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If you're saving for a financial goal like an emergency fund or a down payment on a home, it helps to monitor your progress. Perhaps the best measure of how quickly you're able to put money away is your savings rate: the percentage of income you set aside in savings after meeting your expenses.
To calculate your savings rate, divide your monthly savings by your gross monthly income. Once you know your savings rate, you can adjust your savings habits as needed to move more swiftly towards your financial goals and security.
What Is a Savings Rate?
Your personal savings rate is the percentage of your income you save each month in a savings or retirement account or in other investments.
Say you earn $6,000 per month and direct $4,500 of it toward your bills. If you save the remaining $1,500, determine your savings rate by dividing your savings amount ($1,500) by your income ($6,000), which in this case is 0.25.
Complete the calculation by multiplying 0.25 by 100 to express your savings rate as a percentage. In this example, your savings rate is an exceptional 25%—higher than the 20% rule of thumb advised by many experts.
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Why Your Savings Rate Matters
Your savings rate is a valuable component of your financial health because it directly influences how soon you'll achieve your financial goals, such as buying a home or paying off your debts. And unlike economic conditions, job security and other factors, your savings rate is something you can control. For example, you can increase your income or cut your expenses to provide additional money to put toward your savings.
The stronger your savings rate, the better prepared you'll be for the future and for any financial obstacles that may arise. For example, here's what savings might look like at different savings rates for a person earning $8,000 monthly. Keep in mind, these are contribution numbers only that don't account for the interest you could earn in a savings, retirement or investment account.
| Savings Rates (Without Earned Interest) Based on $8,000 Monthly Income | |||
|---|---|---|---|
| Savings Rate | Monthly Savings | Yearly Savings | 10-Year Savings |
| 5% | $400 | $4,800 | $48,000 |
| 10% | $800 | $9,600 | $96,000 |
| 15% | $1,200 | $14,400 | $144,000 |
| 20% | $1,600 | $19,200 | $192,000 |
| 30% | $2,400 | $28,800 | $288,000 |
By improving your savings rate, you can unlock these benefits that can positively impact your financial security:
- Enables financial independence in retirement: Increasing your savings rate could help you build more wealth over time and retire early. The more you contribute to your nest egg, the fewer financial restraints you'll have to pursue your lifestyle goals in retirement.
- Provides financial security: With a higher savings rate, you'll be better positioned financially if you're hit with an unexpected expense or emergency.
- Offers career and lifestyle flexibility: By improving your savings rate, you open yourself up to more career choices and lifestyle options. You may be more inclined to take a break from work, switch to a lower-paying job or even start a business.
How to Calculate Your Savings Rate
The formula to determine your savings rate is straightforward:
Total Monthly Savings
Monthly Income
=
Your Savings Rate
So, if you save $500 of your $5,000, your savings rate is 10% since 500 divided by $5,000 is 0.10 or 10%.
But should you use your gross or net income to calculate your savings rate? The standard practice is to use your gross income, but you may wish to run your calculations using both gross and net income. Contrasting your pre- and post-tax savings can help you consider the tax advantages of saving in tax-deferred accounts like a 401(k) or a traditional IRA, which reduces your taxable income.
How Much of Your Income Should You Save?
The U.S. personal saving rate is 4.6%, according to February 2023 data from the Bureau of Economic Analysis. This number falls well short of the conventional wisdom to put away a minimum of 20% of your income into savings. The reality is that not everyone can afford to put away that much of their income, but knowing your savings rate, how it changes and how it affects your financial future is important.
Experts recommend certain savings guidelines for specific goals, like saving 10% to 15% of your income for retirement and three to six months of everyday living expenses for your emergency fund. Even if you don't reach these goals, you may choose to focus on improving your savings rate from 4% to 6%, for example.
There are many different approaches to budgeting, and it's important to find one that works for you. For instance, you may see good outcomes following the 50/30/20 budget when managing your finances and prioritizing your expenses and savings appropriately. This approach involves allocating your income to three categories:
- 50% on necessities, including housing, food and utilities
- 30% on discretionary spending, such as entertainment, dining and your gym membership
- 20% on savings and debt repayment to help you save for emergencies, pay down debt and save for a home and retirement, among other goals.
Keep in mind, these recommendations are merely guidelines that may or may not be ideal for your unique financial situation. The amount you should strive to save depends on your age and your financial and lifestyle goals.
How to Increase Your Savings Rate
The more you save each month, the sooner you'll achieve your financial goals, whether it's a home down payment, an adequate emergency fund or financial independence. Here are some actionable steps you can take to improve your savings rate.
- Increase your income. One of the most straightforward ways to improve your savings rate is to boost your disposable income. Switching to a higher-paying job, taking on a second job or starting a side hustle are common ways to increase your revenue.
- Don't increase lifestyle costs when income rises. When your earnings increase or you receive a financial windfall, resist the temptation to significantly boost your lifestyle. Regardless of your income, prioritize paying yourself first by a certain percentage right off the top before paying bills and other spending.
- Pay down high-interest debt. Zeroing out your debt accounts is an excellent way to increase your disposable income, save more and improve your overall financial health. According to the most recent Federal Reserve data, the average credit card interest rate is 20.40%. Consider consolidating high-interest debt with a lower-interest personal loan or a 0% intro APR balance transfer credit card to reduce interest charges and improve your savings rate.
- Maximize your employer 401(k) match. If your employer offers a retirement plan with matching contributions, aim to contribute up to the maximum of your employer match. For example, let's say your employer offers a 50% match on up to 4% of your salary. If you earn $60,000 per year and contribute 4% of your salary to your 401(k), you'll have $2,400 in savings. But when you add in your employer's 50% match, your total contribution is $3,600, improving your savings rate and helping your savings grow faster.
Improving Your Credit Can Lead to Increased Savings
Having a high savings rate over time is an indicator of overall financial well-being. Similarly, good credit is another essential component of your financial health. A high credit score improves your odds of qualifying for favorable terms when you apply for a mortgage, car loan or other forms of credit, saving you money over time.
Discover where your credit stands and stay on top of any changes to your credit report by signing up for free credit monitoring through Experian. You'll receive tips for improving your credit score and real-time alerts about new inquiries or suspicious activity on your credit report.