7 Hidden Benefits of a High Savings Rate (Beyond Building Wealth Fast)

Key Takeaways:

– A high savings rate creates a virtuous cycle of building wealth and passive income
– Lower spending and higher savings can lead to a lower target nest egg for retirement and an accelerated journey to financial independence
– Building wealth quickly with a high savings rate can help you become an accredited investor earlier, granting access to better investment opportunities
– A high savings rate allows you to take advantage of maximum tax benefits and invest more in tax-advantaged accounts
– With a high savings rate and passive income, you may not need life insurance or disability insurance
– Building passive income reduces reliance on a day job and provides recession resilience
– Having passive income gives you a better negotiating position with employers and the opportunity to save more money with remote work
– A high savings rate and passive income can make it feasible for one spouse to stay home and raise kids
– A high savings rate allows you to pursue your dream work, even if it pays less than your current job

BiggerPockets:

A high savings rate creates a virtuous cycle of building wealth fast: You start stacking up passive income streams, each of which adds more freedom to your life. 

This all sounds great in vague, theoretical terms. But exactly how does that virtuous cycle work? What hidden benefits do you start seeing as you build wealth and passive income? 

Sure, you can become a millionaire relatively quickly with a high savings rate and a solid income. But go beyond the obvious, and a fascinating world of savings opens up. 

Before you overspend on a house, car, or dinner out, keep these hidden benefits of lower spending and higher savings in mind. 

1. A Lower Target Nest Egg

If you follow the 4% rule, every dollar of annual spending requires $25 saved in your nest egg for retirement. 

For example, if you live on $80,000 per year, you’d need to save $2 million for retirement. That’s a tall order for most of us and takes decades to reach. 

If you drop your annual spending to $60,000, you hit the problem of retirement in two directions. First, you invest an extra $20,000 per year to compound, growing your nest egg faster. 

But less obviously, it also moves the target closer. Your target drops from $2 million to $1.5 million, a $500,000 reduction. 

That shaves years—potentially a decade or more—off your journey to financial independence. 

2. Become an Accredited Investor Earlier

People love to complain that the rich have access to better investments than the rest of us. 

Well, it’s true, but you can blame Uncle Sam for patronizing us. The federal government regulates private equity investments to largely restrict them to accredited investors

“One of the hidden benefits of building wealth fast with a high savings rate is that you pass that $1 million net worth threshold sooner,” says Rick Orford, author of The Financially Independent Millennial. Indeed, being an accredited investor grants you access to the wide world of private equity. “Consider that most real estate syndications target annualized returns in the 15%-30% range—significantly higher than average stock market returns,” adds Orford.

This isn’t to say that you have no opportunities to invest in private equity as a non-accredited investor. That’s the entire point of the investment club that we created at SparkRental: to let non-accredited investors access real estate syndications with small amounts of money. 

But clubs like ours are few and far between, and most non-accredited investors don’t know how to access these group real estate investments.

As an accredited investor, it’s much easier to find reputable private equity investments. Why? Because the SEC allows sponsors to advertise investments that only allow accredited investors, unlike investments that allow non-accredited investors. 

3. Maximum Tax Benefits

A person who spends 100% of their income has nothing left over to invest in tax-advantaged accounts such as IRAs, 401(k)s, 529 plans, HSAs, and the like. They lose out on all of those tax benefits. 

With a high savings rate, you can take full advantage of every dollar allowed in every account type. That starts by opting into any matching contributions your employer offers, which essentially amounts to free money. 

But it doesn’t end there. You can max out your Roth IRA and potentially even a solo 401(k) if you’re self-employed. The list goes on, from HSAs to 529 plans to ESAs. 

Oh, and you can even qualify for the Saver’s Credit if your income falls below the current threshold. 

The bottom line is that you build wealth even faster by losing less to taxes and investing more to compound for you. 

4. You Can Skip Life Insurance (Maybe)

All the nail-biters will balk at this, but hear me out. 

My wife and I live entirely on her income. We save and invest all of mine. If one of us kicks the bucket tomorrow, the surviving spouse could still pay all family bills with their income alone. 

You might object that you don’t have two earners in your household, so if the breadwinner croaks, the survivor would struggle. However, a high savings rate helps you build wealth and passive income quickly, which also serves as a safety net. When the surviving spouse goes back to work, they don’t have to earn the same amount that their spouse did. They just need enough active income to cover the gap between their passive income and their living expenses.

And that says nothing of the fact that their living expenses can and would decrease. 

What do you do with the money you would have spent on insurance premiums? You invest it, of course, helping you build wealth and passive income even faster. 

5. You Can Skip Disability Insurance (Maybe)

The same logic applies to disability insurance. You buy it to protect against one partner becoming unable to produce income, but a high enough savings rate can make it unnecessary—especially if you have two earners in your household. 

Again, you can take the money you would have spent on insurance and put it toward investments, boosting your savings rate even further. 

If you’re single, you may still need disability insurance or life insurance. Or maybe not, depending on how quickly you build wealth and how little you spend. 

6. You Aren’t as Reliant on Your Day Job

The more passive income you earn, the less you rely on your job to pay your bills. You just don’t “need” it in the same way. 

This comes with several implications and opportunities for you, and each deserves separate treatment. 

Recession resilience

In a recession, lots of people lose their jobs. That’s no picnic, no matter what, but it’s a lot worse for the average person who relies on their job to cover 100% of their living expenses. For someone with a hefty investment portfolio that pays out regular passive income, it stings less. 

Imagine that your passive income from investments can cover 50% of your living expenses. That doubles the length of time that you can comfortably take to find the right next job. 

