Savings Multiplier: 9 Hidden Benefits of a High Savings Rate
Written by
G. Brian Davis
Edited by
Jenna Klaverweiden
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You get it: Saving a higher percentage of each paycheck will help you build wealth faster. You can invest more each month and start earning compound returns on those investments.
But it turns out that a high savings rate comes with a slew of other, less obvious benefits. The rich really do get richer — because they know that savings begets more savings.
1. Avoid Private Mortgage Insurance
If you borrow more than 80% of the value of a property, you need to pay extra each month for private mortgage insurance (PMI). That insurance covers the lender, not you.
Having enough cash saved to put down 20% helps you avoid this unnecessary expense and save even more money.
2. Lower Mortgage Rate
Likewise, lenders charge higher interest rates for smaller down payments. Come up with a 20% down payment from money you have saved, and you can enjoy a lower mortgage rate to drive down your monthly payment even further.
3. Avoid Interest on Other Debts
If you’ve ever fallen into the cycle of debt to cover your bills, you know how hard it is to escape. Once you slip into credit card balances you can’t pay off each month, or the spiral of paying one debt with another, the interest stacks up quickly.
“When you have sufficient savings, you can avoid taking out loans and paying interest,” said Melanie Musson, finance expert with Quote.com. No credit card interest, no personal loans, no student loans or even car loans. “Instead of taking out an auto loan, you can pay cash for your car,” she said.
4. Higher Credit Score, Lower Interest Rates
No credit card balances or late payments also boosts your credit score. When you do go to take out a mortgage loan, business loan or investment property loan, lenders will compete with each other to offer you the lowest interest rate available.
5. Avoid Life and Disability Insurance (Potentially)
Imagine a couple where each spouse earns $50,000 — and the household lives on just one of those salaries. If one spouse died or became unable to work, the household could survive on the other spouse’s income.
That family could potentially avoid coughing up money for life insurance and disability insurance premiums. And with the money they save on those premiums, they can invest even more each month and grow their wealth even faster.
6. Option for High-Deductible Insurance
A person with almost no savings can’t afford to have high-deductible health, auto or homeowners insurance. They likely couldn’t come up with the deductible in an emergency.
But people with a high savings rate have the option to buy policies with higher deductibles and lower premiums. That saves them more money, allowing them to funnel more money into investments and emergency savings.
It also opens the door for them to invest tax-free through a health savings account (HSA), which offers the best tax advantages of any account in the U.S.
7. Lower Taxes With Tax-Advantaged Accounts
When you contribute money to an HSA or traditional retirement account, you can deduct the contribution from your taxable income. That lowers your tax bill, helping you save even more money.
Alternatively, contributing to a Roth account doesn’t lower your tax bill today, but your money then compounds tax-free and you pay no taxes on withdrawals in retirement. That means you don’t need as much of a nest egg saved for retirement — again helping your money stretch further.
8. Lower Nest Egg Target
Remember that couple who earns $100,000 but spends only $50,000 a year? Sure, they’ll save money faster than their friends who earn the same but spend $90,000. But they’ll also become work-optional faster because they don’t need as much income to live on.
Robert Drach, professor and founder of Drach Advisors, put it simply: “The more you save, the better you get at living on less. And if you can live on less, you need a smaller nest egg to retire. You’re saving more while needing less, which means you can retire earlier.”
If you follow the 4% rule in retirement, you’ll need 25 times your annual spending as a nest egg. That couple who lives on $50,000 would need $1.25 million to ditch their day jobs. Their friends who spend $90,000 a year would need $2.25 million, however.
9. Reach Accredited Investor Status Sooner
With a net worth over $1 million, you qualify as an accredited investor. That opens up many higher-return investments for you, such as private equity real estate investments and funds, where you might earn 12% to 20% on your money instead of 4% to 10%.
Savings begets more savings, and wealth begets more wealth. Get off the financial treadmill and start making real progress, and you’ll be surprised at how much easier it gets with every extra dollar you save and invest.
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