Your Savings Rate: Why and How to Calculate

Calculating your personal savings rate is one of the best ways to see how well you’re doing financially and how quickly you can expect to reach financial independence. It’s also one quick and easy measure of how this year compares financially to prior years. 

What is a Savings Rate? 

Your savings rate is the amount of money you save from your total income instead of spending it. Savings can be in many forms.

You might stash some in an emergency fund, retirement plans such as a 401k or IRA, college savings account, or principal paydown on your house.

To calculate your savings rate, you simply divide the amount of money you save each year by your total income. You can calculate your savings rate based on your gross (pre-tax) or net (after-tax) income. 

Why it Helps to Know Yours 

Why is it important to know how much of your gross or after-tax income you’re saving?

The short answer is your savings rate is a straightforward way to grade yourself on how you’re doing financially. It also tells you how quickly you’ll be financially independent. 

While inflation, the stock market, or the price of groceries is out of your hands, you may have more control over how much of your income you save.

And increasing your savings rate has a double benefit–not only are you saving more for Future You, but you’re also decreasing the amount of money you need to live on.

This will produce ripple effects on your future. If you learn how to cook and eat more meals at home, you’ll be able to carry that skill forward into your future and continue to spend less on your food budget. 

Gross versus net

To calculate your savings rate, you need to understand the difference between your gross and your net income.

Gross income is your total income before your employer deducts taxes, 401k contributions, or insurance premiums.

To figure out your yearly gross income, take the annual income you receive from employment and add any additional payments you get, like alimony, dividends that you keep and don’t reinvest, or pre-tax bonuses. 

Some people add retirement matches (like 401k matches your employer gives you) into gross income totals. You can decide if you’d like to add in cash gifts that you receive for your birthday or Christmas, for example, or any stock or ESOP gifts you receive as part of your compensation.

Think of your gross income this way: 

Gross income= yearly income + bonus(es) + dividends + alimony + 401k match

Your net income is your income after you subtract taxes and insurance premiums but not retirement contributions. 

So, look at net income this way:

Net income= Gross Pay + your 401k/403b contributions + Employer contributions + gifts – taxes and insurance

The reason you add your 401k contributions back into your net income is to account for the fact that they would be part of your net income if not taken out as pre-tax contributions in your paycheck. 

After you’ve figured out both your gross and net incomes, it’s time to calculate your savings rate.

What savings should you include in your savings rate?

Include any retirement savings, whether it’s deducted from your paycheck or saved elsewhere, and any other savings.

This may include funds you send to a child’s 529 account, the money you contribute (but don’t spend) in your HSA account, the principal amounts of your mortgage payments since those pay down your house and increase your net worth, or money you add to your emergency fund.

Total Savings= 401k contributions + IRA contributions + mortgage principal + college savings + taxable investments + HSA savings + other savings accounts

Now, divide your total savings by your net income to get your total savings rate and multiply by 100. 

Savings Rate = (Total Savings / Net Income) x 100

If your net income is $50,000 per year, and you’re saving $15,000 per year in total, your savings rate is $15,000/ $50,000, or .3, which is a savings rate of 30% (.3 x 100). 

Net Worth: How to calculate and grow yours

How Much Should I Save?

While there is no perfect savings rate for any one individual, you should know that the more you save, the faster you'll reach financial independence. And while your rate of return plays a role the more years you have to save, the less you need to stash away each year to reach your retirement or other savings goals. 

The US Bureau of Economic Analysis calculates the average US savings rate at 9.4% as of June 2021 (this includes contributions to retirement accounts).

Still, most financial experts recommend saving at least 10-20% of your personal income as a rule of thumb, depending on your age (if you’re in your 20s and have just started saving, you can save closer to 10%, and if you’re in your 40s and are just starting, you likely need to hit a monthly savings rate of 20% or more).

If you can hit a saving rate of 50% of your income or more, you’ll drastically reduce the number of years it will take to reach financial independence. 

How Can I Save More?

While you may be frustrated with your lack of ability to save, increasing your savings rate even by a percentage point or two each year can make a significant impact down the road. 

Consider Tax Implications

If your employer offers a 401(k) or 403(b) plan and you don’t currently contribute or contribute less than you’d like, try increasing your contribution by one or two percent.

Because the money you contribute to traditional retirement accounts is tax-exempt, your paycheck will go down less than the amount you’re contributing, as your total taxes paid will go down as well. 

Plus, if your employer offers a match, you may be able to double the impact of your savings when you contribute up to the match. 

Automate Your Savings

In addition to saving through a retirement account at work, you can save money for your future through an IRA or Roth IRA.

Since it can sometimes be challenging to remember to contribute to your individual retirement account, consider setting up an automatic monthly draft for your savings.

Establishing an automatic transfer of a set amount to your IRA each paycheck or each month ensures it gets done without you having to add a to-do item to your list every time. 

Consider a Side Hustle

Aside from increasing your income at your main job, earning income from a side gig is a great way to increase your savings rate.

By dog sitting, delivering food for UberEats, or even freelance writing, you can earn extra income that can go straight to your savings. Save your side hustle income, and you’ll increase your savings rate. 

Bottom LIne

The more you’re able to save, the faster you’ll be able to reach your financial goals, whether those are paying off debt, increasing investments, or retiring early.

Don’t discount the power of minor changes to your earning and saving–even small incremental earnings and savings can supercharge your ability to save and invest.

Target a savings rate that takes into account the time frame you have to work with. The shorter your time frame the higher your rate needs to be.

Even if it feels like an uphill climb, consider pursuing goals to increase your savings rate by 1-2% per year. In 10 years, you’ll have worked up to a savings rate of up to 20% more than you already save, and chances are, you won’t even notice the difference to your bottom line. 

Next: Financial Planning: What, why, and how to do yours