Episode 35: Is Your Savings Rate Good or Bad?

Do you have a good savings rate? What is a good savings rate anyway? In this episode, learn why a high savings rate is so critical — and how to secure one for yourself.

In today’s episode, you'll find out:

• How do you define a savings rate?
• The history of savings rates in the U.S.
• How advertisements might have affected savings rates
• Where the current average national savings rate has settled
• How having six figures of student loan debt should affect your savings rate
• The saving statistics of the Student Loan Planner® audience
• Our recommended savings rate
• How savings rates affect taking risks or changing your situation
• What a savings rate can get you in terms of retirement
• Five ways to fix a bad savings rate
• Why a savings rate is more important than a student loan strategy
• How to start saving with a better rate
• Why avoiding money paralysis is imperative
• Why considering a fee-only fiduciary financial planner is wise

Links mentioned: 

• Physician Advising
• You Need A Budget (YNAB)
• Mint
• SLP: Betterment
• Physician Wealth Services
• XY Planning Network
• DentistAdvisors.com
• The White Coat Investor
  

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Episode 35 Transcript

Travis Hornsby [00:00:00]Let's talk about savings rates for this episode of the Student Loan Planner® Podcast. Do you have a good savings rate or a bad one? I am going to embarrass a friend of mine. I got this suggestion for this show from Joe, and he's going to be mad that I probably mentioned that because he does not like getting lots of new clients. He just likes having, like, 100, and that's it. So. So, if people reach out to you, Joe, I apologize.

Travis [00:00:29] And by the way, other financial planners — I know there's a lot of financial planners that listen to our podcast — if you have an idea for an episode, maybe I'll give you a shout out if we end up using your idea. So send us a note — Podcast@StudentLoanPlanner.com. Or, you know, if you're just a regular person, I'd love to give you credit, if you want credit for an idea — if we use your idea for an episode.

How do you define a savings rate?

Travis [00:00:46] So savings, right? The issue with savings rates is you can get real technical with it. What do you define a savings rate as? People will talk about net savings rates. A net savings rate would be after taxes. So, let's say that you save $20,000 in your savings and for 401(k), and you earn $200,000 as a household, let's say. So, you would have a 10% gross savings rate. Gross not meaning like, wow, what an ugly, low savings rate. Gross as in before taxes. So, if you are saving $20,000 on $200,000 of pretax income, you have a 10% gross savings rate.

Travis [00:01:25] Let's say you have $150,000 of income after taxes. So then what you would do is you would take $20,000 divided by $150,000, and your savings rate would actually be 13% — and that would be your net savings rate. The typical savings rate that all of our federal statistical agencies use to figure out what savings rates are typically after taxes. You can use gross savings rate, but more commonly, people like to look at it after taxes — because obviously, you can't necessarily get out of paying taxes, right?

The history of savings rates in the U.S.

Travis [00:01:56] So, how have we done in the past? What is the history of savings rates in America? There is this great resource with the St. Louis Federal Reserve Bank, which is something that I'm going to use partly because it's really good and partly because holla, I'm in St. Louis. I'm proud of our local institutions having national footprints, so I'm using this stat from the Federal Reserve Bank of St. Louis.

Travis [00:02:17] And so what they did is they looked at something called the personal savings rate in relation to disposable income. What that basically means, like, in layman's terms is that money going into investments in rental real estate, investing in your house and stuff like that after accounting for taxes.

Travis [00:02:36] So, in the 50s and 60s, we were pretty good at saving money. Our savings rate was in the 10% to 12% range on average, from what I can see with their chart from the Fed's data. And 10% to 12% — that's really pretty solid.

Travis [00:02:49] Now, in the 70s and 80s, that started going down somewhat. So think about what happened in the 70s and 80s. You had way more distribution of various places where people could get targeted by advertisements. Obviously, the television became hugely important in the 70s and 80s, where you had all these different niche channels where advertisers could target to their consumers. The people wanted to convince people to spend more money a lot easier.

How advertisements might have affected savings rates

Travis [00:03:13] Think about this: Before television, advertisements were totally different. And this is just kind of a random thought I have, but I thought I'd just share it with you because I think it's kind of a fun one. If you ever looked at an old magazine and you look at the advertising section, the advertisement for, like, a washing machine is three pages long. It's like a whole essay on why this washing machine is the longest lasting, highest quality. What it can be used for, and why it's going to hold up and all these things. And they're literally making kind of an appeal to emotion but also logic and “this is a practical thing to do.”

Travis [00:03:43] It's just interesting because you don't see ads like that anymore. Nowadays, advertisements are kind of like — I mean, think about the lowest common denominator you see on television. A few years back, you know, the Kias were being advertised as a bunch of, like, mice dressed in hip-hop clothes driving around with, like — I don't know. I just remember the Kia Soul. And it's funny because that's a good ad because I remember it. I'm talking about it, right?

Travis [00:04:04] But you have those kinds of ads, and you also have, like, these really silly ones. Like State Farm ones where they get people from the same sports team to, like, do silly things and dumb things, like destroying each other's houses and cars and showing how State Farm cover you. I mean, like — None of these people are advertisers on the show, by the way. I'm just thinking about why our savings rate might have declined. I think it's partly due to the fact that if you have a lot of opportunities to spend money, you will save less.

Travis [00:04:30] So think about this: People's savings rates in out-of-the-way places are a lot higher. Now, this has come under attack with the advent of Amazon. So, now you can buy a lot of things no matter where you're living. Midwesterners historically have had a reputation as being frugal people. And I think one of the reasons is, if you are on Fifth Avenue in New York, you are constantly seeing massive amounts of ads plopped in front of your face saying that you're not pretty enough. You're not successful enough. You don't have enough money. You're not hitting the bar for life success as well as other people are. So, it basically makes insecurity, I think. And it causes people to spend more money is the reality.

