Savings rate

A savings rate is a percentage, and the percentage is what makes it comparable across months, across raises and across households. The money you kept in a month is scattered across four places: the retirement contribution that left the paycheck before it arrived, the transfer to savings, the surplus that stayed in checking, and the principal inside every loan payment. The rate counts all four and divides them by the income they came from, which is why a household whose bank statement shows a single $300 transfer can have a savings rate of 19%. Interest and market gains are left out, because the rate measures what you did, not what the balance did.

In a sentence

• "Our savings rate last quarter was 19%, and most of it was the 401(k) contribution we never see."
• "Cash flow says how many dollars we kept this month. The savings rate says what share of the pay that was."
• "The paycheck deduction counts toward the savings rate even though it never touches the checking account."

How it's calculated

Savings rate = money kept ÷ (take-home pay + retirement contributions deducted from it)

1. Add up the period's take-home pay, then add back the retirement contributions that were deducted before it arrived. That is the denominator, the money that was yours to keep or spend.
2. Add up what was kept: the retirement contribution, the period's positive cash flow wherever it sat, and the principal portion of every debt payment, from the loan statements. Subtract any savings transfer that came back out within the period.
3. Divide kept by the denominator. That is the savings rate.
4. Compare it with your own rate a year ago, computed the same way.

The last line keeps the figure honest: market growth raises net worth, but it is not a saving you made, and it reverses.

An example

The bank statement for the same month shows one $300 transfer to savings and a checking balance that ended $100 higher, so a household reading the transfer alone would call its rate 7%. The 401(k) deduction is nearly half of what was actually kept. Counting the employer match, $200 here, raises both sides, $1,110 kept from $5,000, or 22%, which is a fair figure as long as last year's was computed the same way.

Why it matters

The savings rate is the link between income and net worth. Two households on the same pay end up far apart after a decade because of the share each one kept, and the rate is the number that says which household you are. Read against your own past rather than against a rule, it catches lifestyle creep before the balance sheet does: a household at 19% that was at 24% a year ago has a category that grew without a decision, and the month-to-month comparison finds it.

The mistake it prevents is reading one account as the whole story. A household that saves 12% through payroll and reads only its bank statement believes it saves nothing; one that transfers $300 to savings while its card balance grows by $500 believes it saved $300 when its cash flow says it borrowed $200.

Savings rate versus cash flow

Cash flow is an amount; the savings rate is a share. Cash flow is what came in minus what went out over a month, and it is one of the inputs to the rate. The rate divides the kept money by the income it came from and adds the two savings that cash flow cannot see: the retirement contribution that never reached checking, and the principal inside the debt payments, which cash flow counts as money out. A $400 cash flow is a different result on $4,400 of take-home pay than on $8,000, and the rate is what makes the two comparable. See Cash flow.

Common questions

Is the savings rate the same as cash flow divided by income? No, though the two are close for a household with no payroll deductions and no debt. Cash flow leaves out the retirement contribution, which never reached checking, and treats the whole loan payment as money out, principal included. Dividing $400 of cash flow by $4,400 of take-home pay gives 9%; counting all four places gives 19%.

What is a good savings rate? Rules of thumb put 10% to 20% of take-home pay as the usual range, and 20% is the savings share of the 50/30/20 rule. The useful comparison is with your own rate a year ago, computed the same way: 8% and rising with high rent and student loans is a better position than 15% and falling.

Does paying off debt count toward my savings rate? The principal portion does, because it raises your net worth by exactly that amount, the same as a deposit. The interest portion is a cost. The loan statement shows the split, and the principal share of each payment grows as the balance falls.

How often should I calculate it? Quarterly, from three months of figures, so that the annual premium and the third paycheck average out. Four readings a year show the trend; twelve show the noise.

Go deeper

• How to calculate your savings rate, and what counts as saving runs the four places through the worked example above and lists what counts on each side.
• How to calculate your monthly cash flow, with a worked example produces the cash flow figure the rate starts from.
• The Budget calculator splits your monthly take-home pay into needs, wants and savings with the 50/30/20 rule or shares of your own, and shows the dollar amount each bucket gets.

Where it shows up in Zypper

Zypper holds the four places in one picture. The cash flow page charts income against spending over any period, and transfers between your own accounts do not count as income or spending by default, because Zypper links the two sides of a transfer as one movement. Net worth is computed from every account, savings and retirement accounts on the asset side and loans and cards on the liability side, and charted over time, so the month's kept money is the change in the line, and the loan balances fall by the principal you paid. On the budget page, Left to budget is your expected income minus everything budgeted for spending, which is the room the plan leaves before the month starts. See Cash flow and Splitting and linking transactions for the details, or get started with Zypper to see the four places at once.