Welcome to The Letter Home, my weekly newsletter about building financial confidence on the path to the life you want 🏡
Each week, we break down one meaningful money concept and leave you with an exercise that you can use to put it into practice.
This week, we’re looking at the one number that predicts your financial future better than your paycheck does 👇️
Consider two people. Person A earns $100,000 a year, and Person B earns $70,000.
If you had to bet on which one ends up wealthier, most of us would pick Person A without thinking twice.
But what if Person A saves 5% of their income and Person B saves 20%?
That means Person A puts away $5,000 a year while Person B puts away $14,000.
After one year, the person earning $30,000 less is already $9,000 ahead.
Give it 20 years at an average 7% return and the gap gets absurd.
Person A ends up with roughly $207,000. Person B ends up with about $580,000.
Nearly three times the wealth, on a smaller paycheck, for their entire career.
That gap comes down to one number: your savings rate.
Your savings rate is the percentage of your income you actually keep.
Most of us measure financial progress by income. A raise (or bigger contract) feels like progress.
But research on what happens after a raise paints a different picture. On average, people save less than 1% of the new income.
The rest disappears into lifestyle inflation. The nicer car, the bigger apartment, the restaurant habit that quietly upgrades itself.
This is why you can meet people making $200,000 who live paycheck to paycheck.
The income went up, the percentage they kept never did.
There’s an old rule in business: what gets measured gets managed.
If the only number you watch is income, you’ll manage your career. If you watch your savings rate, you’ll manage your wealth.
Focusing only on income is like a football team that only practices offense. You can put up points all day and still lose every game!
Now, the objection I hear most: “I can’t save anything until I make more money.”
I call this the Income Myth, and it might be the most expensive belief in personal finance.
When you tell yourself you’ll save once you earn more, you’re building a conditional habit.
We worked with someone who started at $10 a week (just holding off on buying two coffees).
The amount was almost irrelevant. What mattered was breaking the psychological barrier and giving the habit somewhere to live.
A year later, she was saving $100 a week and says her day-to-day life doesn’t feel any different.
That’s the strange part about your savings rate. Small, gradual increases are nearly invisible.
Your spending adjusts to what’s available the same way traffic adjusts when a lane narrows. It just adapts.
So how do you actually move the number? Two moves do most of the work:
Raise your rate by one percentage point every three months. Nobody feels a 1% change. Someone we worked with started at 2% using exactly this approach. Three years later he was at 14% and swears he never felt the squeeze.
The next time you get a raise or a bonus, send half of it to savings before it ever touches your checking account. You still get a lifestyle bump from the other half. But for once, your savings rate gets the bigger promotion.
Income decides how fast money flows toward you. Your savings rate decides how much of it stays.
One of those numbers depends on your boss, your industry, and the economy.
The other one is entirely yours to manage!
Take Action: The Savings Rate Snapshot 📝
This week, find your most important financial number. You need about 20 minutes and last month’s bank activity. Work through these four steps:
1. Calculate your current rate. Add up everything you saved or invested last month: transfers to savings, retirement contributions, investment deposits. Divide that total by your take-home pay. That percentage is your savings rate.
2. Set the next notch. Add one percentage point to whatever you found. If you’re at 4%, your target is 5%. If you’re at 0%, your target is 1%. Ignore where you think you “should” be.
3. Automate the difference. Work out what that extra 1% comes to per paycheck and set up an automatic transfer for payday. If it doesn’t happen automatically, it won’t happen.
4. Write down the raise rule. One sentence: “Half of my next raise or bonus goes straight to savings.” Put it somewhere you’ll see it, because lifestyle inflation will show up the same day the raise does.
The goal isn’t to hit some perfect number this week. It’s to start watching the one number that decides whether your income ever becomes wealth.
Until next week,
Darren McLellan
Editor-in-Chief @ The Letter Home
