What’s your Savings Rate?

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I did a little Twitter poll recently and it’s interesting to see that many people know what a Savings Rate is, but they don’t know their own savings rate. That’s a bit like know about healthy eating but not doing it.

What is a Savings Rate?

Simply put it’s the percentage of your income that you’re saving. If you earn R20,000 per month and you’re saving R2,000 – then your Savings Rate is 10%. That seems easy right?

But do you take your gross salary or net slary? And what about freelance workers who don’t earn a fixed salary? What about additional income you generate from side hustles? Why’s it important? So many questions…

There are a few things to consider and it’s important to look at your finances holistically and decide how you wish to interpret and calculate your Savings Rate.

Using your gross income or after-tax income?

Let’s start by looking at how to calculate the percentage based on your income. The most accurate calculation would be to take your gross salary and then calculate the percentage that you pay towards tax, the percentage towards medical expenses, insurances, general budget and savings. That would give you an accurate figure of how much of your salary you’re actually saving.

Budget pie chart

It’s a bit scary to see that you may be saving 10% of your income while you’re paying perhaps 35% towards tax and maybe 50% towards housing. That kind of view is interesting!

However, I feel that I have no control over the tax that is deducted form my salary. I work at a corporate company and the HR company manages my payslip. Thus, if I’m paying 20% tax or 45% tax, I cannot do anything to change it on a month to month basis.

Note: you can get a tax expert to do your annual reruns and you may well qualify for a rebate. Have a look at the brands I trust to find the voucher code for a discount form TaxTim.

But, back to my thinking of tax, I prefer to look at my salary after the tax is deducted and then calculate my savings rate. In the first example I stated that if your earn R20,000 per month and save R2,000 then your savings rate is 10%. However, say you only receive R18,500 after tax and still save R2,000 then your savings rate could be calculated as 10.8%.

It’s only a slight different way of thinking and I feel it’s okay to choose the one that makes most sense to you. Do you see tax as an expense that you add and track in your budget or is it simply a deduction that you have no control over?

What about freelance workers?

Not everyone earns a fixed salary though so if that’s you then you can either work on an average of the past few months and see how much you earned versus how much you saved. Or, you can decide to set a fixed amount of every invoice towards savings.

Each time you earn money you could save a set percentage. You should already be putting aside a set percentage towards tax as you’ll need to do an annual recon, and taking a set percentage from each invoice towards savings is also a good idea.

How to factor in additional income streams?

This is another interesting thing to consider. If you have an additional income stream that is quite stable each month (eg rental property or side hustle), do you take this into consideration when calculating your savings rate?

There’s not really a right or wrong answer here. Personally I don’t take it into consideration as I have specific “jobs” for my additional income. I’ve decided what it will be used for and add it to my overall plan. I do however like to know the percentage of my salaried income that I’m saving, and to me anything extra is just great.

If you’re a numbers and spreadsheets type of person then you may want to add all sorts of variations of your Savings Rate, but don’t over complicate it. Figure out what it means to you and how you wish to represent it.

Are you interested in general savings or investments only?

Here is yet another consideration; are you wanting to keep track of the percentage of income that you are saving overall, or specifically the money you are investing towards your future financial independence and retirement?

I only consider the money I am actually investing for my future. I don’t count the extra money I save towards my Emergency Fund or generally having a buffer in my budget.

Again, how you interpret the “number” is up to you based on what makes sense to you and your circumstances.

Why’s it important to know your Savings Rate?

Well, as Tebogo said in his first interview with me (I need to fix my finances), you cannot improve what you don’t measure. It’s that simple.

If you want to save more then you need to know how much you currently save and if you know this as a percentage it’s easy to set a goal of increasing your savings by 1% or 5% or whatever you feel is manageable.

I’ve heard of challenges whereby you increase your savings percentage by 1% every 3 months. It’s noticeable but yet quite a slow increase and generally manageable. You will obviously get to a limit where you literally cannot save any more. However, when you get to that point you’ll probably be quite an expert at personal finance and you’ll know what to do!

To close

Even though there are several consideration to think about when calculating your Savings Rate, you really don’t need to overcomplicate it or feel that it’s overwhelming.

Start with the basics and just calculate the percentage that you are saving each month based on your Gross salary. Then, as time goes on you can decide whether you wish to refine this further or not.

Once you know the percentage amount that you’re saving, compare it to other expenses such as transport, housing, food & electricity. Everything is important but it could be interesting to see the difference in percentage between various categories in your budget and decide whether your priorities are correct.

Remember: You cannot improve what you don’t measure.

Please share your thoughts