Spending rate versus saving rate

For years, I’ve argued that your saving rate is the most important number in personal finance. “Saving rate” in the world of personal finance is the same as profit in the world of business. We all understand that a company needs to earn a profit in order to grow and thrive, but what most people fail to realize is that people need profit too.

The greater the gap between your earning and spending, the faster you’re able to grow your wealth snowball and achieve your goals.

Last week, the always-excellent Michael Kitces published an interesting article that argues spending rates matter more than saving rates. He writes:

Most households struggle to save because there is no money left at the end of the month to save in the first place. Because technically their problem isn’t a savings rate that’s too low; it’s a spending rate that’s too high.

When I began reading Kitces’ article, I thought he was picking nits. After all, saving rate and spending rate feel are two sides of the same coin. Turns out, however, Kitces has a good point.

Saving Rate vs. Spending Rate

Your saving rate — and note that it’s not “savings rate” — is calculated by dividing your profit (your income less your expenses) by your income.

Saving Rate

Your spending rate is calculated by dividing your spending by your income.

Spending Rate

As you can see from the equations, saving rate and spending rate are simply the inverse of one another. If you have an 80% spending rate, then you have a 20% saving rate. If you have a 5% saving rate, then you have a 95% spending rate.

Because of this, it’s easy to dismiss tracking your spending rate as a needless exercise. That number is implicit in your saving rate!

But Kitces argues that shifting the attention from saving to spending makes sense because saving is, essentially, a side effect. The two numbers you actually control in this equation are your earning and spending. Saving is a byproduct. It’s not a primary factor but a secondary one. This observation is subtle but it’s important.

Saving as Side Effect

For the past couple of years, I’ve led what seems like a futile crusade to convince folks that they ought not make debt elimination a primary financial goal. That might seem crazy, but I have reasons.

I’ve seen many instances where folks make it their mission to get out of debt, but once they’re debt-free they fall right back into poor financial habits. Similarly, I’m now seeing people pursue financial independence as a goal, and some who achieve it realize it’s not the panacea they had hoped for.

To me, both debt reduction and financial independence ought to be treated as side effects. They’re the byproducts of other more-important financial choices. If you boost your income and cut your spending, you will get out of debt. It’ll happen without you making it a goal. And if you’re clear on your personal mission, then you will achieve financial independence — if FI is aligned with that particular mission. (FI doesn’t fit every purpose in life.)

Kitces helped me to see that saving rate is a side effect too. “The real key to saving isn’t actually the ‘saving’ itself, but setting reasonable and prudent spending guidelines,” he writes. He’s right.

In the fundamental wealth equation, the two variables that you control are your income and your spending. You don’t directly control your saving. That rises or falls depending on the other two factors.

  • If you decrease your spending, your saving rate rises. If you increase your spending, your saving rate falls.
  • If you increase your income, your saving rate rises. If your income decreases, your saving rate falls.

If you want to save more, you can’t tell yourself, “This month, I’m going to focus on setting aside 10% instead of 5%.” In order for your saving to increase, you have to adjust your spending (or your income). To set aside 10%, you need to spend 90% of your income instead of 95%.

Control What You Can Control

The biggest reason I like the shift from “saving rate” to “spending rate” is that it puts the focus on what you can actually do to improve your situation. You can’t directly improve side effects. You have to make adjustments to primary causes, and in this case the primary causes of your saving rate are your income and your spending. Of these two, you have much more control over your spending.

Don’t get me wrong. You should absolutely do whatever you can to earn more money. Become better educated. Work harder and smarter. Learn how to negotiate your salary. But opportunities to boost income are infrequent. Opportunities to reduce spending happen every day.

I believe that becoming proactive is the number-one skill to improve your financial life. You can practice being proactive by reducing your spending rate. How?

  • The best way to spend less is to reduce your housing costs. For the average American family, housing is the largest monthly expense — and by a huge margin. No, high housing costs aren’t quick or easy to fix. I get it. But cheaper housing is the best way to decrease your spending rate.
  • Transportation is the second-largest expense in the average American budget. Best of all, it’s a line-item that can be cut drastically today, if you’ve got the guts. It takes time to move somewhere cheaper. You can ride the bus or bike to work as soon as you decide the inconvenience is worth the financial reward.
  • Another way to practice being proactive is to reduce recurring monthly expenses. Nowadays, most of us have a whole host of subscriptions and recurring fees. I’m very guilty of this. For instance, I have paid subscriptions to Spotify, Pandora, and Apple Music. Plus, I’m paying for Netflix and Hulu and YouTube TV. This is absurd, and I know it. Yet I’m not alone. I’ve spoken with many others who let monthly subscriptions pile up until they’re sizable drains to their cash flow.

