed, your number is a multiple of what you spend. Spending less shrinks the target, and saving more brings it closer, both at the same time.
Go back to the two friends, with made-up figures and the simple 25 times shortcut from module 2. Priya, whom you met in module 1, spent S$45,600 last year and saved S$50,400. Her friend Jun spends S$76,800 and saves S$19,200, a savings rate of 20%. At 25 times spending, Priya's target is S$1,140,000 and Jun's is S$1,920,000. Jun has a target S$780,000 larger to fill, and he is filling it at well under half the speed.
Returns only work on money that is already invested. In the early years of a plan, the portfolio is small, so even a good year adds little in dollars. Most of the growth in those years comes from what you put in.
Here is what that looks like in a simple model that lesson 4.2, A simple model of years to independence, walks through properly. It starts from zero, assumes an illustrative return of 4% a year after inflation, and aims for 25 times spending. On those made-up assumptions, a 20% savings rate takes about 42 years to reach the target. Raise the savings rate to 30% and it takes about 31 years, eleven years sooner. Keep the savings rate at 20% and raise the return to 6% instead, and it takes about 34 years, eight years sooner.
So a ten-point rise in savings rate did more than a two-point rise in the return. And notice how big a two-point rise in returns is. It is the difference between a cautious real return and an optimistic one. Nobody can choose it.
Later in a plan, when the portfolio is large, returns matter much more in dollar terms. A 5% move on S$1,000,000 is S$50,000, which may be more than you save in a year. But by then you are close to the target already. For most of the journey, savings rate leads.
There is one more difference between the two. Returns are set by markets, and the best you can do is keep costs low and stay invested. Your savings rate is mostly in your hands. Not completely, since income can fall and costs can rise in ways you did not choose, but much more than any market.
So this course treats savings rate as the main lever. Returns still matter a great deal, but savings rate is the one you can pull this month and watch the effect.
Lesson 4.3, Raise your savings rate without hating your life, looks at how to pull it without making your life worse. First, you need to know where you stand. Find twelve months of take-home pay from your payslips or bank statements, and twelve months of money moved into savings and investments. Leave CPF out of both, as this lesson explained, and you have what the activity needs.
Calculate your savings rate for the last twelve months from take-home income and the amount you actually saved or invested.
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