Harness Money

What is the Savings Rate?

Your savings rate is the percentage of your total income which you save each year.

How much have you actually saved?

Mom and dad always told us to save money. You need savings to pay for large purchases like a house, car, healthcare or children. But I am betting that they never mentioned your ‘savings rate’.

The majority of people choose to save money based on a dollar amount. $100 per paycheck or $10 per month. Something along those lines. But there is a better way that will have more impact.

Your savings rate is very important. It can be the difference between living paycheck to paycheck or living a lavish lifestyle. It is what determines how fast or slow you will be able to retire from your job.

You are probably already using a savings rate and you do not even know. If you an employee you probably a 401(k). For an in-depth look at the 401(k) check out the article 401(k) Explained. The contributions you make to a 401(k) are not based on a dollar amount, but instead are based on a percentage of your income. You choose a percent you want to contribute and your employer will often match up to a certain percentage.

You do this in your 401(k), but you probably do not do this for your household savings.

The Savings Rate is calculated as (Dollar Amount Saved / Total Income) X 100. This will give you a percent which is your yearly savings rate.

You should do this same calculation for your housing costs as well. Figure out how much of your total income you are paying toward your home.

Why is your savings rate important?

The higher your Savings Rate the faster you will be able to retire. But you must be careful, because the more you save the less you will have to spend. Saving more may impact the type of lifestyle you end up having.

This number will also tell you if you need to earn more or spend less or a combination on the two.