Travis [00:05:08] And the reason why I feel this way is, if you look at the data — I went to this talk with this behavioral economist from Harvard. And she basically looked at the size of someone's house, and once you reached a certain point where, you know, you might have, like, two bathrooms instead of one or something, maybe there was some utility in that for larger families. But, like, she adjusted for all these different factors and found that once you were just looking at a bigger house versus a smaller house, the bigger house had no impact on happiness at all.

Travis [00:05:36] The same thing for cars. She found that once you reached a certain minimum level of safety and drive ability, there was no impact on the value of the car and Kelley Blue Book versus your happiness towards it.

Travis [00:05:47] But what happens to separate us from our money — you have all of these consumer tricks and advertising tricks that convince us of our inadequacy and that causes us to want to spend money. So, we can see this in the data. In the 70s and 80s, the savings rate dropped a couple percent, so went from like 10-12% to 8-10% in the 70s and 80s. And then in the 90s, it fell yet again.

Travis [00:06:09] So, think about the 90s. Probably a lot of you alive during that time were like me and maybe watching Nickelodeon and Disney Channel and — Those things weren't even really that ever present, and golly, man, did I get targeted by some ads as a kid. You probably did, too, right? You're getting hit up with all these different toy ads to go to Toys R Us. And you're getting hit with grocery ads, so you can go bother your mom to buy something at the grocery store when you're there with her. I mean, all kinds of stuff, right?

Where the current average national savings rate has settled

Travis [00:06:34] And so the savings rate has basically been falling and falling since the 50s and 60s. Now, in the 2000s, it fell to 4-5%, so it continued this just drastic downward trend. And then in 2005, it hit an all-time low in July of 2.2%. So, in other words, for all the disposable income after taxes families had, only 2% of it was going into savings and investments.

Travis [00:06:57] And then there was the financial crisis. And as usually happens during a financial crisis, everybody freaked out, realized that they weren't saving enough money. They had all this debt. They needed to pay it down. We got a little bit of tax relief, a little bit of stimulus package going on. And so people increased their savings rates because people realized that, you know, our generationally low savings rate was awful and really a cause of a lot of problems. And it's gone up. It went really rapidly up in the early 2010s. And it's declined, and now it's settled out at about 6%.

Travis [00:07:28] Based off of the official data, our typical savings rate is around 6% of disposable income. That's a number that, if you pair that with Social Security, it's telling you that the typical person would be able to afford retirement sometime in their mid-to-late 60s because Social Security covers, you know, a decent chunk of your income for middle-class people. And then, you know, a 6% savings rate will end up giving you enough of an income provided to maybe cover a decent standard of living, as long as you don't have more than 20 years to live in retirement.

Travis [00:08:01] So that's kind of the history of savings rates, and I wanted to talk about that just because I think it puts a lot of things in perspective. Because as a student loan borrower, if you have six figures of student loan debt, you probably have a higher income than the average American because the median household income in America is about $50,000 or $60,000. Even if you are a single person and you're a chiropractor making $50k and you feel like you got ripped off by your degree program and your school, that's actually not that bad of a situation. You already make about the same as the typical family in America. Also, that means that, you know, half of families in America are earning less than you.

Travis [00:08:35] That's the case if you're a teacher. You know, you could say that 40% of families in America earn less than you as a teacher in a low-paid school district. So, if you have a college degree, you're actually making a decent income compared to a lot of people.

Travis [00:08:47] Now, if you have a graduate degree, you're probably making even more money, especially the very bottom end of a graduate degree that I've probably seen is sometimes people make $30 or $40k working in super-nonprofit kind of roles. But you're still making something kind of decent compared to a lot of people out there.

How having six figures of student loan debt should affect your savings rate

Travis [00:09:04] In thinking about this, what is a good savings rate for someone in general, and what's a good savings rate for a student loan borrower with six figures of student debt like you? That's a little bit of a different analysis to think about that.

Travis [00:09:17] And trying to figure out what is a good savings rate, I wanted to look at some trustworthy sources to ask that question. So I looked at a Vanguard study, and this Vanguard study suggested that if you want a very comfortable conventional retirement in the era of no pensions and lower expected returns for investments in the future, Vanguard suggests that you should have about 12% to 15% of your pay going away into retirement and savings without any student loan debt. That's what they're suggesting, and that's if you want to retire in your early-to-mid 60s on a decent standard of living. That's a good savings rate according to Vanguard.

The saving statistics of the Student Loan Planner® audience

Travis [00:09:55] What about comparing yourself to other people in the Student Loan Planner® audience? I think that's a really good comparison because — How are you doing compared to other people that are in similar financial straits? So, we did an investment survey for our StudentLoanPlanner.com slash investing — that's the address for our investing course, and that's closed right now. But it'll open up in January, I think. We did a survey to make that course, and we asked our audience “what was the amount that you save in investments and retirement and savings?” And here's kind of what we found.

Travis [00:10:26] We found that one in five save nothing. Literally nothing. Golly, that's pretty awful. If that's you, you have an income problem or a budgeting problem, but either way, I really hope you figure out and fix that because that's not good. Two in five save between 1% and 10%. So that's like 40% of people save 1% to 10%. One in five save, like, 11% to 20%. And then about 4% of people didn't know what they saved; they had no clue. So, let's just assume that if you don't know what you're saving, you're probably not saving a lot.

Travis [00:10:58] So, that means that of our audience, 84% save less than 20% of their income. And I'm assuming that's probably an after-tax rate. So, that means that 16% of our audience has a savings rate above 20%. So, if you are saving more than a fifth of your income, you're already doing pretty well compared to your typical Student Loan Planner® reader or listener or client in our audience.

Travis [00:11:26] Twenty percent savings rate: What does that really mean? That's kind of the barrier for what I define as a good savings rate. I think if you're saving more than 20% of your take-home pay, then I think you're doing pretty well. I think that you can obviously always do better. But I think you're doing pretty well, and that's the target that I think most student loan borrowers need to shoot for — a 20% savings rate going away into investments and brokerage accounts, retirement accounts, savings accounts, everything. That's what I would consider a good savings rate.

