How do you calculate your savings rate? Why is a savings rate important? When it comes down to it, the reason for – and the math behind – your savings rate is quite simple.
To calculate your savings rate, divide your monthly savings by your monthly income, and multiply by 100 to get your savings rate percentage. For example, if you had $1,000 in savings and $4,000 in income each month, your savings rate would be 25% ($1,000 / $4,000 = .25 or 25%). This calculation also works annually. If you had $12,000 in savings and $48,000 each year, your savings rate would be $12,000 divided by $48,000, or 25%.
A savings rate is integral to helping you map out your personal finances. It helps you understand what you’re saving, and will help motivate you to find ways to increase your savings rate. Doing so will help you reach financial independence sooner.
How to Calculate Your Savings Rate
Let’s break down how to calculate your savings rate into three easy steps. First, find your savings amount. Second, divide it by your income. And third, multiply that decimal by 100. For this example, we’ll use yearly calculations.
First, Find Your Savings Amount (Income – Expenses). To calculate your savings rate, you first need to determine how much you’re saving each month or year. A simplified calculation of your savings amount can be done by subtracting your expenses from your income. If you had an annual salary of $50,000 and $45,000 of annual expenses, your savings amount would be $5,000 ($50,000 – $45,000).
Second, Divide Your Savings Amount by Your Income. Continuing our example, your savings amount ($5,000) now needs to be divided by your income ($50,000). Dividing $5,000 by $50,000 gives you a result of 0.1.
Third, Multiply by 100. The last and final step is the easiest – multiply your calculation above by 100 in order to turn your decimal into a percentage. 0.1 x 100 = 10, or 10%. With a savings amount of $5,000 and an annual income of $50,000, your savings rate is 10%.
For convenience, here’s a chart on additional savings percentages given a constant annual income of $50,000.
| Annual Expenses | Annual Income | Annual Savings | Savings Rate (Savings / Income) |
| $50,000 | $50,000 | $0 | 0% |
| $45,000 | $50,000 | $5,000 | 10% |
| $40,000 | $50,000 | $10,000 | 20% |
| $35,000 | $50,000 | $15,000 | 30% |
| $30,000 | $50,000 | $20,000 | 40% |
| $25,000 | $50,000 | $25,000 | 50% |
| $20,000 | $50,000 | $30,000 | 60% |
| $15,000 | $50,000 | $35,000 | 70% |
| $10,000 | $50,000 | $40,000 | 80% |
| $5,000 | $50,000 | $45,000 | 90% |
| $0 | $50,000 | $50,000 | 100% |
Gross Income vs Net Income When Calculating Your Savings Rate
Using gross income to calculate your savings rate is an easier way to do the calculations, since you may not know your true tax liability (and therefore, your actual take-home pay) until your taxes are fully paid. Gross income simplifies your savings rate: $50,000 annual income (salary and any side income) and $40,000 annual expenses = 20% savings rate ($50,000 – $40,000 = $10,000; $10,000 / $50,000 = .2 or 20%).
A simple way to calculate your savings rate using net income would be to use your monthly paycheck totals as your monthly net income, subtracting your monthly expenses, and adding back in any pre-tax savings (401(k), IRA, or other pre-tax contributions). For example, if you were paid twice a month, and received $2,000 each pay period, you would have $4,000. If you contributed $1,000 each month into pre-tax funds, add that amount back to your pay period totals to get a total of $5,000 of net income (since you’ve made the money, but have already saved it). If your expenses were $1,000 each month, divide $5,000 by $1,000 for a savings rate of 20%.
If you’re in a higher tax bracket, using gross income may cause you to think you have a higher savings rate. Let’s say your annual income is $200,000, which puts you in the 32% tax bracket. Your take home pay would be $136,000. If you saved $28,000 you’d have a savings rate of 20%. However, if you used $200,000 as your income, you’d calculate a savings rate of 14% instead.
Why is a Savings Rate Important?
Your savings rate is an important personal finance calculation because it helps you understand the impact of your savings on your retirement. As a general rule, the more you save, the sooner you will be able to retire. So the higher your savings rate today, the sooner you can reach financial independence tomorrow.