So, does spending rate matter more than saving rate? Do I agree with the premise of Kitces’ article? Yes — and no.

Because spending rate is the mathematical inverse of saving rate, you can’t really argue that one is more important than the other. They’re essentially the same thing, but looked at from different angles. That said, saving is a side effect, not a primary factor. I like the fact that an individual can directly affect her spending.

I appreciate that Kitces introduced me to the idea of a spending rate. It’s a fascinating concept. But the truth is: I’m going to keep the conversation at Get Rich Slowly focused on saving rates. (For now, anyway.)

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There are 26 comments to "Spending rate versus saving rate".

  1. Eileen says 11 September 2018 at 08:31

    Wow — why all 3 music services? I have none (though I get some of Amazon Music from being Prime member).

    • J.D. says 11 September 2018 at 08:39

      Well, I’ve had Pandora forever. That was the first one I signed up for. When Spotify came along, I liked that it offered features that Pandora didn’t: personal playlists, curated playlists, curated “stations”, friend lists, etc. I paid for it too. I’ve only recently added Apple Music (in the past couple of months). Because I’m firmly entrenched in the Apple ecosystem, I like it. But i’ve reached the point where I realize that it’s silly silly silly to be paying for all three. I suspect I’m going to revert to the free versions of both Pandora and Spotify (because I don’t lose any functionality — I just get ads) and keep paid Apple Music…

      • Cassidy Hennigan says 02 October 2018 at 19:00

        Just so you know, you can get a Hulu/Spotify bundle that’s only $12.99 a month. I actually dropped Netflix and went with Hulu once I found that out since I was paying $9.99 a month for Spotify anyways.

        Although I won’t lie, I kinda miss Netflix sometimes… and Hulu has commercials 🙁

  2. Dave @ Accidental FIRE says 11 September 2018 at 08:55

    I’ve seen many instances where folks make it their mission to get out of debt, but once they’re debt-free they fall right back into poor financial habits.

    This is an interesting point and I have friends who did the same. If you don’t change the core behavior to one of ‘saving first’ then you’re opening yourself up to a do-loop of bad choices with money.

    • Derrell Huff says 15 September 2018 at 06:51

      Hey folks,

      This is not rocket science we are dealing with here. I was
      taught early from my old Papa. It is not what you make,
      but what you keep. I have been retired now for 15+ years
      and my income is 50% less than when I worked, but I still
      save money, DUH!!

  3. Steveark says 11 September 2018 at 09:09

    Very nice way to look at things and nice of you to credit Kitces for his insights. While it is common to preach “pay yourself first” in reality that’s more of a result of controlling your spending than it is a plan in itself. It is always fun to turn an idea around and look at it from a different perspective. But I like your preference for savings rates, it feels more positive and achievement oriented than just controlling your spending. Great read, as always.

  4. Ciwood says 11 September 2018 at 09:30

    I was able to retire comfortably using a different formula that more aligns with your thoughts.

    I saved first and learned to live with what was left. I found budgeting was too difficult but saving first and living on the rest worked for me. I used a 403b so I never saw the money. I was able to retire with 15 times my annual income, all tax deferred or tax free.

    • Luke says 11 September 2018 at 10:02

      As a disclaimer, we’re all on the same team here and this is a get thought experiment. But to be a bit critical… I’m probably more with Ciwood on this:

      I think focusing saving rate first is a less painful approach, assuming the saving rate you target leaves enough for a minimum standard of living you are comfortable with.

      I generally found “Rich Dad, Poor Dad” to be mostly BS, but one thing Robert Kiyosaki got right, in my opinion, is “paying yourself first”. I happen to disagree with Steveark when he says that phrase boils down to “controlling your spending”. Control is something you need when you have options. Take away the option to overspend, and its not an internal battle anymore.

      My saving rate isn’t determined by my spending, its the other way around. I think there is a psychological advantage to thinking in that direction. I would argue its easier to “make due” with spending what is left over after meeting a bi-weekly savings target. When I try to save ONLY AFTER I try to limit my spending, I retroactively found that I THOUGHT I needed to spend more than I ACTUALLY needed, when given no other option.

