How To Calculate Your Savings Rate

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What Is A Savings Rate?

Very simply, your savings rate is how much money you save instead of spend, as a percentage of your income.  Your savings rate tells you the percentage of your income that you’re saving instead of spending.

You can save money in a number of different ways, some of which you may not have thought of.

The obvious savings options are putting money into a savings account, investment account, or retirement plan.  

Or perhaps you’ve got a drawer full of change or a wad of cash under your mattress.  

Those last two “savings vehicles” are not going to get you a big return, but something is definitely better than nothing, so you do you. 

Why Is It Important?

Knowing your savings rate, even a ballpark number, can give you a whole new level of clarity about your finances.

You can easily figure out how long it will take you to achieve whatever money goal(s) you may have.

We could be talking about saving for a vacation, funding your retirement, wanting a new car, the downpayment on your dream home, braces for your kids, the list is endless.

You can figure out your savings rate and then decide to adjust it if you want.  

If you see how long it will take you to save for a vacation and you want to get there sooner, you can adjust your budget a little bit to make it happen.

Maybe you find out that you’re saving for your kids’ college faster than you expected and you can redirect some of the money to another purpose or savings goal.

Or your savings rate tells you you’re right on track for your goals and the timeframe you want to achieve them, so you change nothing.  Everything stays the same but you have new peace and comfort about your finances, knowing everything really is going to work out.


The huge reason for knowing your savings rate is so you’ll know when you’ll have enough money to retire.  

You’ll know how much money you need to retire, and how long it will take you to save it.

Even if you plan on spending your very last day at work (I don’t know too many people who actually have that plan), any number of circumstances could change to make you re-think that plan down the road.

If that is your plan, it’s always nice to have a backup plan.  Aka, retirement savings.

Mr. Money Mustache wrote a very simple post years ago called, “The Shockingly Simple Math Behind Early Retirement“.

If you take a look at the chart in his article, you’ll learn that even if you don’t want to retire “early”, and do plan on working for 40 years, you still need to have about a 15%-20% savings rate to make sure your nest egg is large enough to outlive you.

It’d be a damn shame if you ran out of money before you ran out of life, right?

Do you know what your savings rate is right now?  Does it support your long-term work/retirement goals?

Are you planning on footing the bill for your kids’ college?  Does your daughter have a $50k wedding in mind?  (Don’t laugh, if you don’t know, weddings can be ridiculously expensive without even realizing it.)

How Do I Figure Out My Savings Rate?

The good news is, calculating your savings rate is a very simple equation.

Savings Rate = (Savings / Income*) x 100

Or, if you don’t know the amount of money you’re currently saving, try this one:

Savings Rate = ((Income* – Expenses) / Income*) x 100

*Important Note One: Income here is referring to after-tax income.  Where it says “income” you need to use your after-tax income, not your salary.  (This works in your favor.)

You can find your after-tax income by using the amount of your paycheck that actually shows up in your checking account, or by subtracting your tax liability from your salary.  The former is probably easier.

**Side note to important note one: you can absolutely use your gross income (salary) instead of your after-tax income.  Personal finance is personal, after all.  You have some control over what you pay in taxes, but not much really.  That’s not an area of your budget you can “cut spending” in to increase your savings rate.  I recommend using your net or after-tax income when calculating your savings rate.

Important Note Two: If you’re contributing to a 401(k), TSP, or any other pre-tax retirement vehicle and the money is taken out before your paycheck shows up in your checking account, that money needs to be added back to your income and your savings numbers.

It’s still money you’re “taking home” even though you don’t see it, and it’s still money you’re saving, even though you don’t see it.  Leaving it out of both numbers will give you a different ratio than adding it back to both numbers.  The latter is the correct savings rate ratio and also works in your favor.

I have no idea how much I’m saving or what my expenses are

If you happen to not have a clue how much you’re actually saving or spending, then using either of the two equations above is going to be quite difficult.

