If you follow any financial independence writers, you will often hear talk about savings rate. The underlying principal getting a head is simple… spend less than you earn and invest the difference. That “difference,” when stated as a percentage of your total income is your savings rate. So, simply stated, if you earn $5,000 per month and save $2,500 of that, you have a 50% savings rate. The higher your savings rate, the better your chances are of reaching your financial independence goals. Fifty percent is a figure that is often tossed around but some folks in this space celebrate rates as high as 80% or even higher.
My current struggle is in figuring out how to determine my own savings rate. What figure should be used for income—Gross or Net income? How deep to you go in calculating exactly what is considered savings? There are some obvious items such as 401K contributions and money that I have auto-directed to my investment accounts but then what? Do I consider the portion of my mortgage payment that goes to principal as savings since this is paying down a debt? These questions have bounced around my head so often that I wind up being paralyzed by them and unable to commit to calculating this figure. Thus far I haven’t done this.
So, for this post, I am committing to coming up with a number. It may not be a perfect number, and some may argue for a better way to calculate the figure but at least I will have a starting point.
I will use percentages in order to maintain privacy.
|Total Monthly Gross Pay:||100%|
|Amount diverted to Investment Account:||6.75%|
|Amount diverted to Savings Account:||22.52%|
This simplistic calculation does not dissect each payment to determine if a portion is savings versus expense. But using this very quick calculation I can see that the last three entries would be considered as my current savings rate. So, adding those three items gives me a current savings rate of: 41.27%. This is certainly not as high of a rate as I believe I can achieve, but I will consider it a victory at this point in my journey.
Do you calculate your savings rate? If so, how do you go about this? Feel free to discuss in the comments. My challenge to myself will now be to explore ways to push that rate above the 50% mark. Seeing the number printed in black and white definitely adds to my motivation to tackle that goal.