The White Coat Investor Network[Editor’s Note: The following is a re-published post from the newest addition to the WCI Network, The Physician Philosopher. This article is all about a question I answer frequently — what should your savings rate be to reach retirement goals? My rule of thumb for attending physicians is 20% of your total income should be saved for retirement, but that doesn’t include debt paydown, college savings, or short term savings. TPP’s rule is 30%, but it includes those things. Both are easier than the Physician on FIRE’s admonition to live on half of your net income! Enjoy the post!]

The other day I gave a talk to my residents on Investing 101.  Before I could talk about investing, we had to discuss some personal finance basics, including budgeting and preventing large lifestyle inflation after finishing training. One of the most important questions that we covered was answering the question, “how much should I be saving“?

Today’s post is bent towards answering this question. However, the slant on my site isn’t towards just numbers.  I want to specifically focus on how much of your income you should be using to build wealth when you are feeling stressed out by your personal finances.

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In that situation, what’s the cause?  And how much should you be saving?

The Big Picture

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.

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.

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.

The amount of money you are putting towards building wealth involves both the amount of money you are using to aggressively accumulate assets (savings rate towards investments) and destroying debt.

To calculate your WAR: Add your percentage savings rate (hopefully at least 20%) and the amount of money you are putting towards debt (hopefully at least 10%).

Wealth Accumulation Rate (WAR) =
% Gross Income paying down debt** + % Gross Income savings rate

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For example, if you were saving 20% of your gross income towards retirement and 20% of your income was going towards paying off student loans, this would result in a 40% WAR.

A Case Study 

For example, 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 19,000 (any matching money goes towards your WAR, but it also increases your gross salary!)
  • $19,000 into your spouses 401K
  • backdoor Roth annual contribution of $6,000 (per spouse, if married) = $12,000
  • Paying $25,000 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, this person is also applying The 10% Rule towards their bonuses and promotions to help increase their WAR, which will allow them get to their goals even faster!

Physician financial book**Edit: Debt being paid off when calculating your WAR should be “Good debt” such as a mortgage or student loan debt.  It has been pointed out that it should probably not include your consumer debt like that Tesla you are financing.  Increasing your WAR in this way prevents wealth accumulation. 

How Much Should I Be Saving?  The 30% Rule

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 the 30% Wealth Accumulation Rate

You are putting less than 30% of your adjusted 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 over 30% of your 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 >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 enjoying life?

Take Home

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 the 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?

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