      You may think you NEED that coffee from Starbucks, but its a moot point if there is no wiggle room for it. Some people may find this lifestyle miserable, but its the only thing that works for me. Like Ciwood said, I found that sticking to a budget is easy on paper but hard when you see the extra $$ in your account. I like to get it away from me as fast as possible and force frugality on myself – sink or swim.

    • lmoot says 13 September 2018 at 04:37

      I agree too. I have always hated budgeting. Not only did it feel constrictive, but it was too much work. Also once I got the hang of spending less and became quite intimate with my expenses, budgeting seemed more like a hindrance than a help. Sometimes I spent more in a month, sometimes I spent less, but as long as my savings goals weren’t being disrupted, there is no need to do an “analyses” of my spending habits. If I miss my savings goal a few times in a row, and there isn’t an immediate known cause, then only at that point will I dissect my spending. After I save, the rest is to do with as I please.

  5. The Debt Shrink says 11 September 2018 at 15:12

    Every month for the past 3 years, I’ve calculate my Spending rate. It does give me a sense of control. If I get a bill for $2,203 for 3 stiches for my kid, I will do what I can to lower all other costs to help keep the spending rate down that month. Reducing Spending has been my mission and it makes sense that Savings rate is the side effect.

    But I’m intrigued by your comment that Debt Reduction is a side effect of cutting expenses and increasing income. To me Debt Reduction (and avoidance of future debt) has been my mission. Have I been looking at this all wrong?

  6. Sequentialkady says 11 September 2018 at 21:28

    Kind of perfect that you’ve posted this on the day I started a 457 plan so that I will have something to tap in the 2.5 years between retirement and being able to touch my 403.

  7. Anthony Christian says 11 September 2018 at 21:42

    I’m in the reduce spending with an increase savings as a side effect camp.

    I still use the old Microsoft Money program to track spending (never found anything as good). Punching in my data once a week, to hold myself to account, has proven to be effective for me.

  8. Mr PoP @ Planting Our Pennies says 12 September 2018 at 04:54

    Seems pretty similar to me. Maybe there is a psychological advantage in concentrating on spending rate, but it seems small.

    I would argue that savings rate isn’t a byproduct at all if you are using the “pay yourself first” strategy. Most people’s spending is so over-the-top that if they concentrate on hitting a certain savings rate every month they will be forced to get creative and lower their spending in ways that they didn’t think were possible.

  9. Joe says 12 September 2018 at 07:06

    I’ll stick with saving rate too. From a psychological point of view, I think it’s more positive to try to increase something than to decrease it. Also, when you say spending rate, I automatically think about spending less.
    To me, saving rate means you need to work on both income and expense.

  10. MrMoneyBanks says 13 September 2018 at 11:49

    I’d echo Joe above – always better to focus on growing saving rate (not savings rate!) and the pay yourself first mentality. This was such a simple idea but revolutionary once realised!

  11. AJ says 13 September 2018 at 12:44

    Personally, I like the rate of (Savings / Spending) even better. Another subtle difference in these numbers that all say similar things but here is why:

    1) Simplicity. I think when using Income as one of the numbers you can sometimes run into lots of questions that are harder to standardize / answer. Pre or post tax income? Do I include company contributions in Income? What about dividends or other smaller income sources. Not that in of these are impossible to answer, but it does force you to make some choices. Savings and Spending are two simple numbers in my opinion. Did I put it in the bank or pay off debt principal? It’s savings. Did I spend it on anything else? Spending. Easy.

    2) It tells a even truer story of how the path to FI is going since once you are living off your savings, your annual spending is one of the most important factors. Not that it’s hard to derive from the other ratios, but I like the idea that 100% savings rate with this ration means I just put in the bank in one year enough to live off for a year based on my current spending.

    Some people don’t like that this ratio allows you to get a number over 100%, but that doesn’t really bother me.

  12. S.G. says 13 September 2018 at 19:13

    I guess I’m too literal.


    I tend to think of spending in absolute dollars and saving in terms of percentage. I dont think it’s useful to think of many of my expenses in terms of percentage. But I use whatever’s useful for what I’m trying to figure out.

    Numbers are fun.