Travis [00:11:53] Now, that's not including necessarily your loan payments. If you're doing an income-driven plan, you probably would want that to be 20% of your income going to these investment stuff besides that — besides your student loan payments. If you're doing refinancing, you know, maybe you can include the refinancing payment in that 20% because you're paying down debt.

Our recommended savings rate

Travis [00:12:13] That's kind of an inexact science, but you know, just 20% of your money going into increasing your net worth. Let's put it that way — 20% of your money going to increasing your net worth is what you want aim for. So obviously, when you're refinancing and paying down debt, that's going towards adding towards your net worth. And when you're investing and putting money away into retirement, especially for people that are on an income-driven plan where you're just paying whatever they tell you you have to pay, that increases your net worth. So that should be the target, is a fifth at least going to growing your wealth.

Travis [00:12:41] Now, that's what I think gives you a good savings rate. What does this good savings rate give you in terms of life options? That will give you enough money so that you can retire in your early 60s with a little bit of margin for error.

Travis [00:12:53] Let's say you live until you're 100 or 105 or something. You know, you'd have enough money probably with a savings rate to be able to quit work at 61, 62, something like that.

How savings rates affect taking risks or changing your situation

Travis [00:13:03] The other thing I like about this level of savings is it gives you enough money to start a business or pursue something in your career. That's kind of risky. So, if you think about the battle of labor versus capital — if you think about, like, the 1900s and 1800s — like, why does labor strike? Why does labor unionize? The people who own the factories, why do they try to seek out additional returns? Right?

Travis [00:13:25] Part of the reason is that your average worker, for either the fault of society or themselves or their employers taking advantage of them, whatever the reason is, your average worker, especially back in the day, had little to no money saved. So, very little capital. So, that means that they were really at the mercy of their employer. Period.

Travis [00:13:44] Your typical worker couldn't afford to just go and start their own business. So the 1900s — they just didn't have the money. They didn't have the savings. If you wanted to take a risk in your career, go back to school, try to do something that was less safe, less stable but higher potential returns — you know, if you don't have any savings, you really can't do that, especially back in the day. It was really hard. You know, maybe you had a cash flow school yourself.

Travis [00:14:08] I mean, there are some reasons why you want to have savings in terms of having the potential to become your own boss and people who start businesses. That's one of the most tried-and-true ways to becoming a millionaire and starting a successful business, whether that's a dental practice or a medical practice for physicians out there or a law practice. Or, you know, you're an MBA grad and you're trying to do a startup or something like that. Or veterinary practice. Chiropractic. Whatever it is. If you own your own business, the only way you can do that is by having a little bit of capital saved away. That's one reason why you want to have a good savings rate.

Travis [00:14:41] And then also simply career risk could also be something besides, you know, something that has a high payoff in financial terms. It could be a life decision, like you want to stay home with your kids, and you want to have a very serious conversation about how you're going to quit your job with your employer unless they comply with that request. That's only possible if you have a good savings rate.

Travis [00:14:58] Otherwise, you have the golden handcuffs. Have you ever heard that term before? So, that's typically used with, like, sales professions where you've got a sales guy or woman who spends a lot of money. And the joke is they have golden handcuffs tied to their desk, and so they spend so much money. Those golden handcuffs — literally the spending is forcing them to work because they have no savings and they have no choice but to do exactly what their employer asks of them. So the dynamic of power is totally in favor of the employer and not the employee.

Travis [00:15:28] The other thing that it will give you when you have a good savings rate is it can get you out of a bad situation. One example is a job. So you've got an abusive boss, somebody who doesn't care about you. You're going nowhere in your job. You feel stuck. If you have a good savings rate and you have money stashed away, you can get out of that situation.

Travis [00:15:45] Now a lot of people, they hate their job. So why don't they quit? Well, it's because they don't have enough savings to take that risk, and so they feel stuck and they get really unhappy with their lives. Right?

Travis [00:15:53] Another bad situation is a house. So, you're in a bad situation with your house. You are underwater in your mortgage. You feel trapped. You morally just can't bring yourself to walk away and take a hit on your credit, which a lot of people, they kind of think that way. If that's you, if you're stuck in a bad housing situation, if you have savings, you can pay down your mortgage until you're not underwater anymore. And now you can sell your house and retain the ability to get a new mortgage to buy a new house later down the road.

Travis [00:16:18] Same thing with the bad car purchase. Say you had your wild and crazy 20s where you went out and bought a bunch of sports cars. I actually have a friend in St. Louis who did something like that. He bought like five cars in his 20s. And the way he was able to get out of that crazy period of his life was he had a lot of savings, and so he was able to pay off a lot of the loans on the cars that really had a hard time selling. And then on the ones he could sell, he paid down the loans until he wasn't underwater on the car value anymore, and he sold that and was able to get out of a dire situation with this car setup.

Travis [00:16:47] And so there's another interesting thing. So, my wife has this idea that she needs to have a wife account, which is this thing where you have a little money stashed aside in case the husband's a jerk, is the way she puts it. And so she's been taught that this is a good thing to do. We joke about it, and I, like, sometimes like, think, aw, come on. Like, you don't need something like that. Right? Because I'm not a terrible guy, I hope.

Travis [00:17:10] But realistically, like, what if you end up getting stuck in a bad relationship? I don't want to dwell on that, but I'm going to be honest, like, of the thousands of student loan plans we've done, we have seen a couple situations that were definitely, not necessarily physically abusive relationships, but the person was trapped in a, at a very minimum, an emotionally and financially abusive relationship. If you have a high savings rate, if someone [has] betrayed you in terms of the marriage vows or life vows or partnership promises that you made to one another, a good savings rate can get you out of an abusive situation. At a very minimum, with the separation. At a maximum, if you need to leave the person, you can make that decision if you have a high savings rate.

