In the personal finance world it’s no hidden secret that the key to reaching financial independence is through saving a large portion of your income. There are many different levels of savings, though, and many type of savers. Today I want to outline the 5 different types of savers by comparing annual income with annual expenses. To represent annual expenses I use a red circle and to represent annual income I use a green circle like these:
The size of the circles represent the amount of annual income or annual expenses. For example, if the green circle is larger than the red circle that means your income is greater than your expenses, which is a good thing! Using these circles we can visualize the income and expenses of the 5 types of savers – let’s have a look:
“The Constant Consumer”
Savings Rate: Negative
The first type of saver is the Constant Consumer. This type of saver actually isn’t a saver at all. Notice that their annual expenses (red circle) are greater than their annual income (green circle). Thus, they spend even more than they earn, meaning they have a negative savings rate. This is possible through using credit cards excessively, taking on loans they can’t pay back, and a whole slew of other unwise financial decisions. It’s likely that this type of person is caught up in the world of consumerism – a vicious never ending cycle of purchasing consumer goods in an attempt to find fulfillment and joy. This type of behavior leads to no savings, accumulation of debt, and ultimately the inability to ever gain financial independence or ever retire.
“The Average American”
Savings Rate: 1 – 10 %
Next up we have the Average American. This type of saver represents an enormous percentage of the U.S. population. Most people aren’t even aware that they should be spending less than they earn, and if they are aware of this fact they typically end up saving less than 10% of their income. From the circles we see that their income is slightly larger than their expenses, meaning they are saving a small amount of money each year. This type of saver is definitely in a better position than the Constant Consumer but they’re still on track to work most of their life before being able to enjoy a brief retirement.
“The Steady Saver”
Savings Rate: 11 – 30 %
The next type of saver is the Steady Saver. These people are saving between 11 – 30 % of their income. This savings rate is higher than the Average American and these people are setting themselves up to retire earlier than the conventional age of 65. I give them a pat on the back. But oddly enough, this type of saver might be the rarest. Why? Because most people fall under the Average American category, but among the people who are enlightened enough to know about the possibility of early retirement, most attempt to kick up their savings rate above even 30%. Don’t get me wrong, these people are practicing great savings habits, they’re just an uncommon breed.
“The Savings Specialist”
Savings Rate: 31 – 60 %
Now we reach the Savings Specialist. These type of people save between 31 – 60 % of their income. These people are on the route to early retirement and they typically have above average financial acumen. They track their spending in some type of way and they’re conscious consumers. They buy what is necessary but refrain from excessive spending. Many savers that fall into this category aspire to save even more than 60% of their income, but it might not be financially possible at the level of income they happen to be at.
“The Money Master”
Savings Rate: Above 60 %
The final type of saver is the Money Master. From the picture above we see that their annual income far exceeds their annual expenses. They save more than 60% of their annual income. These people will work for 10 years or less before achieving financial independence. Simply put, they have mastered the money game. They know where every dime is being spent, what asset allocation is optimal, the powerful benefits of minimalism, and they revel in the joy of frugality. Money Master’s max out their 401(k)’s and likely contribute heavily to an IRA and an HSA as well. Achieving the status of Money Master requires significant work, but it’s possible for almost anyone to achieve.
What type of saver are you? What would it take to move up the ladder to the next type of saver? I’d love to hear your thoughts and opinions!