If you primarily spend money using a credit card, go through your statements and you can get a good idea of how much money you spent in a given period of time.  

If you’re primarily a debit card or cash user, the same can be done with your checking account statement.

Since we have a budget and track our spending, we know how much money we have coming in and going out each month.  I can figure out our savings rate for the month fairly easily.  

However, since spending fluctuates and certain bills only come up annually, etc. we look at our savings rate more on an annual basis, as an average for the year.

You can go back through a year’s worth of statements and get a big picture look now.  That has the potential to be time-consuming.

If you’re new to this, I’d recommend looking at the last month or two and figure out your spending and saving, so you have a rough idea of your starting point.  

Then set up a system to track your spending, or perhaps even a budget.  Then this only gets easier going forward.

I talk about some popular platforms to make your life easier here and here, with YNAB and Personal Capital being my two favorites.

Your Mortgage Payment

For those of you who have a mortgage, or mortgages.  There is an argument to be made for adding the principal part of your mortgage payment to your savings number, as well.

This makes the most sense to me if you own investment properties.  

Their purpose is not to put a roof over your head, but to put a roof over someone else’s head and make you money.

You can absolutely account for your mortgage payment of your primary home too though if you wish, it doesn’t have to be a rental property.  It’s all up to you.

The interest part of your mortgage payment is the bank’s money forever.  That’s what you pay them for borrowing their money.  It can be helpful come tax season, but you never actually get that money back.

The part of your payment that goes towards the principal, however, is still technically your money.

Sure, it’s tied up in an illiquid asset and you can’t get the money back out easily in a pinch, but that payment goes into the equity of your house.  

If you sell the house, assuming you’re not underwater in your loan, you will get that money back.

Since it’s your money still, it’s building equity in your home now and you can get it back later, you can certainly add it to your savings column instead of your spending column.

If you’re calculating your annual savings rate at the end of the year, depending on your mortgage company, you may be able to pull the total payment that was applied to the principal of your loan off of your Form 1098 you receive from your mortgage company for your taxes.

Some lenders have the total principal paid right there, some require you to do some digging to find it or maybe even calculate it.

If you’re calculating your monthly savings rate you can get the principal portion off your monthly mortgage statement.  

Or you can use an amortization schedule and have all your payments for the life of your loan laid out for you.

It requires a little bit more work, but not much and will also probably make you feel better too, as you watch your savings rate go up, legitimately.  

You just have to remember that this part of your savings isn’t sitting in an account somewhere, you’re living in it instead.

Now What?

Now that you know your savings rate you have to decide what to do with this information.

You have two choices:

  1. Do nothing and keep everything the same and just know what your savings rate is
  2. Do something, change something to change your savings rate

I know, profound right?

But seriously, that’s pretty much what it boils down to.

If you like your number and are happy with what it means for your saving projections, retirement plans, you’re good in your current lifestyle, etc. then now you know you’re good and party on, Wayne.

If you think you’d like to adjust or increase your savings rate a lot or a little to achieve your goals, now you have the power to do that.  

Knowing is the first step, and now you know.

What if I don’t know what my goals are?

That is an excellent question.

If you’re not sure what your long term goals are, maybe now is a great time to think about it!

You don’t have to map out every detail of your life for the next 40 years.  And if you did do that, there’s a reasonably high chance it’s not going to go exactly that way, anyway.

However, you can think about the big picture stuff you think you might like.

Do you want to work until you’re 65?  Would you like to shoot for an earlier retirement?  Maybe 55?  Maybe 37?  Perhaps you want to make sure you’ve got enough saved to put your kids through college so they don’t have to take out tons of student loans.  Or your family has been talking about taking an epic once-in-a-lifetime vacation, or a normal vacation.

Or maybe you just want to know that you’re on the right track and you don’t need to worry about money.

That is not nothing, my friends.

Ready to stop running around with your hair on fire?  Check out my free resources or schedule a free consult call to see what future you is up to.

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Written by Kayla

Stop Running Around With Your Hair On Fire


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