How to Calculate your Personal Savings Rate.

You hear statistics on the news or on social media saying you should be saving XX each month. But what does that really mean to you when it comes to your personal savings each month? Let’s look at how to calculate your personal savings rate and what that rate can tell you!

What is a savings rate? 

A savings rate tells you what percentage of your income is going into savings for a certain time period. This can be useful to you, as an idea of what you are saving each month or year with the assumption that the remainder of your funds is then being spent on debt repayment or living expenses. 

It sounds simple, but there are some potential pitfalls and calculation nuances to watch out for. While you read this, make some notes as to what choice you will be making so you can be consistent in how you calculate your personal savings rate from month to month or year to year. 

How to calculate your personal savings rate.

How to calculate your personal savings rate is a simple formula. 

The dollar amount you put into savings divided by your income in dollars then multiply by 100 to get a %.

Amount added to savings

Income

An example would look like this:

I earn a gross salary of $5,000 a month. I make the following contributions to my savings or retirement accounts:

• $500 to my 401k (no match)
• $300 to my long term savings account
• $200 to my vacation savings account
• $350 to my sinking fund account

I contribute $1,350 to savings each month, and my income is $5,000 each month. Dividing those two numbers gets me 0.27, and converting it to a percentage is 27%. 

There are some nuances to this calculation in the real world, and some ways you can make this information work better for you. 

Time period

I usually think about my savings rate in either monthly or annual terms. Monthly, means my monthly income is divided by my regular monthly contributions to retirement accounts and other savings. Annual means I take all of my yearly income and divide it by all of the savings and retirement contributions made during the year. 

Both annual and monthly personal savings rates are important, especially if you have some “lumpy” savings during the year. This may mean you get a large bonus during the year and save a high percentage of it, or you fund your IRA in full once a year with a windfall.

In the example above, I don’t list my IRA savings. Maybe I fund my IRA with my bonus each year, so that isn’t getting factored into this savings rate for the month. 

Short term vs long term

You probably have different savings goals and timelines for the money you are saving? Some are short-term (like the travel fund to go somewhere amazing this summer!). Others are long-term, as a downpayment fund for a house or retirement savings.  

In the example above, I would say my short-term savings rate is 11% and my long-term savings rate is 16%. How you classify savings between short-term and long-term is up to you, just make sure you keep it consistent each time you do the calculation.

Savings funds for expenses

We just talked about sinking funds, but should you include the money you contribute to a sinking fund in your personal savings rate calculation? It will be spent on your annual expenses, within the next year. There is no rule for this. You do you!

 If you want to include it, then go ahead and do so. It is part of your savings each month. The key for a decision like this, once you decide to either include it or exclude it from the calculation, you have to keep it the same way going forward. Your savings rate will change and be less meaningful if you include it this month and exclude it next month. Pick one way and stick to it!

Do you include money others contribute for you?

How do you factor in the money that someone contributes to savings on your behalf? The most common example of this is an employee match into your retirement account. The employer puts it directly into the account for you. 

1. Include the match amount in your savings contributions and don’t include it in your income.
2. Include the match amount in your savings contributions and do include it in your income figure. 

I do option one for my calculation. Lots of personal finance experts have opinions on this, but either option is ok. Pick what you prefer! The key is to pick the method you use, and stick to it! Your percentages will fluctuate and be difficult to compare if you do option one for a month/year, switch to option two, and then switch back. 

What your personal savings rate can tell you.

There are some key pieces of information you can take from calculating your personal savings rate. This information is useful the first time you do this calculation, but it becomes even more interesting when you have multiple months or years of data to compare! 

Lifestyle creep

Lifestyle creep or lifestyle inflation is where you start spending more money, unconsciously, as your income goes up. Here is a more in-depth piece on it.  

You know I am a giant numbers nerd, so my personal savings rate is one of the things I calculate each month and each year as a part of my money meetings and the main purpose is to identify lifestyle creep.

If you have 6 years of annual savings rate data, that looks like 20%, 23%, 22%, 26%, 14%, 16%. What happened between years 4 and 5? 

This is where lifestyle inflation can really show up. Someone gets a large raise between years 4 and 5, but they don’t adjust their monthly savings or retirement contributions and end up spending their entire raise on inflated living expenses. That can be a fine choice if it is done intentionally, but often it is an unpleasant surprise and means missing out on financial returns. 

Retirement savings rate

Often your retirement savings rate is referenced in determining how much of your income you are saving for retirement. 

This rate is very similar to the personal savings rate, but it only factors in your contributions to retirement accounts and excludes any non-retirement savings accounts. For the example I used above, the retirement savings rate for the month would be 10%. 

This is often more useful as an annual number since contributions or matches can happen once a year in some cases. 

Debt payment rate

This rate is very useful to know, especially if you are aggressively paying off debt. This calculation takes the amount you pay towards debt (both principal and interest) and divides it by your income to get the percentage of your income used for debt repayment.

As you get closer to paying off all of your debt, this is a great figure to know so you can decide what you will do with the money once your debt is paid off, ideally, it should be split between increasing savings or retirement contributions and increased intentional spending. 

What is next?

Now when you hear someone talking about a personal savings rate or a debt repayment rate, you will have an idea of what yours is. There are as many opinions about what your personal savings rate should be as there are “financial experts” in the world! 

I don’t have an answer, it depends on your financial situation, financial values, and lifestyle. There is always someone who will be saving more than you, it is not a competition! Figure out what you can afford, and start there. Then each time you get a raise or a windfall, add a little bit more to your savings. 

Don’t make it overly complicated or fit exactly into a “rule”. Do what feels right for you!

So, I would love to hear from you! Do you have any questions about how to calculate your personal savings rate? Is this a rate you calculate for yourself regularly or is it new to you? I would love to hear your thoughts in the comments below or over on our Instagram page! 

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