What a savings rate can get you in terms of retirement

Travis [00:17:52] So there's a lot of things that a high savings rate gets you besides just retiring at an earlier age and having the option to. Obviously, it also allows you to be more generous and have a bigger legacy and impact on the world with donations. So, one in six Student Loan Planner® listeners and readers have a good savings rate, by my definition of ‘what is a good savings rate.'

Travis [00:18:14] Let's think about this. OK? Here's a rough rule of thumb for what a savings rate can give you in terms of retirement. So, a 15% amount of your income going to loans and investments means that you probably will have approximately 30 years to go until you have the option to retire, if you want it to. And if you increase your savings percentage, say, 30% going to loans and investments, you've cut your required working career down from 30 years to about 20 years. That's a big difference. And if you increase that yet again to 50%, you've cut your required working career down to, like, 10 to 13 years.

Travis [00:18:51] As a general rule, you know, you can drastically cut your time until you have work being optional with a high savings rate. If I run those same numbers and I run Public Service Loan Forgiveness (PSLF) happening or not happening, then I can pretty much prove to somebody that the very most in terms of years that the right loan strategy could save somebody off of their required working career is maybe a couple years. And the savings rate can save you a decade or more. So really, what you'll see is when you're analyzing things, you'll find that a good savings rate is about five to 10 times as important as getting the very best loan forgiveness program for your situation.

Travis [00:19:31] And that rule of thumb is a very rough rule of thumb. We have in our student loan calculator – if you go to our site, you'll see the calculator option to download that, if you haven't already — there is a portion of it where you can find out exactly what your setup looks like in terms of how fast you're going to reach retirement and work being optional with different levels of savings rates.

Five ways to fix a bad savings rate

Travis [00:19:51] So, I wanted to go into a section of the show where I'm going to talk to you about five ways to fix a bad savings rate. These are five tried-and-true tips of real-life examples we've seen in making student loan plans for people that have had a huge impact on people's lives when they make changes in what is currently going on with their life.

1. Replace your house or car with lower-cost options

Travis [00:20:12] Number one: Sell the house or car you do not need and replace them with lower-cost options. I'm going to give you a real-life example here. We had a client with a two-bed, one-bath house in Los Angeles that was worth about a million dollars. And they felt like they were going nowhere. They had a lot of credit card debt. They had a lot of private and other kind of consumer loans. And they had borrowed against the house a little bit — you know, [funded] various projects — and they were so stressed. Oh my goodness, they were stressed. They just felt like they weren't saving anything for retirement. They weren't achieving their financial goals, and that was not even that impressive of a house.

Travis [00:20:47] So I asked the various things that were important in their life, and we kind of realized that homeownership was really not something that they had done as a big goal. It was just something that they did because they felt like that's what you're supposed to do.

Travis [00:20:57] And I made the point, like, “OK, well, tell me what kind of minimum standard of living you would want.” They said, “Well, we wouldn't mind living in a building or condo or something like that.” And so, OK, how much would that cost, right? What's the monthly expense? They were able to rent a place that they really liked for about half of what their mortgage was.

Travis [00:21:16] But they felt like, “Oh, well, I can't rent because that's throwing money away.” Well, that's a lie told by the real estate industry to try to get you to buy too much house. That's just — it's not true mathematically. What matters the most is how much is going to housing. Rent versus owning, in most cases, is a lifestyle decision, not an investment decision.

Travis [00:21:35] So, this couple basically was able to sell the house and get a couple hundred thousand dollars of equity out of it, and they paid off all of their bad debt and started fully funding their retirement. And now they're renting, and they're way ahead of where they were financially. And they have a much higher savings rate — because now that money that was going into a money-pit house with a super-high property tax level, now that money is going into retirement savings and a brokerage account instead. So even if you have a stock market crash, that family is set up where the house is not going to drown them because they replaced it with a lower-cost option with a very nice apartment that they're renting instead.

Travis [00:22:08] Another example: I had a family with about $1,500 a month in car payments, and they paid down that loan on some of the cars strategically one at a time until they weren't underwater on one of them. So, whatever the easiest one to sell was, they would pay the loan down until they were no longer underwater, and they would sell it on Craigslist for top dollar. Or they could have traded it in to a place like a CarMax and traded down. Everybody typically trades up, but you don't realize a lot of times that you can trade down instead of up.

Travis [00:22:36] This couple basically was able to, one at a time, get rid of their problem car debt and instead, once they fixed their emergency fund, they were able to buy cars in cash on Craigslist instead. So, in doing that, they eliminated a fixed $1,500-a-month expense, and they broke their car addiction and that increased their savings rate a ton.

Travis [00:22:55] Getting rid of a bad house or car situation or just really high-cost, high fixed-cost expense for living and transportation costs, that can add 10% to 20% to your savings rate. What that does is that cuts your required working career anywhere from five to 15 years, in addition to giving you more life and career options that we mentioned earlier. That's option number one: Get rid of the expensive house and car you don't need.

2. Move to a place that actually needs you

Travis [00:23:18] Number two of ways to fix a bad savings rate is move to a place that actually needs you. Here's an example of this. Recently, a dental specialist — I won't say what specialty but think, like, a root canal doctor or, you know, an orthodontist or, you know, somebody who restores teeth or does dental anesthesia, that kind of thing. It's one of those kinds of fields. Right? And this person had one of the highest overheads I've ever seen. Meaning that the person's profit was not good at all for their practice that they own.

Travis [00:23:50] One of the reasons for that was because she was in an area that was extremely expensive to do business. Think about this. And this is — I've seen this actually with multiple dentists and dental specialists and, you know, other professions, too. But, you know, I'm just picking on that one because it's pretty easy example that you can kind of imagine, right?

