Our/Your Savings Rate

Our/Your Savings Rate


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.

The LightBulb

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:

  1. Calculate your gross income (whatever that may be)
  2. Then calculate how much money you save into your retirement plans (e.g. 10k)
  3. Calculate how much money you might receive in a match from your retirement plan (in my case it is 4.3% of my salary)
  4. Calculate how much you might put into other savings (e.g. kids college funds, etc)
  5. Calculate how much you reduce your debt principle (e.g. each month we reduce our mortgage principle about $950)
  6. 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).

  1. Don’t include the interest you pay on your debts (e.g. mortgage, student loans, etc).
  2. 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.


10 thoughts on “Our/Your Savings Rate

  1. Good, well-rounded method of calculating savings. The flip side, of course, is that you need to roll your mortgage payments into some other kind of savings when your house is paid off – and remembering to treat that part of the budget as savings is a very useful step in that process.

    1. Hi Tim,
      I would certainly agree. I think also it provides a little bit of perspective when people say Americans don’t save enough. It is true we don’t save enough for retirement or at least in liquid assets, but we do “save” more than people thing, particularly if you pay down debt. The trick is, of course, to not have lifestyle inflation creep in when you pay off that debt and continue that money to be “savings” of some kind. If not, you could find yourself back where you started from. Thanks for stopping by and hope you are well.

  2. I don’t have a real savings rate because almost all of my earnings are plowed back into my business. Last year, probably 80% of my earnings went back in the business and the other 20% I took out as salary.

    1. While you may not have a savings rate this will pay off huge dividends within a couple of years once everything is up and running. However, it also depends on what your ultimate financial goals are. Mine certainly are to retire early, but I would like to hit that FI number sooner than later. More so later than sooner unfortunately.

  3. Good article, Jason. Does the “gross income” include dividends and capital gains on investment portfolio? If it does, then my savings rate is around 73%.
    Without the portfolio income (i.e. dividends & capital gain), the savings rate reduces almost to 0%. In other words, we are spending all that I earn as a salary, and I am a sole worker in the family 🙂

    1. Well, I don’t know. I don’t necessarily think it includes the gains because technically you aren’t putting in that money. It is growing off of previous principle, unless you are reinvesting it then I guess it could be considered savings rate, particularly if you are only taking it out for income or living expenses. I mean it is really up to you. No matter what it sounds like you are doing fabulously. Thank you so much for stopping by.

  4. My problem with the savings rate is that the IRS taxes money that we have in savings accounts. If they really want to encourage saving, wouldn’t Congress give a tax break for the interest we earn on saving accounts (as little as that might be with current interest rates)? It doesn’t seem as if the government wants us to save, so it is better to put those funds into the market, real estate, etc which makes us appear to have little savings.

    1. That is true they do tax them, but your savings rate is still probably quite high. I don’t even think about the taxes regarding the savings rate. I worry about that later and traditionally we don’t even calculate it into savings rates, knowing the government will get their cut eventually.

  5. 2013 – 54.7% w/ $54.6k salary
    2014 – 32.5% w/ $60.6k salary (bought a car w/ $9k cash)
    2015 – 59.3% w/ $65k salary
    2016 – 54.4% w/ $75.7k salary (paid $8k MBA tuition)
    2017 – 70.6% w/ $84k salary

    Really want to get to close to 80% some point soon.

    *almost 34 yrs old, no kids, gf slowly getting the idea, 1 int’l trip a yr when I find a deal.
    **started with $85k in student loans, have paid $17k in interest on them w/ $8k left to go. Spent too much partying early on but @ $110k net worth as of today. It’s a long road, but hopefully FI in ~8 yrs.
    ***when you mention gross income, I assume you mean after-tax gross income.

    1. That is fantastic! You are doing well. I hope to get to 50% someday (but that also includes some debt payments….and then once that is paid off then increase it even further). Awesome! Thanks for stopping by Landon.

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