  13. Chase says 13 September 2018 at 19:48

    I think it’s interesting we all say saving rate or spending rate. I think of my spending rate as 40k per year. My saving percent is about 45% I think. A rate is usually something per time. But in the PF community it’s a percent.

    • S.G. says 13 September 2018 at 20:11

      It’s still annualized. I guess some people might calculate per paycheck or something, but most of us annualize it so we can include bonuses, tax returns, etc. Though % can be useful because it IS relatively time independent. If i told you I save $500 the time period would matter. But if I told you I saved 5% of my income it doesnt matter because it would scale with time.

      Plus % helps online if you want to obfuscate your actual earnings and it can be an easy way to normalize without needing a lot more personal financial and geographic information. “My rent/mortgage is 10% of my income” is clearer than “my rent/mortgage is $1000”.

  14. PM says 14 September 2018 at 14:06

    I have to say that I used to be squarely in the savings-oriented mindset, realizing that savings and spending were just part of the same equation, and with income fixed, manipulating either one is a zero sum game. However, as I continued to learn and make progress to my goals, I came to be more focused on the spending side of the equation, and here’s why – when you get down to FI goals, the amount you need to put away to achieve FI is only related to your spending. If you’re a believer in the 4% rule of thumb for withdrawals, for instance, your goal is probably to sock away 25 times your annual spending. So, the equation you should be looking at is (total savings and investments)/(spending). Spending is in the denominator, and should be much smaller than the numerator as you progress toward your goal. That is a powerful thing! When the denominator of a fraction is much smaller than the numerator, small changes in the denominator result in wildly different outcomes. $1,000 in decreased spending is equivalent to $25,000 less that you need to accumulate in savings/investments (following the 4% rule). The denominator is key! Hence my change of focus toward the spending side of the equation.

  15. Ekin says 16 September 2018 at 09:41

    I check your pinboard daily and the printer ink article reminded me of a youtube video of austinmcconnell it is called “ink cartridges are a scam” so i thought may be you’ll like it too. I love your content and cant wait for you to post more. Have a nice day 🙂 🙂

  16. Rick says 16 September 2018 at 15:44

    RE: Spending Rate VS Saving Rate: My mother taught me that if you want to save money you set as a goal a specific monthly rate that you’re pretty sure you can maintain, come hell or high water, even if it’s only $10 a month. More would be better, of course. No math, no formulas. When you get your monthly paycheck (we were lower-middle income folks), you put that amount in your savings account FIRST: then you pay your bills, buy groceries, and if there’s any money left you can buy a candy bar. If not, suck it up and wait ’til next month. I think that’s why I’m now what used to be known as a millionaire.

    • S.G. says 16 September 2018 at 20:24

      What’s it known as now?

  17. Dime@MindTheGapFinancial says 17 September 2018 at 04:43

    Some really thought-provoking stuff here. My husband and I kind of got stuck after paying of all consumer debt. We didn’t go back into debt, but we couldn’t seem to get any traction on our saving rate either. Partly that was an income issue. What really broke the log-jam for me personally was discovering the world of F.I. Now our saving rate on take- home pay is about 30%…and climbing! Thanks for sharing a different angle, J.D.

  18. MK@Mompowered Life says 18 September 2018 at 11:05

    I’m so happy you’re writing in September, J.D. I randomly checked, hoping you’d changed your mind. I like these simple calculations. I have a good idea of our saving vs spending rate, but it’s not where I want it to be. I’ve worked hard over the past year to really optimize our spending, but we’re one of those families that lives in a HCOL area and in order to get into a good public school system for our three kids, we pay the price in housing (even for our town home). That definitely impacts our spending rate a ton. I wouldn’t trade that though because education is something my husband and I really value.

    In a few years the preschool costs for the two younger ones will vanish, which will allow more savings. I feel like the only option for our family at this point is to really focus on increasing income, which is a big focus of mine right now. I’d love to get to a 50%+ saving rate in the next few years, just by adding some income and cutting out preschool costs. I feel like the rest of our spending is as optimized as we can get it (without losing our sanity).

  19. Carl says 27 September 2018 at 15:29

    I like paying yourself first. When we prioritize, it almost always get’s done. When we wait until we have extra money, I’ve found it rarely happens. If I’ve put the money into savings or invested it or even paid down debt, I’ve made a commitment to live on the remaining amounts.

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