Travis [00:24:08] So, the place where this doctor was doing business was very expensive real estate. It exploded in value, and she was on a lease. So that lease was going to basically run up, and then her choice is dealing with this landlord that's either going to drastically increase her rental price or they're going to try to sell her the place where she practices and charge a lot of money for that. So, they're going to try to sell the practice at a super-high valuation to her or raise her rent. And either one of those is going to really hurt her in terms of the amount of dentistry or whatever she does that she needs to do just to get to a break even every month.

Travis [00:24:46] That's what's real stressful, is high fixed expenses. You got to do a certain number of fillings or procedures or write a bunch of wills or sell a bunch of, you know, widgets, if you're an MBA type. You know, you've got to do a set number of that just to hit your zero-dollar profit level, and that's tough.

Travis [00:25:00] What's also tough is besides just the real estate being really expensive, labor was really expensive. So labor in this area was very high because a bunch of tech companies had moved to the area, and they were running up the price of everything. Because it's so expensive to live there, to get a skilled worker that's a hygienist or even a front desk person is two or three times as expensive as places in the country that have a worse job market. So, the cost of labor was super high.

Travis [00:25:27] Then the other thing was this person had competition all around her, so she had no ability to raise her prices. So, really high cost of all of the sort of overhead, plus no ability to raise her prices because of how much competition because how many people wanted to live in the area. This combined to be a terrible situation for this poor doctor. And we talked about it, and I said, “Look, you know, the only way that you're going to have a really good savings rate is if you move to a place that actually needs you.”

Travis [00:25:56] For example, I know of a couple people who did startup practices in areas that looked really attractive, had a really good population-to-dentist ratio, had good economics of the wealth levels in the area. They were taking over a practice for somebody that, when they looked at the list of procedures the older doctor did, they saw a bunch of procedures not on the list that they learned how to do in dental school that they could do and make more money. So, those people who went to these places that there was no competition and they crushed it, made a ton of money. And obviously, having a good savings level is a lot easier when you're making a lot more money and not having to worry about getting to zero profit every month.

Travis [00:26:34] So a lot of you listening, you know, that are health care specialists — this is true not just for people who want to be owners out there, it's also true for employees. It's a term called geographic arbitrage, which my friend Physician on FIRE (Financial Independence, Retire Early) talks about a lot. He's an early retiree physician. Basically, it is why one urologist in Southern California might make $250,000 to $300,000 and then a urologist in Minnesota might make $500,000 or $600,000.

Travis [00:27:03] The difference is primarily because of supply and demand. The supply of physicians in these saturated areas is very, very high. And then the cost of doing business is a lot higher. You, like I said, have a lot higher cost for support personnel, and you have less ability to charge higher prices because lots of competition. And so it pushes your wages down, whether you're an employee or an owner or whatever it is.

Travis [00:27:24] It's not just dentists that suffer from this. Physicians — One example is a lot of physicians out there, when you take a nonprofit hospital job or even just a name-brand health system job — This is not true for everywhere, but I'm going to be real honest, like, a lot of these business types that these not-for-profit health systems, like, the higher-ups are kind of — They're real jerks.

Travis [00:27:47] You know, like, they're always telling doctors, like, “Oh, you're not producing enough. You're not making enough money for us. You're not seeing patients, not producing enough revenue.” They also just are hardcore in their negotiations with doctors, and they're just like, “Oh, we're not going to pay you, you know, higher salaries. We're not going to negotiate. It is what it is. Nobody negotiates. We never offer better contract terms.” Which is a bunch of baloney, by the way. They always negotiate. They just lie and tell you that because they're hardcore, and they care a lot about making money.

Travis [00:28:16] It's just interesting to me that the most prestigious, U.S. News World Report kind of hospitals tend to pay a lot less than these more out-of-the-way, less prestigious places.

Travis [00:28:26] Now, there could be reasons for that. Like, you know, you're going to interact with smarter people, maybe people that are more at the cutting edge of their fields if not smarter. And then, you know, maybe you'll have more opportunity to do research or a more collegial environment or better work environments. There could be reasons, and there are, I'm sure, reasons why these name-brand hospital systems pay less money.

Travis [00:28:44] And sometimes it's worth it to accept a job where you get paid a lot less. I went to this talk with this Federal Reserve economist recently. And they basically said that areas that are highly sought-after and employers that are highly sought-after because of prestige, the name or whatever, they don't have to pay that much to attract talent because they're already well-known. They don't have to spend advertising dollars or high wages to lure people.

Travis [00:29:04] But lower-cost-of-living areas that are not really name-brand places to work and the communities are kind of random places that you wouldn't really want to live in, you really got to pay up in some cases to attract talent.

Travis [00:29:16] You can also have situations where you would make a lot less working in an area that you don't really think is, you know, a New York City or San Francisco kind of place.

Travis [00:29:24] So, for example, think about, like, Columbus, Ohio versus Dayton, Ohio. You know, what's the difference between those two places in terms of amenities? Well, Columbus probably has maybe some more opportunities for education with Ohio State being there. They have the Columbus Blue Jackets NHL hockey team. Whoop whoop. Right? Like, there's not a huge difference in my mind between Columbus versus Dayton or like Cleveland Clinic or something besides the prestige and opportunities intellectually, maybe.

Travis [00:29:50] But for whatever reason, these little health systems that really desperately need people in Dayton, as more of a quote unquote out-of-the-way kind of place, I've seen pay differences of $200,000 or $300,000 between physicians in different cities within Ohio. You know, so kind of a similar state. It's just different health systems that have different levels of need to try to attract people. So, if you want to fix yourself, in a lot of cases, fix your savings rate, you need to move somewhere where you're actually needed.

3. Track your spending

Travis [00:30:17] Number three in the list of ways that you can fix a bad savings rate is to track your spending. So, if you track your spending, you need to do it in a place like YouNeedABudget.com or Mint.com. The way I look at these two places is Mint.com is an after-the-fact look at what you spent without planning ahead, and YNAB — You Need A Budget — is a planning-ahead tool. A lot of people, they prefer, you know, Dave Ramsey's budgeting tool. There are other budgeting tools out there. It's fine. I don't care which one you use, but I would suggest that you use one of them.

