Let’s get this clear. You cannot be effective with meeting your long term financial goals if you don’t know what your saving rate is. Simple as that!
People are a lot into tracking their income. It is much more usual to hear friends say: “I net X thousand per year” than “I save X percent of what I bring home”. But in fact, the latter saying shows someone who is much more in control of what is going on with his money.
Bottom line is, you need to know what you keep.
In order to know your saving rate, you need to do some simple math, which will be explained below. But before, you need to know the underlying reason why you need to understand this metric
Why is knowing your saving rate important in the pursuit of your financial goals?
Because you will become conscious about how long it will take you to be ready for bigger ticket investments.
Over time, the savings can stack up to a great amount and allow you to fund your bigger expenses, and ideally investments. Being able to save great chunks of your income, at the earlier phases of your financial journey is key. By being able to amass a significant percentage of your income, you will realize that you will be able to consider investing in things that matter to you.
Are you planning for a dream vacation?
Are you dreaming of becoming an entrepreneur?
Are you looking to change careers or advance your education?
Are you looking to invest in the stock market, or in a promising real estate project you believe in?
Having the savings ready is the best first step to bring to reality any of these. The more you save, the more interesting opportunities will surface. A loan is easier to obtain if you show the banker that you have a decent down payment (and a good credit score). A potential business partner is more inclined to join forces with you if you have money ready to invest.
And you may also notice that the more savings you have, the more secure you feel. Knowing that you can cope with some unexpected and costly event is truly soothing.
Not living paycheck to paycheck is such a blessing!
What is the saving rate?
The saving rate is expressed generally as a percentage and represents how much you are saving out of how much money you bring home.
How is the saving rate calculated?
The calculation goes as follows:
Total savings / Total Net Income = Saving Rate
For example, someone who is making $1700 per 2 weeks and manage to pay for his bills, food and other expenses with $1000 and is able to save $700 consistently can say he has a saving rate of 41%. ( 700$ / 1700$ = 41%)
What does help in increasing your saving rate?
Now, here are the different ways you can increase your savings rate. At large, this is a very simple concept to understand. In a nutshell, it gets down to this. Either you:
- Save more
- Make more
- Or you both save more and make more
Simple isn’t it? I know. But simple doesn’t mean easy.
Here are some scenarios that will help in increasing your saving rate
- You live with roommates (or significant other). This makes a big difference in the bottom line since rent generally is part of a good chunk of every adult’s expenses. And if you live with your significant other, it is possible that you join forces in saving toward a specific financial goal.
- You have a high paying job. Some of us Millennials and Gen Zs got all their career choices aligned and manage to be working in very lucrative industries. Higher the amount of money you take home, the easier it is to increase your saving rate. For example, let’s say that you can live and pay your bills with $1000 per 2 weeks. Having an income of 1500$ gives you a 33% saving rate, but have a paycheck of 2300$ move that saving rate to 56%.
- You live in a low cost of living part of the country. If you live in the US, Canada, or elsewhere, you know that there are some areas of the country that are much less affordable than others. Living in some big US cities like New York, Los Angeles or Washington DC may cost much more than living in virtually any other city in the country. Taking this into consideration if you want to spend less in order to increase your saving rate is crucial. Here are all the North American major cities ordered by the cost of living
- You don’t have children. If you happen to have other mouths to feed, to dress and to take care of, it is obvious that your ability to save is lessened. If you don’t have kids and want to better your financial situation, not becoming a parent while reaching your goals will probably get you there faster.
This is just to give you an idea of what an ideal situation can be, but no matter where you stand, being able to save is doable.
But what if I have debt?
The answer to that question depends. If you have credit card debt you should put all your savings efforts toward paying these. Loans and credit cards should be taken care of first. This will be a win-win to pay off your debt because the sooner you get rid of them, the less interest you have to pay and this will increase your credit score which is also very important for the later phase toward your financial goals.
What should I look for in a savings account?
There are so many different things that make an online saving account appealing. Among them, here is what I suggest to look for:
- Fees. Fees are among the top financial growth killer. Avoid fees as much as you can. Some online saving accounts are limited in terms of transactions and will charge you for any transaction above their specified quota. Make sure to look for an account that as unlimited transactions.
- APY. This stands for Annual Percentage Yield. It is the percentage of interest the financial institution will deposit in your account on an annual basis. This percentage varies for multiple reasons but looking for an average to above-average number, when compared to its competitors, is what I suggest.
- The Minimum Balance To Open. Some saving account request you to be able to deposit a certain amount as a prerequisite to deal with them. You need to verify if this amount is within your capacity.
- Monthly Balance To Maintain. It is also frequent that you’ll have to stay above a certain cash balance in order to earn your interest. This required balance can vary wildly so make sure to have a look for any clause that specifies this information.
I am planning on doing a more in-depth post on the best online saving accounts, but for now, have look at this article that is quite exhaustive from Nerd Wallet.
The saving rate: Final thoughts
So this completes what you need to know about the saving ratio. I cannot emphasize enough on how much knowing my saving ratio and on striving to maintain it turned my financial health upside down. Hopefully, it will have the same impact for yours as well!