What Is the Savings Rate? A savings rate is the percentage of your monthly income that you set aside for savings.
Definition and Examples of the Savings Rate
Your savings rate is the percentage of your income you save after paying taxes. According to Jason Dall’Acqua, a CFP at Crest Wealth Advisors LLC, “For example, if your net income for the year is $50,000 and you save $5,000, then your savings rate is 10%.”
- Alternate name: Personal savings rate
How Does the Savings Rate Work?
Once you know your take-home pay, net income, and personal savings amount, you can calculate your savings rate.
Let’s assume that your annual take-home salary is $82,000. Using the following formula, you may determine your savings rate:
Personal savings rate = net income is the personal savings rate.
Let’s return to our earlier example and imagine you save $1,000 per month or $12,000 annually. You can use this figure to determine your savings rate by adding it to your disposable income ($82,000):
$12,000 / $82,000 = 0.146 or 14.6%
In this case, your savings rate is 14.6%.
Why Is Calculating Your Savings Rate Important?
According to Dall’Acqua, “your savings rate is vital in accomplishing long-term financial goals like buying a home, paying for college, and most importantly retiring.” Social Security and a pension no longer guarantee a comfortable retirement, especially since private-sector employers are less likely to offer pensions. People are more accountable for personally funding their retirement.
Save 15% to 20% of your salary, advised Dall’Acqua.
If you are currently saving less than this amount, consider ways to raise your income or lower your spending so that you have more money available for savings. Keep up your saving if it exceeds this amount.
National Savings Rate in the U.S.
Every month, the U.S. Bureau of Economic Analysis releases data on the national savings rate for Americans. The national savings rate has been ranging recently from roughly 7.8% to 33.8%:
|Month||National savings rate|
Source: U.S. Bureau of Economic Analysis
According to Dall’Acqua, the fact that individuals are getting their vaccinations and businesses are reopening is one of the reasons why the U.S. savings rate has been typically falling this year.
As the economy has continued to recover, savings rates have been trending lower, with the national average now back in the single digits, according to him. People have a repressed drive to spend, and the numbers amply demonstrate that they are.
Although many Americans raised their savings during the pandemic, Dall’Acqua noted that the savings rate was not the same for all income levels.
Due to a higher percentage of job loss, “lower-income households were more significantly impacted by the pandemic,” he claimed. Higher-income households, on the other hand, saw a fall in spending as a result of weaker economic activity but may not have seen a decline in income, enabling them to dramatically boost saving.