Travis [00:30:47] And the reason is the spreadsheets that you're using don't work, at least in nine cases out in 10. I do not see people that track their spending in spreadsheets where they actually really know what they're spending. And these little apps and these websites, they're very cheap. Doesn't take a ton of time to input all your data into them.

Travis [00:31:05] And realistically, if you're a saver and your spouse is a spender or you're more of a planner and your spouse is a living-in-the-present kind of a person, your spouse is not going to look at your spreadsheet. They're going to ignore it, or they're just not going to be interested in looking at it. Whereas a more-attractive app that's easier to interpret that doesn't involve as much spreadsheet numbers, that's going to be something that your spouse is going to be more interested in looking at when you get married.

Travis [00:31:29] If you're married or in a long-term relationship or a partnership, neither of you really knows what the other is spending day to day unless one of you checks religiously the credit card statements. Right? So it's real easy to spend more than you think by things just kind of disappearing down a black hole because you're not keeping track of everything.

Travis [00:31:45] So our experience — we have we got a lot of data to back this up — our experience is that when people track their spending, their spending falls by about a third without having a worse quality of life. That's a big, big difference. That's a great way to cut your spending. It's simply tracking it to know where it's all going.

4. Get on the right student loan plan

Travis [00:32:04] Number four in the ways to get a better savings rate is to get on the right student loan plan and potentially, you know, either figure it out yourself or hire somebody like us at StudentLoanPlanner.com slash Help to figure out if you could be saving money on your student loans.

Travis [00:32:17] Here's one example that's rather obvious. We had a client who was on the Income-Based Repayment program, was going for PSLF, had a lot of accrued interest, didn't know if they should switch as a couple to REPAYE (Revised Pay As You Earn). And, you know, they heard from FedLoan that they should switch, and they didn't believe FedLoan because it's generally good life advice to never believe anything they say because you can't know if it's reliable or not. But in this case, it was. And that person saved about $24,000 per year by getting them onto the obviously better repayment plan.

Travis [00:32:51] The bad news is it's not always that obvious and very rarely is it that obvious for savings that large. A lot of times, we see people who are filing taxes the wrong way. They're doing separate instead of joint or joint instead of separate. They're on a plan that counts their spouse's income instead of one that doesn't count their spouse's income.

Travis [00:33:08] I've seen cases where people are long-term planning on doing PSLF. But they're working in a locum tenens job or a contractor job for a couple of years, and they're still making payments instead of using forbearance. Also, I see people with refinancing options where they could refinance to a much-lower interest rate and save thousands of dollars that way.

Travis [00:33:26] So when you get a student loan plan, you can save thousands if not tens of thousands of dollars per year by getting a more-efficient plan in place there. So that is one way to save money when you have a lot of student loans is making sure that your assets are not inefficiently used.

Travis [00:33:42] Another example is people who pay extra every month to try to do a debt snowball kind of strategy when they need to be going for student loan forgiveness because there's no chance they'll be able to pay it all off. Those people are just wasting money because instead of getting forgiveness, they're just putting money down on something that's going to be taxed at a 40% rate in 20 years. So they're trading, you know, a dollar for, like, 40 cents. You're just destroying wealth that way.

Travis [00:34:06] You know, a lot of people all the time cost themselves money and hurt their savings rates by having a very inefficient student loan strategy, which is really why we exist. And I would say probably the majority of people don't realize that they have the wrong student loan strategy. They're suspicious that they might, but they don't know for sure.

5. Become an owner of your labor

Travis [00:34:23] The fifth way to fix a bad savings rate is to become an owner of your labor instead of a renter. So here's the reality. You know, renting is more flexible. Renting is probably safer. It's less a downside risk. And I'm talking about kind of things in general, right? Because the worst-case scenario is you just give the thing back, or you stop using the thing. You stop doing the service that you're doing, and then you're done and you're out. There's no commitment so to speak, right?

Travis [00:34:52] You can think about that in the sense of maybe relationships, too, right? Are you — Have you owned the relationship, you're long-term committed? Or are you just kind of seeing how it goes? You're kind of renting the relationship, so to speak, right?

Travis [00:35:02] So you can think about this in terms of if it works out — and this is just in general — if you are committed to something, if you are in charge of something or — My analogy is breaking down here a little bit, but you understand what I'm trying to get at. If you have control over the situation because you are responsible for the ups and the downs, then you have the potential to do better than if you just coast.

Travis [00:35:23] So here is just an example, before my analogy just totally falls apart and you're like, “What that heck, Travis? What are you even talking about?” So, let's say that you are a dentist that gets paid a percentage of your revenue production for your employer. So a very typical percentage of production to get paid for dentists is 33% of the revenue that they produce. That's real typical.

Travis [00:35:46] What's really interesting to know, though, is the typical overhead for a dental practice, meaning [the] the typical amount that goes to expenses, is anywhere from 50% to 60%, which means that the profit is anywhere from 40% to 50%. So when you're dealing with overhead, if you can earn 33% as an employee and 40% to 50% as an owner, how do a lot of dentists get rich? Or how do a lot of people that own dental practices get rich?

Travis [00:36:16] They basically make a bunch of investments with capital, either that they borrow from banks or that they provide themselves, and they will pay the employee dentist a percentage of the profits and keep the rest for themselves in exchange for taking the business risk.

Travis [00:36:30] So a lot of people, they will work long term for somebody else because it feels safer. And in a very, very safe industry, like a professional job, you're better off being an owner instead of an employee because the risk of the business that you're doing is pretty low.

Travis [00:36:46] When a dentist wants to take over a spot in a strip mall, the landlord of the strip mall is overjoyed because they know that they're going to get paid every month. In contrast, you've got a restaurant that goes up, and they're like, “Well, I better protect myself because that's probably going to go belly up in like two years, like 50-50 of them do.” Whereas dentists, they fail maybe 1% of the time or less.

