It can be hard to put away money for different occasions. Most of the time, we put money away for short-term things, like for a new gadget we want, to fix something in the home, or for holidays the following year.
But we don’t very often put aside money for things that are far in the future, like our retirement.
For these times, you need a plan, and this plan should show you how to calculate savings rates.
This is because it can be challenging to do so or to keep our hands off that set-aside money due to other more critical factors happening at the time.
But what should your savings rate be when you are doing these calculations? And what even is a savings rate?
In this article, we seek to look at savings more closely and see what rates we should provide for ourselves.
What Is A Savings Rate?
When we talk about savings, the conversation of savings rates will often come up as well.
Savings rates are measurements or percentages of money a person will take from their disposable personal income that they will set aside for a specific purpose, often a nest egg or a retirement.
The idea behind a savings rate – in economic terms – is to lessen the current consumption that you can use to increase your future consumption.
This is reflected in the effort and time put into a particular savings rate.
For example, if you put a high amount of disposable income into your savings over a short period, you are making yourself much poorer for a short period to be a bit richer later.
This cash can be used as you see fit to advance your retirement plans, either as currency, bank deposits, or put into different investment schemes – like a money market fund or an IRA (Individual Retirement Fund).
Generally, this savings rate will depend on the person and other external factors – whether they get a good pension from their job or not.
How To Calculate Savings Rates?
There are a few things you need to take into account before you begin calculating your own savings rates.
The first thing to consider is that your savings rate should not impact your essential spending; it should only affect your disposable income.
For example, if you make $2000 a month, $1000 of that is on rent, and $500 of that is on essential groceries, transport, and utilities, then you have $500 as disposable income.
You can only take what you might save from that $500. If you take it from anywhere else, you are running the risk of harming your present well-being.
Once that is out of the way, you should start to look at how much you have left over at the end of the month. If the answer is nothing, you need to look at why and how you can stop that.
For example, if you go out spending all your money four nights a week, you could stand to go out maybe once a week and have $500 left at the end of the month. Could you do that?
This isn’t to say you should cut everything, as that would be inhuman. We need stress relief in our lives; maybe tone down how much you do.
Once you have decided what things you can and won’t cut out, or you have established how much money you can put towards savings, it’s time to calculate your monthly savings rate.
Generally, the rule of thumb is to spend your income after the essentials on a 50-30-20 rule, which means 50% on your needs, 30% on your wants, and 20% on your savings. However, this doesn’t always work out the way you want.
As such, we have come up with a different marker that is for your income after you’ve spent it on your needs: 60-70 percent of what’s left on your needs and 30-40 percent in your savings.
For example, of that $500 we discussed earlier – if we use the 70/30 percentages – $350 would be for your wants and $150 would be for your savings.
Now that we have that down, we can calculate your savings rate. To do this, you need to use this formula:
Your actual savings (Annual savings + employer retirement matching + your retirement contributions) / Your actual income (Annual take-home pay + retirement contributions + employer matching) = Savings rate.
To give an example
Let’s say you save $1450 annually and put $1000 away in retirement contributions, with your employer matching ideally $1000. That makes your actual savings $3450 if you are just starting.
If your annual take-home pay is $24,000, then adding all the rest together makes $26,000. So, $3450 / $26,000 = 0.13 (give or take) which we then turn into a percentage of 13%.
As such, the savings rate here is 13%, which is actually pretty low.
Realistically, for your retirement to be comfortable, you want to aim for a savings rate of about 15-20 percent if you can afford it.
This is especially true when you are younger. As you get older, more expenses begin to come up – especially medical – and you may find yourself shelling out more and more.
As such, try to pay more into your savings or have a higher savings rate when you are young so you don’t find yourself in a predicament when you are older.
Conclusion
You can calculate your savings rate by dividing your actual savings by your true income and turning the decimal number you get into a percentage.
This rate calculates how much you are saving for your retirement plan each year; from it, you can understand how comfortable it will be for you.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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