The most important financial ratio - savings rate

When it comes to financial ratios, there are none more important than your savings rate. Your savings rate is the best overall indicator of your financial health. In this article, we’ll cover how to calculate your savings rate and how to determine what your savings rate should be.

When it comes to financial ratios, there are none more important than your savings rate. Your savings rate is the best overall indicator of your financial health. In this article, we’ll cover how to calculate your savings rate and how to determine what your savings rate should be.
How to calculate your savings rate

To calculate your savings rate, you take your monthly income after taxes subtracted by your monthly expenses. Then, you’ll divide that number by your monthly income after taxes, and multiply that by 100. For example, if your monthly income after taxes is $5,000 and your monthly expenses are $4,000, your savings rate would be 5,000 – 4,000 = 1,000/5,000 = 0.2 X 100 = 20%. If you aren’t sure what your monthly expenses are, you can learn how to calculate it here.

If your monthly expenses are higher than your monthly income after taxes, you’ll have a negative savings rate. This means that you’re not saving, and instead taking on debt each month. If this is the case, you’ll want to either reduce your expenses, or increase your income (or both).

What should your savings rate be?

Unfortunately, there isn’t a one-size fits all answer to this question. The proper savings rate will depend on your individual goals and situation. A common suggestion is to have a 20% savings rate. This is a good target as a starting point, but how much you need might be much less (or much more) than that.

Our recommendation would be to make a list of all your goals, how much money you’d need for each goal, and when you want to reach that goal by. Once you have these goals written down, you can determine how much money you’d need to save each month for each goal and what your savings rate would need to be to reach them.

After listing out your goals, you might realize that you’re not able to save enough each month to reach them all. This is a very common situation. The good news is that you now know what your target savings rate should be. This can help you realize you need to earn more or spend less in order to reach your goals.

It can be useful to use a tool to help you determine what the proper savings rate is for your personal situation and to help you track your progress towards your goals over time.