One of the things that financial planners and professionals constantly complain about is the low savings rates among Americans. The average saving rate in the United States is 5.7%, which is woefully under the 10-15% that people recommend you save for retirement/other things. In the ROB household, we are saving about 20-25% for retirement and I hope to kick that number up even further.
However, is the 5.7% really the savings rate in America? How should we calculate it?
One of the things that always amazes me about some people in the financial blogosphere is their high savings rates. For some of them it can reach 75, 80, even 90% if you lead a very frugal lifestyle (and that might be possible if you have no debt, eat at home, read, etc). It can also be rewarding. When I read these savings rates I think, on the one hand, how nice it would be to save that much and the other hand, I think that is something that might not happen in the ROB household.
Then about a few days ago or so I was reading a post on the Early Retirement Now blog about savings rates. The title of the latest blog post was “You Want to Know Our Savings Rate? Which One? In that post, he went onto detail how he you can calculate different savings rates. There is the standard one that we could calculate (e.g. saving for retirement, kids college funds, etc) but additionally Mr. and Mrs. ERN include their debt payments as included in their savings rates. And when I mean debt payments I mean how much you actually take off the principle of your debt. So let’s say your mortgage payment is $1000, but only $250 of that reduced principle then you only get to include $250 into your savings rate because you are getting a return on your money.
So one of the ways to calculate savings rates is any return you get from your money, which would include paying off debt and reducing principle. Mr. ERN confirmed for me an earlier thought I had when I asked could paying off debt be included in your savings rate?
The lightbulb for me was how the ERNs were calculating that specific rate. In essence, the principle you pay off should be included in your total savings rate.
What Does This Mean?
You might be asking yourself so what? Well, the so what is a couple of things. First, if we use the ERN formula then Americans savings rates might be better than we think it is. Second, it means that the savings rate in the ROB household is higher than I thought. Finally, it means that readers of this blog have a higher savings rates than they think and should hopefully feel a bit better about their financial position.
Now that doesn’t mean, however, we don’t have a retirement crisis. Just because your savings rates may go up under these calculations doesn’t mean that the money shouldn’t/couldn’t be channeled to more productive ends. For example, you could be reducing the principle on your car loan but that doesn’t mean that you are engaging in altogether productive savings. You are saving by bringing down the principle of your car loan, but you are doing so on a depreciating asset. Eventually I want people’s savings to go to things that APPRECIATE in value (e.g. investments, real estate, etc).
So we still have a savings crisis in this country. But the question we should ask is what KIND of savings crisis? And the savings crisis is really a retirement savings crisis.
How to Calculate Your Savings Rate?
So how then do you calculate your savings rate (well at least this is one way)? The basic formula is this:
- Calculate your gross income (whatever that may be)
- Then calculate how much money you save into your retirement plans (e.g. 10k)
- Calculate how much money you might receive in a match from your retirement plan (in my case it is 4.3% of my salary)
- Calculate how much you might put into other savings (e.g. kids college funds, etc)
- Calculate how much you reduce your debt principle (e.g. each month we reduce our mortgage principle about $950)
- Add that number up and divide it into your gross income.
What should not be included (and I totally agree with the ERNs on this).
- Don’t include the interest you pay on your debts (e.g. mortgage, student loans, etc).
- Don’t include the amount of money you pay off on your credit card each month, particularly if you pay it off every month because those are basic living expenses.
There are more things that you can include/not include in your savings rates, but for my own brain I want to keep it simple stupid.
So after doing a calculation for our monthly budget our savings rate is?
34% and that is including everything.
Our retirement savings rate is about 20% when you combine all of our income together.
This isn’t where I would like to be. I would like to be at savings rate of more like 50%, but for now it is better than nothing.
Readers of this blog what is your savings rate? Reply in the comments below.