In my last blog post, I talked about my 2016 Savings/Investing Plan. I stated I wanted to increase my 2015 Savings rate from 15% to 44% in 2016.
What is the Savings Rate? Your Savings Rate is a percentage of your savings to your income. Simply put, your savings rate is your total savings (including retirement account contributions) divided by your after-tax income (plus added back pretax retirement contributions).
Why is it a Dirty Little Secret? The personal savings rate is not something a lot of people keep track of or discuss. I find it more common for people to discuss how much they make vs how much they save/invest.
Let’s take the following example:
You have a take-home pay was $45,000 after taxes and retirement contributions are taken out in 2015. You contribute $5,000 to your 401k Plan, your company contributes $4,000 to your 401K and you also save $3,000 in a savings account in 2015. What is your savings rate?
Step 1: Figure out your savings total, which would be all of your savings (pre-tax and post-tax accounts) including retirement contributions and employer match contributions.
In the example above, its :
$5,000 + $4,000 + 3,000= $12,000
Step 2: Figure out your take home pay plus pre-tax retirement contributions taken out (including company match)
$45,000+ $4,000 + $5,000 = $54,000
Step 3: Divide the Savings Total by the Take Home Pay Total
In the above example, your savings rate would be 22%.
In the case of my savings rate, I chose to include the principal payments made on my primary mortgage. Some people choose not to include principal payments made to their mortgage. I like to include it because paying down my mortgage before the maturity date is one of my overall goals.
The OLD general rule of thumb is that a 10% savings rate is good but it all depends on your personal financial goals. If you want to grow your net worth quickly or retire early, the higher the savings rate, the better. The folks that aim to retire in their 30’s and 40’s using a savings/investing model usually have a savings rate of 50% or higher. That can be too high for some people who live in a HCOL area or who have higher expenses they are just not willing to cut.
I get it. If I could swing it, I would like my savings rate to be at least 50% but at this point in my life, it’s just not doable. Not only do we live in a HCOL area, but we just aren’t willing to live on the bare minimum just yet. My husband and I enjoy going out to eat a couple times a month and still want to enjoy some of the fruits of our labor. My goal is to push our savings rate to the limit and find that line of investing/saving aggressively for our future and enjoying life in the meantime. That means cutting out the unnecessary fluff from our budget but still allotting money towards things that bring us joy.
It’s important to know your savings rate because it gives you a figure by which you can measure your savings goal. Knowing this number can help you grow your net worth and plan successfully for retirement. The higher the savings rate, the better and because the savings rate is a percentage, it doesn’t really matter how much you make, all that matters is what percentage of take-home pay you save.
For example, if Person A takes home $200,000 and saves $10,000, their savings rate of 5%. Person B makes $60,000 and also saves $10,000, their savings rate 16.7%. Person B savings rate is 3x more than Person A.
At the end of the day, it’s not about how much you make but how much you can save/invest that truly determines your wealth.
So what’s your savings rate?
I challenge you to figure out your rate for last year and set a target savings rate for this year. Let’s call it the “Dirty Little Secret Challenge” and hold each other accountable at the end of the year when we review how we did.
What did you save last year and what is your target savings rate for this year? Come on, let me in on your dirty little secret…