6 Hidden Benefits of a High Savings Rate (Beyond Getting Rich Faster)
Written by
G. Brian Davis
Edited by
Jenna Klaverweiden
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The more of each paycheck that you save and invest, the faster you pay off debts and build wealth. That proves reason enough to spend less and invest more. But it’s just the tip of the proverbial iceberg.
Consider the following hidden benefits of a high savings rate, beyond simply building wealth faster.
Lower Target Nest Egg
In retirement, you’ll likely need to cover some or all of your living expenses with passive income from investments. And the lower your living expenses, the less passive income you’ll need to cover them.
Consider a few simple numbers. If you follow the 4% rule of retirement planning, you can withdraw 4% of your nest egg in the first year of retirement. That means you need to save up a nest egg equal to 25 times your annual spending.
If you spend $100,000 a year, that means coming up with a nest egg of $2.5 million. But if you spend $50,000 a year, that target nest egg also drops in half to $1.25 million.
To state the obvious, it’s far easier to reach $1.25 million in savings than $2.5 million. You can potentially retire decades earlier when you have lower living expenses to cover — especially since your high savings rate could go straight into compounding investments.
Freedom To Choose Your Ideal Work
Ever heard of the “golden handcuffs”? It refers to feeling chained to a job you don’t love because of its strong income and benefits.
Consider a person earning (and spending) $100,000 a year. They have little wiggle room in their budget.
Next, consider their more frugal friend who also earns $100,000 a year but spends only $50,000. They wake up one day and say, “You know what? This job is not why I was put here on this earth. I’m wasting my talents and my life. It’s time to switch to my dream work — even if it pays half as much.”
They can have the freedom to do that because they spend so much less than they earn.
Possibility of Skipping Life Insurance
The life insurance model makes the most sense when a household has a single breadwinner whose death would prove catastrophic to the surviving family members. However, if you have a high savings rate, this could potentially be avoided.
For example, say a couple has similar incomes but they live entirely on one income and save and invest the second. They have a high savings rate and live on less than they make. So if one of them were to die, the surviving person could support the family on their income alone.
Sure, some people get fancy with the “infinite banking concept,” using whole life insurance policies for purposes other than death benefits. But for families focused on death benefits, it can make more sense to skip the cost of life insurance policies and put that savings toward their investments for an even higher savings rate.
Lower Taxes With Tax-Advantaged Contributions
If you spend every penny you earn, you can’t contribute to tax-advantaged accounts and lower your taxable income.
Consider a worker earning $55,000. By contributing $7,000 to their IRA, they drop their taxable income to $48,000 — below the $48,475 threshold above which they start paying 22% income taxes instead of 12%, per the IRS tax brackets for 2025.
In other words, this worker earned an instant 22% return on their contribution, simply by avoiding income taxes on it.
And that’s just an IRA. The same principle applies to solo 401(k) accounts, health savings accounts and other tax-deductible contributions.
Alternatively, you could come at taxes from the other side and contribute to a Roth account. Sure, you’ll pay taxes on the contribution now, but your money then will compound tax-free and you’ll pay no taxes on withdrawals later.
Either way, the result looks similar: You’ll pay lower taxes because you saved and invested more money.
Access to Better Investments Sooner
Some people love to complain that the rich have access to better investments than the rest of us. For example, the Securities and Exchange Commission restricts many private equity investments to accredited investors who have a net worth of $1 million or more, excluding equity in their home. Investors can also qualify if they’ve earned at least $200,000 for the last two years ($300,000 for married couples).
Because a high savings rate helps you invest more and build wealth faster, you could potentially qualify as an accredited investor sooner. That gives you access to more real estate syndications and other private equity investments.
Nonaccredited investors can still access some of these investments, but they have to work harder to find them. Often, that involves joining an investment club where members go in on these investments together.
Lower Stress
Sure, it’s harder to measure stress than, say, your net worth or whether you qualify as an accredited investor. But that doesn’t make stress any less real.
Households that spend nearly every dollar they earn live on the edge. There’s little room for error. If an earner loses their job or an unexpected expense strikes, for example, they could go into a panicked tailspin. They may have to max out their credit card or take a payday loan or other high-interest debt.
When an unexpected expense hits a household with a high savings rate, it could be an annoyance and could mean saving or investing less than planned for a month. But it doesn’t always cause a crisis.
To achieve a high savings rate, stop trying to keep up with the Joneses and stop spending most of each paycheck. It takes discipline, but that discipline comes with enormous benefits — some more obvious than others.
These benefits compound on one another too. Escaping the rat race isn’t just about earning more, but about spending less and investing the rest.
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