Travis [00:37:07] So you want to do this, even if, you know, you're a physician. For example, if you're a physician, you make money, you get a high salary because you do a procedure, and then your employer bills Medicare or Medicaid or the insurance company a certain amount of money for your labor. And then obviously, what they do is they pay you a percentage of the revenue that they bring in.

Travis [00:37:29] And let me tell you, like, these big health systems, they take a huge percent out to fund other projects. They're nonprofits, but they're really — a lot of them are nonprofits in name only because they will take the money, and they'll build a giant new complex. Or they will spend a ton of money on some sort of expansion project or taking over another health system to make even more money.

Travis [00:37:50] You know, I go to these investment conferences sometimes, and I met some investment managers of pools of capital for these large health systems. They're managing billions of dollars, in some cases, of endowment money from these hospital systems. They're just printing money. And the reason is because they take a big share of the revenue that you produce as a physician when you do procedures.

Travis [00:38:08] Now, if you would rather just not deal with any hassle, you hate the idea of getting involved in billing or hiring somebody to do the building for you and that's the last thing you want to think about and you just want to clock in and clock out and you like the camaraderie. You like going out to the department meetings and department luncheons and stuff — and, you know, listen, like, not everybody is meant to be an owner. I'm not saying that that's a decision that you should make. I'm just saying that be aware that one way to fix your savings rate if you have a bad one is to become a business owner rather than somebody who works for somebody else because the person who you're working for has to make a profit off of you, otherwise they wouldn't stay in business.

Travis [00:38:42] So if they're staying in business, that means you're doing something right. So if you learn from them and take over the job of being the boss and bringing in the money and hiring and firing people and doing all this stuff, there's a big return to doing that. That's all I'm trying to say.

Why a savings rate is more important than a student loan strategy

Travis [00:38:55] Now, one thing that we found in consistent results of models that I've built is that your savings rate is five to 10 times as important as the right loan strategy. It doesn't matter so much what your rate is or how you define it. You know, gross savings rate, net savings rate, what percentage is going away — it actually doesn't matter all that much.

Travis [00:39:12] What matters is how many dollars are you putting into your future in investments instead of the bank. Or how much money are you throwing it at bad debt to get out of debt and be debt-free and focus on your future instead of having a negative net worth. Or are you putting money away into retirement, maxing all that stuff and putting money into a tax bomb — and overfunding that tax bomb so that you'll easily be able to pay your $200,000 tax bill to the IRS when your loans are forgiven in 20 years? Are you going to be able to do that? That's what matters a lot more than what your savings rate is.

How to start saving with a better rate

Travis [00:39:42] So a couple of things that are practical rules of thumb that will help you have a high savings rate without having to really worry about calculating what yours is, a good starter goal is to put $100 a month into a brokerage account — which a brokerage account is a place like StudentLoanPlanner.com slash Betterment. B-e-t-t-e-r-m-e-n-t. That's an affiliate link where you get a month to a year free of management if you use them for your brokerage account. What's important there is you need an automatic recurring contribution to index funds in a brokerage account so that you can pull that money out for tax bomb but also so that you have the freedom to not work before age 60.

Travis [00:40:19] After age 60, retirement accounts are what need to carry you for the rest of your life. And you can put 10% of your pay into retirement in addition to this $100 a month in a brokerage, and no matter what your student loan strategy is, if you do those two things, you'll be in pretty good shape overall.

Travis [00:40:34] A good rule of thumb if you have less than $100,000 of income, a kind of next-level medium goal would be to max out all of your 401(k) accounts. That's $19,000 per year. If you have above $100,000 of income, you might want to try to max all pretax accounts. The Holy Grail is if you have access to a retirement plan like a 401(k), 43B, and then if you have access to a 457, you can max both of those. That's $19,000 each.

Travis [00:41:01] A lot of people, if you have a 401(k), you probably have a 457, so you don't need to worry about that. It's either $19,000, or it's $38,000. And then you can do a backdoor Roth IRA, about $6,000 there. And then for the Health Savings Account (HSA), you can put $7,000 in that as a family or $3,500 as an individual.

Travis [00:41:20] So there's really like this Holy Grail where both spouses are maxing out their retirements, their backdoor Roths, their HSAs, where you're putting a ton of money away into your future, and that's a wonderful thing.

Travis [00:41:29] Now, something to consider: A frequent mistake that I see people make that are really, really good at maxing on their pretax accounts is they don't put money away into brokerage accounts. So, that's that StudentLoanPlanner.com slash Betterment thing. You can do that with them or Vanguard or any place that has a brokerage account option.

Travis [00:41:46] And what happens is a brokerage account is unlimited contributions. You can put as much as you want in there, which is attractive if you make more money, you have a place to put it. If you do not have this automatic recurring contribution going away that has a specific cap, you feel maybe a lot more stressed in putting money away because you feel like you don't know what's adequate. And it doesn't matter what you put in there, you just need to put a lot in there.

Travis [00:42:07] So, for example, my dad had the option to put away some of his sick leave money when he was a teacher. So tens of thousands of dollars over 40 years of teaching, right? He could have put it into investments, into account like a brokerage account, or he could leave it alone and just leave it in a savings account. That's what he did, and that cost him hundreds and hundreds of thousands of dollars. He just didn't know that he could put it into investments, and that was obviously a big mistake that cost him a lot of money.

Travis [00:42:32] A lot of the people that I talked to that are really good savers that do not have a lot in net worth, it's because they leave it in the bank where it's earning 1%. Markets obviously crash, but if you consistently contribute with automated contributions, you're going to end up to be quite wealthy one day.

Travis [00:42:46] That's just a great truth that is accurate over the long period of time. If you are frugal enough in shoveling money into all these accounts and you have a brokerage account, you have all these retirement accounts, it doesn't matter so much what your student loan strategy is, you just need to be cognizant as to what the best thing is. And, you know, we can obviously help coordinate all that if you need that professional help.