Better negotiating position with employers

That cushion, that lack of desperation, puts you in a position of power at the negotiating table. You have the luxury of not needing that job the same way typical job hunters do. That frees you to push more aggressively for higher pay, better benefits, and more flexibility. 

The worst-case scenario is that they say no. The best: You earn more money or secure better benefits. One of those benefits may even include working remotely full-time, which comes with its own opportunities for saving money. 

Saving more money with remote work

Sure, telecommuting saves you money on gas. But that’s just the tip of the proverbial iceberg. 

You also save money on work clothes, work lunches at restaurants, and car maintenance. In fact, it frees you to get rid of a car entirely, potentially saving you five figures each year. My wife and I don’t have a car at all. 

But think bigger than that: You can live anywhere in the world. That could mean a city in your home country with a lower cost of living, of course. Or you could move to another country entirely and take advantage of geo-arbitrage. 

I earn money in U.S. dollars, but I spend money in Peruvian soles most of the year. Once again, this leads to even more savings. 

One spouse can potentially stay home

The more passive income starts flowing in, and the less your family relies on active paychecks, the more feasible it becomes for one spouse to stay home and raise kids. 

Many parents love working, of course. I certainly do. But for others, there would be no greater joy than the opportunity to become a full-time parent. 

A high savings rate and the passive income that stems from it can make that possible. 

You can pursue your dream work

Your dream work may not pay as well as your current day job. For the average working stiff who succumbs to lifestyle creep and finds ways to spend more as they earn more, that keeps them chained to their day job and prevents them from pursuing their passions. 

But when you live on a fraction of your income, you don’t have the same golden handcuffs. You may be able to afford to make the change right now, today. 

Sure, you’d take a pay cut, and that would trim your savings rate. But what of it? You’ve already saved a healthy nest egg with your existing high savings rate, and it will keep compounding on its own. 

Or maybe you still spend a little more than your dream work pays each month. If only you had another source of income to bridge the gap. Thank you, passive income.

7. Less Stress Over Money

I’m not going to get all touchy-feely on you. But here’s a simple financial fact: A higher savings rate gives you more financial security, and that cuts back on your stress. 

Less financial stress means fewer fights with your spouse about money. It means not panicking when life throws inevitable curveballs at you. When you get an unexpected $2,000 repair bill for your car or furnace, your reaction becomes, “Well, that sucks,” rather than a hyperventilating meltdown.  

I can’t promise you’ll never worry about money again. But it becomes a vague, general sort of worry instead of an acute how-will-I-pay-my-rent panic.

The Virtuous Cycle of Savings

Saving money begets more savings. Wealth begets more wealth. 

Shortsighted people complain about that and see only “sacrifice” or “unfairness.” Wiser people see opportunity as a clear path to building not just wealth and passive income but also freedom. They see the opportunity to design and live their own perfect lives, all for the cost of being mindful about their spending, for not just jumping into the biggest house or fanciest car they can possibly afford. 

People in the financial independence community talk about stealth wealth. It exists not in a giant house or a flashy car but in the freedom and flexibility to work remotely, part-time, or doing passion work instead of corporate drone work or not at all, in the case of parents who want to stay home with their kids or those who want to retire early. 

The higher your savings rate, the more options open up to you. That goes for your career, your investments, your tax optimization, and expenses you can avoid paying. 

So stop running on the financial treadmill and start getting more intentional about your spending.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

A high savings rate can create a virtuous cycle of building wealth and passive income. While this concept may sound great in theory, it’s important to understand how exactly this cycle works and the hidden benefits that come with it.

One of the first hidden benefits of lower spending and higher savings is the ability to lower your target nest egg for retirement. According to the 4% rule, every dollar of annual spending requires $25 saved in your nest egg. By reducing your annual spending, you not only have more money to invest and grow your nest egg faster but also decrease the target amount needed for retirement. This can potentially shave years off your journey to financial independence.

Another benefit of building wealth quickly with a high savings rate is becoming an accredited investor earlier. Being an accredited investor grants you access to a wider range of private equity investments with potentially higher returns. While non-accredited investors have limited access to these investments, being an accredited investor allows you to find reputable private equity opportunities more easily.

A high savings rate also allows you to maximize tax benefits. By saving more and spending less, you have more money available to invest in tax-advantaged accounts such as IRAs, 401(k)s, and HSAs. Taking advantage of employer matching contributions and contributing to various tax-advantaged accounts can help you build wealth faster by reducing the amount lost to taxes and allowing your investments to compound.

Furthermore, a high savings rate can potentially eliminate the need for life and disability insurance. If you are able to save and invest a significant portion of your income, you can create a safety net that provides passive income to cover living expenses. In the event of a tragedy, the surviving spouse can use their income to cover the gap between their passive income and living expenses. This not only eliminates the need for insurance premiums but also allows you to invest the money instead, further building wealth and passive income.

As you build wealth and passive income, you become less reliant on your day job. This provides a level of recession resilience, as you have passive income to cover a portion of your living expenses in case of job loss. This also puts you in a better negotiating position with employers, as you have the luxury of not needing the job as desperately as others. Additionally, the flexibility provided by passive income and remote work opportunities can lead to more savings and financial opportunities.

Lastly, a high savings rate and the passive income it generates can open up possibilities for pursuing your dream work and lifestyle. With a healthy nest egg and passive income, you may have the freedom to pursue a career or passion that may not pay as well as your current job. This can lead to a more fulfilling and satisfying life, even if it means taking a pay cut in the short term.

In conclusion, a high savings rate not only helps you build wealth quickly but also comes with a range of hidden benefits. From lowering your retirement target and becoming an accredited investor to maximizing tax benefits and reducing the need for insurance, a high savings rate creates a virtuous cycle that can lead to financial independence and a more fulfilling life.

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