Challenge

Day 5: Your Savings Rate (30 Day Financial Wellness Challenge)

Understand how much of your income is allocated towards savings goals, future spending, and retirement.

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Day 5: Your Savings Rate (30 Day Financial Wellness Challenge)Welcome to Day 5 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.

After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 4: Calculating Your Personal Monthly Cash Flow

On Day 5, we’re calculating your savings rate which is the amount of money you save from your income.

Why is it important to know your savings rate? It helps quantify how much of your income is used to reach your savings goals, future spending, and retirement. Knowing your savings rates helps you answer the question, “Am I saving enough?”

What is saving money?

Saving is money you set aside for future spending and the money left over after spending. Saved money can be in a jar on your kitchen counter and in a savings or an investment account. When you stash money away, it’s available to you when you need it without having to wait for a paycheck. The financially well thing to do, however, is to store money into accounts that earn interest. This is when you start making money with money. We’ll cover how to make your money work for you later in the challenge.

Learn more: How to save purposefully

Saving account types

A savings account is a place to store your cash that you don’t plan to spend right away. There are different types of savings accounts such as:

Deposit savings accounts

These are the basic savings accounts that we’re all familiar with and also the simplest way to store money. It’s offered by banks, credit unions, online banks, and many nonbank firms like brokerages that offer interest-bearing cash management accounts. These savings accounts are often easy to open and require smaller minimum deposits.

Money market accounts

These savings accounts allow you to save money and get better interest rates compared to basic savings accounts. Money market accounts typically require a higher minimum deposit and associated fees for going below. Unlike a savings account, a money market account allows you to write checks against the balance.

Certificate of deposits

Also known as CDs, you can deposit money into these savings accounts that have a maturation period. With certificates, you earn higher interest compared to basic savings and money market accounts. However, you’re unable to touch the savings until the duration or term has been met.

The difference between assets and savings

Although savings accounts are included in the asset side when you calculated your net worth on Day 1, savings accounts differ from other assets because of their liquidity. Liquidity means the accessibility to cash. With cash being the most liquid, followed by funds deposited in the above savings account types.

We’ll calculate your Liquidity on Day 6, but if you’re interested in learning a little bit more now, you can read about Liquid Assets.

What’s Your Savings Rate

The savings rate is the percentage of income you save into savings accounts, invest in brokerage accounts, and contribute to retirement accounts. Arriving at your savings rate can get somewhat complicated based on what numbers you include in the calculation.

For the purpose of today’s challenge, we’re going to simplify the calculation by only using your gross income and the amount of money you’re saving into the accounts I described earlier.

How to Calculate Your Savings Rate

First, define what income you plan to include in the calculation. You can refer to Your Income Numbers from Day 2. Second, review your list of assets from Day 1 and highlight the asset types that fit the savings types. Finally, complete today’s assignment to get your current savings rate.

As a calculation, the savings rate can be viewed as:

Annual Savings / Annual Income =  Savings Rate*100 (%)

Basically, you’ll take your annual savings divided by your annual income to get the savings rate. Then multiple that number to 100 to get a percentage.

For example, you save $10,000 annually with an income of $55,000.

$10,000 / $55,000 = 0.18*100 = 18%

In this example, you’re savings rate is 18%.

What calculating your savings rate reveal?

There are benefits in calculating your savings rate. First, it provides a benchmark to measure your financial progress. By calculating your savings rate today, you can compare that rate a year later and determine if you’re improving.

Second, it gives you a quantifiable number to work with that moves as your income and expenses change. For instance, your income grows to $65,000 and you want to keep pace with an 18% savings rate, which requires savings more each year.

Day 5 Assignment

There are two approached I want you to consider:

  1. Calculate your annual savings rate by using last year’s numbers. This gives you a benchmark to compare your future progress to. (Recommended)
  2. Calculate last month’s savings rate using last month’s income and amount of money saved in that month. This is simpler but is limited in scope.

Steps to calculate your savings rate

  1. Determine how much saved in a year. Review your banking statements. Pro tip: Include money invested in brokerage accounts and contributions to retirement plans (like 401ks and IRAs).
  2. Use your gross income from last year.
  3. Calculate your savings rate from last year.

**Column 3 allows you to calculate last month’s savings rate.

Total Saved Last YearTotal Saved Last Month
 Savings Types(how much did you save?)(how much saved last month?)
  Savings account$
  Money market account$
  Certificate of deposits$
  Other savings$
$
$
 Retirement$
  401(k) contribution$
  IRA contribution$
  Other account:$
$
$
Investments$
  Cash management accounts$
  Brokerage account$
  Other account:$
Total Annual Savings $

What’s your annual income from last year? Refer to Your Income Sheet from Day 2.

Total Income Last YearLast Month’s Income
Income Sources(how much did you make?)(how much made last month?)
  Active Income$
  Passive Income$
  Portfolio Income$
Total Income$

Calculate Your Savings Rate

Annual Savings Rate (Last Year)Last Month Savings Rate
   Total Savings$$
÷ Total Income$$
= Savings Rate
(multiply saving rate *100)
%

Savings Rate Calculation Pro Tips

  • Consider adding the employer match in retirement plans as part of your gross income.
  • Consider adding the cash you’ve contributed to your retirement plan and invested into brokerage accounts as part of your savings rate calculation.

Why is calculating Savings Rate important?

  • It helps you understand if you’re saving enough of your income towards future goals.
  • Sets a benchmark and target that enables you to see your progress.

Additional Reading:

Resources:

Next Daily Challenge: Day 6 – Liquidity and Cash Ratio: Can you cover an emergency?

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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