Explain why a higher savings rate both adds money to your portfolio and lowers the number you need.
Modules 1 to 3 gave you your number, the amount you need so that you no longer depend on a salary. Module 4 is about how fast you get there. Most people who want to get there faster think first about investment returns, such as better funds or a market that grows faster. For most of a plan, though, your pace depends more on how much of your income you keep.
Take two friends from university. Both take home S$8,000 a month (all the figures for these two are made up). One spends about S$3,800 a month and invests the rest. The other spends S$6,400 and invests the rest, which most people would call respectable. If you asked them whether returns or saving matters more for reaching independence, both would probably say returns. For the next decade or two, both would be wrong.
Your savings rate is the share of your take-home income that you save or invest over a year. Take-home income is 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, and Module 3 already counted these in your number. If you counted CPF in your savings rate as well, you would be giving yourself credit for the same money twice. Work out your savings rate on take-home pay only, and keep CPF as a separate line.
Savings rate measures behaviour over time, so use at least a full year of data. One frugal month tells you very little. Add up your take-home pay for the year, then add up the money you saved or invested over the same year. A bonus that went straight into investments counts as saving. Money you moved into a savings account and then spent later, for example on a holiday six months later, does not count. Leave CPF out of both totals, then divide your savings by your take-home pay.
Say you took home S$96,000 last year and saved or invested S$50,400. Your savings rate is 50,400 / 96,000 = 52.5%.
Those figures belong to Priya, whom you first met in Module 1. She is the friend who spends less. Last year she spent S$45,600 and saved S$50,400. Jun, her friend, is the other one. He spends S$76,800 and saves S$19,200, a savings rate of 20%.
Most personal finance levers work in one direction, but savings rate works in two. Most people already know the first effect: every dollar you save is added to your portfolio. The second effect is that every dollar you save is a dollar you did not spend. Lesson 1.1, "Your number starts with spending, not a round figure", showed that your number is a multiple of what you spend, so spending less shrinks the target. Saving more makes the target smaller and brings it closer at the same time.
Using the 25 times spending shortcut from Module 2, Priya's target is 25 x S$45,600 = S$1,140,000. Jun's target is 25 x S$76,800 = S$1,920,000. His target is S$780,000 larger than hers, and he is filling it at well under half her speed, S$19,200 a year against her S$50,400.
Returns only work on money that is already invested. Early in a plan your portfolio is small, so even a good year of returns adds little in dollars. Most of your early growth comes from what you put in.
A simple model shows the size of the difference. Its assumptions are made up for illustration. You start from zero, you earn a 4% a year return after inflation, and your target is 25 times your spending. At a 20% savings rate you reach the target in about 42 years. At a 30% savings rate it takes about 31 years, which is eleven years sooner. If you keep the savings rate at 20% and the return rises to 6% instead, it takes about 34 years, which is eight years sooner. So the ten-point rise in savings rate did more than the two-point rise in return. A two-point rise in return is roughly the gap between a cautious real return and an optimistic one, and nobody can choose it. Lesson 4.2, "A simple model of years to independence", goes through this model in detail.
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, and one year's return can be more than you save in a year. By that stage, though, you are already close to the target. For most of the journey, savings rate matters more than returns.
Markets set returns, and the most you can do about them is keep your costs low and stay invested. Your savings rate is mostly in your hands. You don't fully control it, because your income can fall and your costs can rise in ways you did not choose. Still, you control it far more than you control any market. This course treats savings rate as the main lever, though returns still matter a great deal. You can change your savings rate this month and watch the effect. Lesson 4.3, "Raise your savings rate without hating your life", covers how to raise 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 explained above, and you have what the activity needs.
Work out your savings rate for the last twelve months. Divide the amount you actually saved or invested by your take-home income.
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