# The Intelligent Saver - Do You "save too much" - Concept of 6-30

I have carefully studied the posts in this group. Some topics and answers concern to aspects as "is it possible to save too much", "save
much, retire early" and "the advice to balance savings and life".
Obviously, the problem for most people is not "save too much", but "save enough". Nevertheless, today, people have the opportunity to earn a "lot of money", for example after university, and some of them may not feel any reason to change their lifestyle and therefore save most of their earnings for years. Further, more and more women start their own business in prosperous fields like engineering, law, especially fiscal law, and medicine. And, as I have read today in a german newspaper, especially such women are notably careful and neither take out a loan, if possible, nor want to have large disbursements for a secretary, office space, and such.
Hence, I think there is a need for a simple rule to decide, whether someone may increase his/her consumption in a very conservative way. You may also read "should" instead of "may", when you follow the advise to balance actual savings and actual life.
My rule, as a concept that I put here under discussion, is:
It is advisable to increase consumtion, while consumtion stays within 6 % of personal net worth and while a saving rate of at least 30 % of earned income after income tax is maintained.
Or more formally:
a) Determine net worth; b) Determine earned income per annum after income tax (including savings invested according to official plans); c) Calculate aa) 6 % out of net worth determined and bb) 70 % out of income per annum determined; d) Advise: Increase of consumption is possible in a conservative sense within the range limited by (aa) and (bb) of calculations according to (c).
Remarks: - 100% - 70% = 30% = minimum saving rate within this concept. This is where the 30" in the name of the concept comes from. - Obviously, most people are outside the calculated limits, because this is a rule to determine when to spend more. - Savings of an employee that are invested according to a pension plan are already a part of the 30 % saving rate. - Rental and capital income is not regarded in (b).
Simple Example:
Net worth = 500,000; earned income after tax = 60.000 /a; actual spending = 15.000 /a, and therefore saving is 45.000 /a (saving rate 75%); 6 % of 500.000 = 30.000; 70 % of 60.000 = 42.000; Advice: It is possible to increase spending up to 30.000. As a result, the new saving rate is at least 50%.
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tiger wrote:

Saving 30% is pretty remarkable and, if started early enough, should lead either to an early retirement, or to one where money is no concern. JOE
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But, if you save more, you can retire early. Or, you can handle downturns more easily. Your advise seems to be to calculate and encourage spending. I know very few people (well, I'm one of them) that need to be encouraged to spend. So, your premise seems to be needed only for the very few.
======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.
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You provide the rule, but don't provide any real world support for it. How well does it work for somebody who is retired and meeting 100% of their needs from Social Security and pension? How well does it work for someone who has four kids who will be in college in five years? ... someone who is just out of school with \$100K in school debt, needs a car, work wardrobe, and furniture?
I think peoples' situations vary too much for a simple rule to work.
For that matter, why is this simple rule better than other simple rules? Say consumption of 3% of net worth and savings of 20% of earned income. Or some other set of random percentages of random financial measures?
-- Doug
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I question one of your premises "- Rental and capital income is not regarded in (b)."

People with NW above personal residence have meaningful income from such sources, with every expectation that it will continue through retirement. If you are going to exclude that income, why bother with the 6% NW number at all, or with retirement planning? Perhaps you could clarify what you mean there?
I also question the 15k expenditures given in your example, since that is below poverty - more realistic is near the middle of the income / spending distribution. Looking at the BLS (Bureau of Labor Statistics) tables, the middle quintile income and spending is around \$50,000 a year per family, which gives a number to work with.
Otherwise, your assumptions would probably work quite well for someone aged 40 - 50 whose NW (net worth) exclusive of principal residence exceeds 500k. More work is required however, to cover more of the population and more of the financial alternatives available.
The general idea is to ensure an adequate life-long income stream, indexed for inflation IN THE SECTORS OF PLANNED EXPEDITURES, while avoiding significant changes in comfort in either direction. Estate planning will figure into the picture as well.
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Since the OP is located in Europe, his entire set of assumptions is probably much different than those of the predominantly US-based people in this newgroup.
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First of all, thank you for your answers and encouragement. Let me present my revised rules for my model and some explanation for the model.
1) A conventional idea is to determine spending on the basis of actual earnings. This has the disadvantage that people may spend to much in the beginning of employment.
The object of my model ist to provide a relatively homogenous welfare over lifetime for people who are accumulation money and are willing to increase their spending slowly.
The rule is an alternative which determines "advisable spending" on the basis of actual net worth, especially as 6 % of net worth.
2) As an example, at the beginning of career, a person may live in a small apartment and drive an inexpensive car. This is a "normal" lifestyle for people between 20 and 30. And it is possible to continue with this lifestyle for a while. In my example of the initial post, earned income after tax is 60.000. If spending is 15.000, then with i = 5.19%:
year net worth     6% 0 0         0 4 200.000     12.000 9 500.000     30.000
Consider a doctor who has an job offer in a new district, or who drives an old car. Should she rent a nicer apartment or buy a faster car, while still following the road to accumulate net worth? The rule says, if she wants this in year 4, the advice is to concentrate on accumulation, because the "6%" are actually smaller than actual spending. But in year 9 the "6%" are larger than actual spending and an increase up to this value is possible.
3) Peter Lynch proposed a "6% rule" for retirement, which was considered as too optimistic. But, during employment, it is a good point to start with. Claiming a figure under 6 % may advice an unnecessary frugal lifestyle.
I think the saving rate limit is not necessary at all. When a relatively high net worth has been accumulated, the spending limit of 6 % can be continuously reduced to a value that is intended to start retirement with.
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You might want to look into "consumption smoothing" which is a far more complex means of doing the same thing. I believe the complexity is necessary because life is complex. While I'm willing to be convinced otherwise, I believe your rule is too simple to have broad application.

These are both examples of how to apply the rule. Before that gets interesting, we need to justify the rule itself. Does it really achieve the goal stated above? Is it better than other rules, simple or complex?
-- Doug
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Maybe if you are starting out in adult life you have to set some rules. But if things are not changing a lot, a simple rule might be last year's budget plus five percent.
You might keep a seperate accounting of exceptional events- e.g. emergencies like an expensive medical procedure, or car or furniture that needs replacing, job or housing change, etc.
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