How to calculate your savings rate, and what counts as saving

Your savings rate is what you kept in a month divided by what you had to keep from. Count as kept everything that raised your net worth: the retirement contribution that left the paycheck before it arrived, the month's positive cash flow, and the principal portion of the debt payments; count as the denominator take-home pay plus that retirement contribution, since it was yours before it was deducted. A paycheck with a $400 retirement deduction, a month that kept $400 in cash flow, and $110 of principal inside the loan payments is $910 kept from $4,800, a savings rate of 19%. The rate is compared with your own rate last year, not with a rule, and the comparison is the point.

Why the rate is hard to see from the accounts

Saving happens in four places and the accounts show each differently. The retirement contribution never touches checking, so a household that saves 12% through payroll reads as saving nothing in its bank. The debt principal is buried inside payments that look like bills. The cash flow that stayed in checking looks like a balance rather than a saving. And a transfer to savings looks like the only saving there is, when it is one of four. The rate is computed, not read, and computed from all four.

What counts as saving

The last line matters: the savings rate measures what you did, not what the markets did. Investment growth raises net worth and belongs in the net worth reading; it is not a saving you made.

Compute it in four steps

1. Add up the month's take-home pay, then add the retirement contribution that was deducted from it. That is the denominator, the money that was yours to keep or spend.
2. Add up what was kept: the retirement contribution, the month's cash flow if positive, and the principal portion of the debt payments from the loan statements. Subtract any savings transfer that came back out within the month.
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.

A worked example

Nineteen percent, while the bank statement shows a $300 transfer to savings and a checking balance that ended the month $100 higher. A household reading only the transfer would call its rate 7%. Including the employer match, $200 in this example, both sides rise: $1,110 kept from $5,000, or 22%, which is a legitimate figure as long as it is compared with a figure computed the same way.

The cash flow figure comes from the month's income against its spending, with transfers and card payments left out; see How to calculate your monthly cash flow. The principal figure comes from the loan statements, which split each payment into principal and interest.

Read the rate against yourself

A savings rate compared with a rule of thumb produces a grade; compared with last year's, it produces information. A household at 19% that was at 14% a year ago is doing something right and can name it. One at 19% that was at 24% has a category that grew, and the month-to-month comparison finds it. The rate is also the link between income and net worth: it says how much of each dollar earned becomes wealth, which is the question a salary alone never answers; see Net worth versus income, and why a high salary isn't wealth.

Compute it quarterly rather than monthly. A single month's rate swings with the annual premium and the third paycheck; three months average them out, and four readings a year is enough to see a trend.

Common mistakes

• Reading the savings transfer as the rate. It is one of four places saving happens, and often the smallest.
• Leaving the retirement contribution out of both sides. The rate reads low by the whole contribution, which for many households is most of their saving.
• Counting the whole debt payment as saving. Only the principal is kept; the interest is spent.
• Counting market growth. It is the market's doing, not yours, and it reverses.
• Counting a set-aside that will be spent this year. The insurance premium's sinking fund is a bill in slow motion, not a saving.
• Comparing with a rule instead of with yourself. The rule does not know your rent.

Common questions

How do I calculate my savings rate? Divide what you kept in the month by take-home pay plus the retirement contribution that was deducted from it. What you kept is that contribution, the month's positive cash flow, and the principal portion of the debt payments, minus any savings that came back out. The worked example is $910 kept from $4,800, or 19%.

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

Should I include my employer's match? Either way is fine, as long as you compare like with like. Including it shows the rate at which your wealth is actually growing from work; excluding it shows the rate you chose. Many households compute both and watch the second.

Is my savings rate good? Compared with your own rate a year ago is the useful question, and rising is good. Rules of thumb put 10% to 20% as the usual range, but a household with high rent and student loans at 8% and rising is doing better than one at 15% and falling.

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

How Zypper handles this

Zypper holds the four places in one picture. Net worth is computed from every account, savings and investments 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; retirement accounts, including 401(k), IRA and Roth IRA, and HSA accounts, connect and contribute their balances, and the loan balances fall by the principal you paid. The cash flow page charts income against spending for any period, the last quarter for the quarterly reading, with transfers between your own accounts left out. See Net worth tracking, Supported account types, and Cash flow for the details, or get started with Zypper to see the four places at once.