A popular post by Mr. Money Mustache made savings rates so popular because he was able to generalize the amount of time it would take for someone to reach financial independence. His chart is broken down below, and is based the following assumptions:
Your calculations are based on a current net worth of zero
Your financial independence number is based on the 4% rule
Your expected return is 5% (adjusted for inflation) on your investments
| Savings Rate | Working Years Until Retirement |
|---|---|
| 5% | 65 |
| 10% | 51 |
| 15% | 42 |
| 20% | 36 |
| 25% | 32 |
| 30% | 28 |
| 35% | 24 |
| 40% | 21 |
| 45% | 19 |
| 50% | 17 |
| 55% | 14 |
| 60% | 12 |
| 65% | 11 |
| 70% | 9 |
| 75% | 7 |
| 80% | 6 |
| 85% | 4 |
| 90% | 3 |
| 95% | 2 |
Breaking this down further, the idea is that the amount you’re saving each year is growing by 1) your contributions, and 2) the compounding gains of your investments (5% in this example). If we were to look at the numbers assuming a $50,000 annual salary, they would look like this.
| Annual Income | Annual Savings | Savings Rate | Annual Expenses | FI Number (Annual Expenses / 4%) | Years to FI |
| $50,000 | $25,000 | 50% | $25,000 | $625,000 | 17 |
| Year | Savings | Contributions | Growth | Year end balance |
| 1 | $0 | $25,000 | 5% | $26,250 |
| 2 | $26,250 | $25,000 | 5% | $53,813 |
| 3 | $53,813 | $25,000 | 5% | $82,753 |
| 4 | $82,753 | $25,000 | 5% | $113,141 |
| 5 | $113,141 | $25,000 | 5% | $145,048 |
| 6 | $145,048 | $25,000 | 5% | $178,550 |
| 7 | $178,550 | $25,000 | 5% | $213,728 |
| 8 | $213,728 | $25,000 | 5% | $250,664 |
| 9 | $250,664 | $25,000 | 5% | $289,447 |
| 10 | $289,447 | $25,000 | 5% | $330,170 |
| 11 | $330,170 | $25,000 | 5% | $372,928 |
| 12 | $372,928 | $25,000 | 5% | $417,825 |
| 13 | $417,825 | $25,000 | 5% | $464,966 |
| 14 | $464,966 | $25,000 | 5% | $514,464 |
| 15 | $514,464 | $25,000 | 5% | $566,437 |
| 16 | $566,437 | $25,000 | 5% | $621,009 |
| 17 | $621,009 | $25,000 | 5% | $678,310 |
A Savings Rate Isn’t Always a Silver Bullet
These calculations are incredibly helpful when charting your way up your financial mountain. However, it’s important to remember the underlying assumptions behind the math (a 5% return adjusted for inflation and the 4% rule). The 4% rule states that the amount you need for retirement (or the amount you plan to withdraw in retirement) is 25x your expenses. The amount of money we spend isn’t as linear as we’d hope it to be. You may be spending less now, and could be spending more in a lavish retirement. If you were to begin spending more in retirement, you’d deplete your nest egg faster than the compounding gains of your investments can produce.
Additionally, if you’re saving your money in something that doesn’t provide you as high of a return, you’ll effectively need to spend more working years saving up for your nest egg. If you’re not investing or receiving any type of return, it will take you even longer.
Per the example above, the assumption is that an individual’s annual expenses are $25,000. It becomes increasingly more difficult to spend less and less, especially if you have a family. If you can’t get your expenses down to a certain level to achieve a particular savings rate, you’ll need to find ways to increase your income overall. That comes with additional complexity of finding ways to make more money.
Summary
Remember, To calculate your savings rate, divide your monthly savings by your monthly income, and multiply by 100 to get your savings rate percentage. Your savings rate is important because it helps you track the climb up your financial mountain. It isn’t a perfect silver bullet, but if you keep on top of your expenses, savings, investments, and overall financial independence goals, you’ll be able to reach your summit.
More Savings Rate Articles
If you’re hungry to learn more about your savings rate, we’ve put together a comprehensive guide for you that will teach you everything you need to know.
Ultimate Savings Rate Guide: Everything You Need to Know
Looking for deeper dives on a particular subject? Check out the rest of the articles from our Savings Rate series.
Savings Rate 201: How to Beat the Savings Rate Next Door
Savings Rate 301: Avoid These Pitfalls With Your Savings Rate
Savings Rate 401: How to Determine the Best Rate For You
Savings Rate 501: The Best Ways to Increase Your Rate
Savings Rate 601: Increase Income or Cut Expenses?
See you at the top of your financial mountain.
Climb on, FinBase.