Why avoiding money paralysis is imperative

Travis [00:43:06] I will warn you. Paralysis is a huge problem. I have this problem in my own life, even, where you're a little scared about what you should put the money into. You're like, “Oh gosh, U.S. stocks have done so well, maybe I should put it in international. Maybe I should put it into value stocks because these thing tech stocks, like Amazon and Netflix, are just so overheated, and they have traded like 150-times earnings in some cases. That's just absurd. Right? So maybe I shouldn't invest at all.” Right?

Travis [00:43:32] And that's the psychology that really hurts you when you're trying to have to make the physical decision to invest. That's why I really want you to have an automated setup for investing where it goes in every month, no matter what, and you don't have to make that decision about putting it into something.

Travis [00:43:46] And then another thing that will happen is if you leave it in the bank, somebody — you or your spouse or someone — will want to spend that on something. For example, if you have $100,000 in savings just sitting around, there's a pretty doggone good chance that at some point, you or your spouse might be like, “Huh, you know, that Sandals vacation to the Caribbean looks pretty fun. Better drop $15,000 on that because we have the money.” Or you might say, “Huh, you know, why not spend $30,000 at Disney World to take our whole family there because we got the money sitting around, you know, instead of going on a vacation to national park or something.”.

Travis [00:44:18] I'm not saying there's anything wrong with doing that if you can afford it. I'm just saying, like, practically, you're going to have savings sit around, and that money generally finds a place to be used because of how good — going to earlier in the episode — businesses are at giving us advertisements that convince us to part with our hard-earned money.

Travis [00:44:35] A good rule of thumb for retirement is about $730 a paycheck — so, seven hundred and 30 dollars a paycheck. That's $19,000 divided by 26 paychecks a year, which is how most people get paid. So that's how you max your retirement account. Just figure out how to set up $730 a paycheck going away to your retirement. You want to grow your brokerage account by putting auto contributions in and remembering that there's no limit on brokerage account contributions. So, whenever you got extra money lying around, increase your automated contribution.

Travis [00:44:59] If you need an accountability partner to not have a junk savings rate, get one. For example, if I start getting fat, I'm going to hire a personal trainer. And I'm a little worried. I'm about to turn 30, and I'm starting to notice, you know — my wife is, too — that, oh boy, you know, I'm starting to not have the metabolism that I used to, right? So if I start putting on the pounds, you better believe that if I don't have that self-control to eat less and exercise more, I'm going to get somebody professionally that kicks people's [butts] and keeps people accountable, which is a personal trainer. Right?

Travis [00:45:33] And, you know, you don't have to spend an arm and a leg to get one. You can get a personal trainer actually pretty affordably in a lot of cases, but it's not super cheap. It probably shouldn't be because they're giving you one-on-one help, and they're a professional. And they're going to probably get you better results than you want on your own.

Why considering a fee-only fiduciary financial planner is wise

Travis [00:45:47] So that's the same when I look at hiring a financial planner or a student loan consultant or anything. Right now, we don't do financial planning. Who knows if that will change in the future. We obviously do the investment course. I hope to do more of those courses, too. If you have an idea, by the way, for courses you would like to see stuff about, send me an e-mail: Podcast@StudentLoanPlanner.com. I'd love to hear your thoughts about what we should talk about more.

Travis [00:46:08] But, you know, consider hiring a fee-only fiduciary financial planner. Like I mentioned Joe Matelich, you if you're a physician, earlier on. Or Ryan Inman does Physician Wealth Services —I think — dot com. Kayse Kress — there's a lot of friends from XYPN (XY Planning Network) planning that I know. Reese Harper — DentistAdvisors.com. There are all these different places where you can get a fee-only fiduciary financial planner. You know actually, if you are in the medical world, WhiteCoatInvestor.com has a really good recommended list of financial planners that you could check out.

Travis [00:46:39] We haven't monetized that part of our business yet, where we're getting paid for advertising, you know, on the podcast. We probably should at some point. I'm mostly concerned about just doing a doggone good job getting you great knowledge to help you make your life as good as it can possibly be. And I think the money is going to take care of itself. We do get the affiliate link with StudentLoanPlanner.com slash Betterment — “better” like ‘better not worse' and then “ment,” ‘m-e-n-t,' is the way you spell that. That's the main referral partner we have for investment stuff right now.

Travis [00:47:10] But I will say this: You need to get your butt kicked if you have a low savings rate. And the only way that's going to happen is if you hire a professional to keep you accountable, and that is worth its weight in gold. So do that if you don't have the motivation to do it yourself. But hopefully you do have the motivation to do it yourself.

Travis [00:47:26] To go back to those five key things to do, right? Get rid of your house or car you don't need and get a more practical option. Move somewhere that needs your services — take advantage of geographic arbitrage, right? Track your spending. Get a good student loan plan in place with us or on your own using our free stuff. And then be an owner and business owner, specifically — get the profits of your labor instead of just working for somebody else for your entire career. Those are some suggestions that you can increase your savings rate.

Travis [00:47:54] And remember that savings rates are way more important than anything else in personal finances for things that will determine your future, and it will allow you to take risks. It will make your life richer, not in just money but also in your options that you'll have available. And work will be optional much, much sooner.

Travis [00:48:09] So, I would love your comments. If you go to StudentLoanPlanner.com slash 35, you will see the show notes for today's episode. You can leave a comment. You can also send us a note. We will have an option for you to leave voicemails and questions for the Student Loan Planner® Podcast very shortly, so stay tuned for that. I'm real excited that it's going to add a new dimension to our show, and I would love to hear what you want to hear about.

Travis [00:48:31] Please send us an email: Podcast@StudentLoanPlanner.com. I would love to know more about what you want to listen to because that's how we make the show entertaining and useful. Thanks so much for listening and have a wonderful week.