Today’s guest post is written by Ricard from Escape to Freedom. I think he put together a killer post on the number one factor it takes to accelerate our path to financial independence: our savings rate! I hope you get as much out of the article as I did!

Without further ado:

How To Increase Our Savings Rate and Accelerate Our Financial Independence

We all have “light-bulb” moments along our path towards financial independence when everything suddenly clicks into place and we acquire a new level of understanding. From learning that money can actually allow us to retire decades early, to experiencing the first returns from our investments. For me, the biggest moment was realizing that it all comes down to the savings rate.

Simply put, having a high savings rate will mean you’ll be able to become financially independent pretty quickly. The beauty of this is how absolute it is; a 50% savings rate will make a minimum wage earner financially free as quickly as it will a multi-millionaire. This is exciting (I admit I may have a slightly alternative definition of exciting!) for two reasons:

  1. Anyone, at any income level, can realistically become financially independent.
  2. Accelerating financial independence boils down to increasing this number – nothing else matters as much.

When you’re armed with the knowledge that all you have to do is increase that number by 1% at a time, the gargantuan task of becoming financially independent suddenly becomes a lot more manageable. Matt himself wrote an article a while back about how a 1% increase in your savings rate could shave two years off work. For some people, a 1% increase will mean saving another $15 per month by only getting coffee three times a week instead of five. For others, it’ll mean saving $50 by buying the cheaper food brands.

While I’m convinced that most people would be able to save another 5 to 20% if they were serious about reaching financial independence, there are some things that are simply worth spending a little more on. Things that make our lives better.

This is why I believe the best way to significantly improve your savings rate is to focus on earning more money.

There is a limit to how much money you can save if your income stays the same, and there are some fixed expenses in your life that you won’t be able to radically reduce. Imagine trying to halve your housing cost – it may be possible for some people on higher incomes, but I can’t imagine anyone on the lower salary side of the spectrum doing it.

Here’s the good news: Increasing your income has no limits. There is nothing holding you back from making more money with your time.

Have a look at an article I wrote, which introduces 8 online business models that you can use to make side-income. None of these require any previous studies or outstanding skills that you don’t already possess. The best part is that all you really need is about an hour a day after work. That’s enough to put in the work and start earning more money on the side.

Take Kindle publishing for example, as it’s the business model that I’ve been focussing on myself. It consists of writing non-fiction e-books on very specific topics that people will benefit from. The system is fairly simple: write a book, make the cover and publish it on Amazon Kindle. After a bit of marketing, you’ll get paid for each sale, for as long as the book sells.

You can even hire a ghostwriter and a graphic designer to produce the content for you if you want to save time. Once the book is on Amazon it will provide you with a nice source of passive income.

This is what I like to call a 10-percenter business – one that will increase your savings rate by an overall 10 %.

Take a moment and add 10 to your current savings rate and crunch the numbers using Networthify.com. All of a sudden you’re years closer to retirement and all it takes is a few hours a week to set up the operation.

In other words, you can trade a small amount of extra work for years of freedom. It’s a pretty good deal when you think about it this way, and “future you” is going to love you for it.

Let’s use a fictional example to drive my point home. Meet Brendan, a 30-year-old computer engineer with a savings rate of 20%. Since he has no previous savings, he should be able to become financially independent in 37 years, just around the average retirement age – not very exciting.

He wants to increase his savings rate, but he doesn’t think a promotion at his current job is very likely. That’s why he decides to start a 10-percenter business. He works for an hour after work, Monday to Friday, so he doesn’t have to compromise his weekends.

In a few months, his side business is generating a steady profit of $200 per month which is going straight into savings. Since his expenses remain unchanged, this increases his savings rate from 20 to 30%, cutting his retirement date by 9 years.

After a few more months of growing his business, he decides to pay a virtual assistant to run the bulk of his business for him. Despite the added cost, he still makes a net profit of $200 each month, which is now mostly passive. At this point Brendan could choose to start a different 10-percenter business, getting his savings rate to a respectable 40% and be able to retire a further 6 years earlier. And just like that, his life is much better than before.

The best thing is that this example assumes that his savings rate is fairly low, he doesn’t have any savings, and that he is never going to get a pay-rise at work. Neither of these assumptions is very realistic, so your own situation is likely to be even better!

What I’d like you to take away from this article is that making an extra few hundred bucks a month requires less work that you might think. It’s also definitely easier than saving a few hundred more than what you’re already saving. As you can see, the benefits can be huge, bringing financial independence from a utopian scenario to a realistic certainty.

Thanks for reading. What do you think about starting a side business to supplement your income? Have you got any experiences that you’d like to share?

For more advice on how starting an online business can accelerate financial independence for you, and to follow my own journey, check out my site Escaping to Freedom.

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