As a whole American’s have been saving less and less.
Back in the 1980’s our savings rate was in the double digits, but each passing year it went lower and lower. In October or 2001 it was a measly .9%. While we are a bit better today, November 2012 was 3.6%, this is not even close to where we need to be for financial health.
This savings rate barley gives us enough to handle emergencies and makes us as a nation weaker.
Do you know how much you are saving? Here we are going to take a look at how to calculate your personal savings rate and how to determine what to include in the calculation and what your target savings rate should be.
What is Your Personal Savings Rate?
The personal savings rate is the percentage of your income that you put into savings.
The basic math is take how much you saved for the time period you are looking at and then divide that by how much income you had during the same time period and then multiply by 100. This will give you your savings rate as a percentage.
Example: $2,000 savings divided by $20,000 income equals .1 then multiply this by 100 giving you 10. Your savings rate is 10 percent. (Scroll to the bottom of this for the video version).
Factors to Take Into Consideration When Calculating Personal Savings Rate:
The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent. (Side note: to me this makes the savings rates from above even scarier, because it includes debt payments, therefore in reality we are not saving much at all!)
Let’s take a look at a couple of these items that you need to consider when calculating your savings rate.
Before Tax or After Tax
I personally calculate my savings rate on my before tax. Why? Because I am still going to have to pay taxes when I retire so I will continue to need enough to cover taxes. Therefore I calculate my minimum 10% savings goal on before tax income.
When deciding if you want to calculate your rate based on before or after tax, take into consideration that the after tax amount will always change based on tax rate changes. It is easier to plan for savings and calculate your personal savings rate based on your before tax income.
What Savings to Include:
I think it is extreme to include very thing that was not consumed. For a couple reasons:
- I do not consider paying off debt to be savings. To me is more about paying for expenses that have already been consumed, it is not saving money that you will have access to later in life. It frees up your income to do more savings, but it is not savings.
- Just because it was not spent does not mean it is necessarily being used for long term wealth goals. To me the reason we are saving is to build long term wealth. Some of those funds not spent may have gone to emergency funds or for purchases later. While these are necessary things to save for, I don’t consider them part of my savings rate.
Remember that when you hear the recommendation to save 10-15% of your income it is a recommendation for retirement, not for everything you will need to cover. Your savings rate will need to be larger than that if you want to have an emergency fund, money to send your kids to college and savings for other large purchases.
Is it Important to Track Your Savings Rate?
If your only goal is retirement and you are only saving in your 401K, then it might not be necessary to worry about this calculation. Your savings rate should be what you are putting in from your paycheck. If you are saving for anything else, saving in multiple places or have income that varies it would be beneficial to figure out what your personal savings rate is.
This does not have to be every month, but you should at least do it on a yearly basis to make sure you are on target. Add it in with your final balancing at the end of the year, or with your taxes. Doing a quick check to make sure you are saving the right amount will help you a ton at retirement. Especially if you have income that is different every year such as the self employed or commission employees.
I have an excel file that I use for many financial purposes, one of which is to track my ongoing savings rate. Below is a picture of what you could set up to track yours.
Determining Your Goal Savings Rate:
I recommend that you really only set a percentage target for retirement savings. You can read more about what that should be here: What to Save for Retirement.
For other financial goals, I believe it is easier to set a specific amount you are targeting and then set up a monthly goal until you achieve it. For example: with emergency savings instead of trying to save 1% of your income, you might have a goal of saving $5,000 by saving $25 a month. Most of the non-retirement goals are more about a specific number than trying to replicate an income, therefore a specific amount each year is more useful.
I only ever work in after tax dollars as that way at the end of the year when I get my tax cheque i have a nice little lump sum payment to play around with.
Last year my wife and I saved over 50% of our after tax income. This year I think it will be closer to 10% as she is taking the entire year off to look after our new born.