I often give talks to my residents on Investing 101. Before I can talk about investing, we have to discuss some personal finance basics, including budgeting and preventing large lifestyle inflation after finishing training. One of the biggest questions we answer when it comes to saving money, though, is “how much should I be saving?”
The slant on my site isn’t towards just answering tough math questions, though. Let’s specifically focus on how much of your income you should be using to save money and build wealth when you are feeling stressed out by your personal finances.
In that situation, what’s the cause? And how much should you be saving?
The Big Picture on Saving Money
Let’s keep this simple. Money can dramatically impact most relationships.
The first time I witnessed this was when a couple – two of my best friend’s parents – had starkly different views on finances. The husband could not have been more frugal, and the wife enjoyed spending the money that they made without a second thought.
They were doing well financially by most standards, but they still experienced an enormous amount of financial stress because they had different views on expectations and reality as it related to finances.
Further Reading: One of the biggest sources of financial stress for many is student loan stress. Check out the student loan refinance page to lessen that stress!
We all know the feeling – when finances put a strain on our relationships with those that we love. The question is whether this feeling of stress is caused by overspending or by being so frugal that we aren’t just trimming the fat, but have now sunk the knife deep to the marrow.
The 30% Rule can help us figure out what’s causing our issue if we are saving enough money (or too much).
WAR and the 30% Rule
I don’t talk about war much on this blog, but today it’ll be necessary as I introduce you to a different kind of WAR – your Wealth Accumulation Rate (WAR).
In simple terms, your WAR is the % of your gross income spent towards building wealth.
To calculate your WAR: Add your annual savings rate (hopefully at least 20%) and the amount of money you are putting towards debt (hopefully at least 10%) until you are debt free.
Wealth Accumulation Rate (WAR) =
% Gross Income paying down debt** + % Gross Income savings rate
For example, if 20% of your gross income went towards saving money for retirement and 20% of your income was going towards paying off student loans, this would result in a 40% WAR.
A Case Study
For someone making $250,000 gross per year, a 30% WAR would amount to $75,000 each year going towards paying off debt or investing. For the physician on the traditional path, this kind of WAR will typically result in financial independence before the age of 60.
Here is an example of what that might look like for a married couple:
- Maxing out your 403B/401K at 19,500 (any matching money goes towards your WAR, but it also increases your gross salary!)
- $19,500 into your spouses 401K
- A backdoor Roth annual contribution of $6,000 (per spouse, if married) = $12,000
- Paying $24,000 in student loan debt each year
Of course, the higher the student loan debt burden that exists, the more likely it is that a person will need to shift their WAR percentage towards paying off debt.
Hopefully, you are also applying The 10% Rule towards their bonuses and promotions to help increase their WAR, which will allow them get to your goals even faster!
**Edit: Debt being paid off when calculating your WAR should be “Good debt” such as student loan debt. It has been pointed out that it should probably not include your consumer debt like that Tesla or buying more house than you can afford. Increasing your WAR in this way prevents wealth accumulation.
Saving Money. How Much Is Enough?
Obviously, the higher your WAR the better – as long as your life is tolerating it. A high WAR is how people achieve FIRE.
However, aggressively building wealth to the extent that it negatively impacts your wellness may not be worth it. A WAR that is too high can negatively impact your life and relationships. On the other hand, if your WAR isn’t high enough, your wellness will also be impacted as you limit your future choices and fail to obtain financial independence.
How much you should be saving can be directly answered after you calculate your WAR. And, if the thought of saving stresses you out, then you need to figure out if you have a spending problem or a frugality problem.
After you determine whether your WAR is above or below 30%, you put yourself into one of two camps.
Less Than 30% Wealth Accumulation Rate
You are putting less than 30% of your gross income waging WAR and yet you are still feeling financial stress.
This means you likely need to build something I like to call financial resilience.
Life can be full of tough decisions, but if you are suffering from financial stress (not related to other happenings in your life) and you are at a less than 30% WAR, as a physician, you likely need to find your frugal gene and express it.
Speaking of genes, are your other jeans all designer brands? Are you paying two brand new car payments? Did you buy the big house (or are you contemplating it)? Do you live in a high cost of living area?
Maybe, its time to make lifestyle changes if you are feeling financial stress with a WAR of less than 30%.
More Than the 30% Wealth Accumulation Rate
If, however, you are feeling the tight constraints of your budget and you are saving money at a WAR over 30% of your Gross Income, you may need to question the extent of your frugality. Is it cutting too deeply?
For example, my friends parents mentioned in the introduction:
Their WAR was likely much greater than 30%, but this was clearly negatively impacting their marriage. It simply isn’t worth it to pinch pennies with a high-income if it negatively impacts your marriage. Becoming Financially Independent and Retiring Early (FIRE) is important, but it should not be an all consuming goal that prevents you from living a life well lived.
Who cares how big your bank account is if you aren’t enjoy life?
Calculating your WAR and using The 30% Rule should serve as a guideline for discussion and thought. You can either adjust your spending or adjust your WAR to improve your wealth and live the intentional life of your dreams.
I think a 30% WAR is a pretty reasonable goal, but I need to show some grace and recognize that not everyone’s situation is the same.
Regardless, this is one of tools I use to consider how I am doing in my mission to obtain both wealth and wellness.
Am I investing enough? I don’t know… What is your WAR? Does it impact your lifestyle negatively? Are you feeling financial stress with a WAR more than or less than 30%? What do you think?