If you could do only one thing to improve your finances, what would it be?

Would you earn more money?

Spend less?

Pay off corrosive debt?

Spend more time tracking your cash flow?

All of these are terrific things to do and one of them is directly affected by the action I have in mind.

Here’s the scoop: By far and away the best thing you could do to create financial strength is to save more.

It’s not sexy, but it is the magic sauce in every financially secure person’s recipe for success.

What’s wrong with earning more money?

Nothing. In fact, I’m a big fan of encouraging women to earn more and showing them how to do that, but without money management skills, a higher income doesn’t guarantee that you’ll be better off.

Let me introduce you to Wendy and Matt*. When I first met them, they earned $200,000, placing them solidly in a high income bracket.

With that kind of income, you’d think that they’d be in great shape. They weren’t.

Every time their income went up, so did their spending. By the time they reached out to me, they were living in an expensive house they couldn’t afford, they had six figures of credit card debt, and some of their bills had gone to collections.

From the outside, they looked successful. Their financial file told a very different story, though.

The problem was that they had never learned to save money. Every dollar that came in became a reason to spend more.

Their lifestyle hadn’t just crept up over the years, it had bloated.

Clearly, making more money won’t guarantee financial strength.  It can be terrific, but it’s not the most important factor in creating a solid financial foundation for yourself.

The most important number in your finances

If you track nothing else in your money management system, track this: your savings rate.

That’s the percentage of your income that you pull out of circulation – i.e. your chequing account – and place in a separate savings account, ideally at a different institution than the one that holds your chequing account.

Behavioral economics teaches us that the less you see your savings on a daily basis, the less tempted you will be to tuck into them for discretionary spending.

Here’s how to calculate your savings rate:

Let’s say that you earn $75,000 per year, after tax, and that you put $5,000 into your savings account last year, where hopefully you directed it to one of three uses: planned spending, Emergency Fund, and investments.

Your savings rate for the year would be as follows: [$5,000 ÷ $75,000] x 100 = 6.66%. That’s the percentage of your income you would have saved in this scenario.

What does that percentage mean? Nothing in and of itself. You have to view that number in context.

Here’s the question you want to ask yourself: “How much money do I need to get to my Freedom Number – that point where work becomes optional, which could be retirement or sooner if I choose?”

Once you know your Freedom Number, you can work backwards to figure out how much of your income you need to save every year. That’s where you savings rate becomes important. It will let you know in a hurry if you’re on track to meet your goals.

Most people aren’t saving anywhere near the amount they’ll need simply because they prioritize spending over saving. That’s not what they’d tell you if you ask them, of course, but when saving is done with the leftovers after all the monthly spending, that’s what it boils down to.

Why your savings rate matters – a *lot*

In his book The Psychology of Money, Morgan Housel made a compelling case for increasing your savings:

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

He went on to say,

Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more….

Savings is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.

And there you have it: No one knows what the future holds. Having wealth, built up by savings, is your insurance policy and it provides you with great options regardless what life throws your way.

Anyone who has experienced a “life happened” moment knows exactly what I’m talking about.

Unexpected events happen to us all. Cranking up your savings rate is the best way to ensure you are ready to jump on opportunities or protect yourself with solid options when the tide turns the other way.

How much should I save?

I don’t know how many financial files I’ve seen over the decade and a half that I’ve been working in personal finance, but here’s what I can tell you: most people I’ve worked with have a savings rate well below 5%.

One of the reasons for that is that with the advent of easy access to credit in the mid-20th century, we’ve lost the habit of saving money.

It’s sooooo easy to spend money, with the tap of a cell phone or a piece of plastic, or one click of a mouse, that unless you create an intentional, systematic spending and saving plan, you will default to spending first, saving later.

That rarely works out well.

What that leads to is people approaching retirement suddenly realizing they are nowhere near their freedom number and feeling panicky about the future.

The good news is that you can change that starting right now. Below, I’ll share my top tips on increasing your savings rate.

But first, let’s talk about how much to save.

The flippant answer would be to save more than you do now. That would be a start. Seriously.

Ben Carlson, who writes a great blog called A Wealth of Common Sense, suggested that getting your savings rate into the double digits is a great place to start.

Carlson’s advice lines up with David Chilton’s advice in his classic book, The Wealthy Barber, in which he made a case for saving 10% of your earnings.

Will that be enough? You won’t know until you calculate your Freedom Number and the amount of time you have left to save and invest. But it’s a great place to start.

My husband and I currently save 50% of our income. Every month, we deposit one salary cheque into our chequing account and the other in our high interest savings account.

From there, most of the saved funds are directed into our Questrade investment accounts. Smaller portions are attributed to planned spending, such as trips, planned repairs, and university costs for our older daughter.

We’ve made this work because we are intentional about our spending, saving, and investing.

Here are the strategies we used to get here, which are based on the money management system I teach.

6 Strategies to Grow Your Savings Rate

1. Every month, spend your dollars in this order:

• • Pay for ESSENTIALS first – things are necessary for your survival.
  • Next, pay for PRIORITIES – corrosive debt payments, savings and investing, and expenses that are congruent with your core values. An advanced move would be to automate your savings. Take the money out of the chequing account before you even see it.
  • Everything else – once the Essentials and Priorities are taken care of, do whatever you like with the rest.

With this approach, you start with savings and then move on to discretionary spending. Saving money is no longer an afterthought.

2. Run all spending decisions through the Values Filter:

Is that expense congruent with your core values? If so, proceed. If not, give it a pass.

3. Set a rule for all new money coming in from your work, including bonuses, raises, and tax refunds:

• • 90% or more goes straight to long-term saving and investing; the rest can be used for short term use. This avoids lifestyle creep and prioritizes building wealth with additional funds. Remember the story of Wendy and Matt when you’re tempted to spend your tax refund. For the latter, I recommend investing 100% of it.

4. Go through your recurring expenses and reduce or eliminate anything that isn’t in line with your values.

That will immediately put money into your pocket. It’s amazing how much cash you free up when you start to rethink spending that’s on automatic.

5. Find ways to earn extra money that goes straight to savings:

• • through occasional gigs – house sitting, dog-walking – or through building a side hustle using your skills – consulting, coaching, etc.

Adding an extra source of income can make a significant difference to your bottom line, especially when you earmark that income for saving and investing.

6. Plan to increase your savings rate incrementally

Turn saving money into a game in which you increase your savings incrementally over a period of time.

Maybe you decide to increase your savings by 1% every quarter this year. That’s just one possibility. Choose a period and a percentage increase that makes sense for you and go!

You probably won’t even miss the money since it’s disappearing out of your spending in small increments, but it will add up to a great deal over time. Plus, you’re reprogramming yourself to save more in an easy-to-maintain way. Double win.

Block out some time in the next week to calculate your savings rate and choose at least one of the strategies above to implement starting right away. Let me know what you come up with.

If you’re a member of my Women’s Money Group, you’re probably already doing this since it’s central to the money management system I teach.

WMG members: If you haven’t done it, you can use the WMG Money Tracker spreadsheet to fill in your income and your spending. The savings rate is calculated automatically for you – easy peasy!

Shoot me an email to pass on your tips and strategies to save money. I’ll share them on my Facebook page (anonymously if you wish). Let’s get the savings train rolling full speed ahead!

*not their real names