Personal Savings Rates

Everyone knows that saving money is a good idea, but many are unclear about how much they should really be putting away. Building up a nest egg is a generally accepted concept, but many people simultaneously struggle to manage their current expenditures and save for the future.

Your personal savings rate is an excellent, quantifiable measure to help guide your saving strategy and financial plan. It is expressed as a percentage representing the amount of money a person deducts from their disposable personal income and dedicates to savings. Let’s look at how to calculate your savings rate, trends in the US, and why it is such an essential aspect of effective financial planning.

How to Calculate Personal Savings Rate

Your personal savings rate is calculated by dividing your monthly savings amount by your monthly disposable income and multiplying that decimal by 100 to get a percentage. You can also perform this calculation with annual figures.

An example is always a helpful way to understand a calculation better.

Let’s assume John and Pam earn $10,000 a month as a household ($120,000 annually). They save $1,000 a month for retirement. This is how their personal savings rate is calculated.

$1,000 (monthly savings) / $10,000 monthly = 0.10 * 100 = 10%

John and Pam have a personal savings rate of 10%.

US Personal Savings Rate

Since the mid-1970s, the savings rate in the US has been on the decline. Through the 1970s and 1980s, personal savings rates ranged between 7% – 15%. The 21st century saw a low of 2.2%, and as of September 2020, it was 14.3%. Significant recessions and the recent COVID-19 pandemic caused sharp increases in the personal savings rate among Americans. (Investopedia)

Best Personal Savings Rates

There isn’t a magic number when it comes to saving. The best thing you can do is save as much as possible. The first step is identifying how much you currently put away, and then you can work to improve your personal savings rate with time. Developing a sound financial plan with a strong focus on saving is the most effective way to build up a balance. It offers a wonderful peace of mind knowing you have money available for emergencies, a down payment, or retirement.

It is not always easy or possible to save, and various factors can impact your personal savings rate. Anything that influences the rate of time preference will affect your savings rate. Time preference is defined as the degree to which current consumption is preferred over future consumption. Economic conditions, income earned, education, interest rates, and cultural preferences can significantly affect our personal savings rate.

There are many ways to improve your personal savings rate, some easier than others. A simple strategy is to set up automatic deposits. You can have the funds come out at any frequency you like, and the automation makes the contribution easy. Earning a higher income will allow you to save more. Perhaps you can upgrade your training, education or seek a different position. Rearranging your budget can also provide more room for increased savings. Meticulous and intentional planning can help you uncover more money than you might have expected.

Commitment to your personal savings rate is a fundamental part of an effective financial plan. Positive saving habits can bring many beautiful things within reach, including a home, luxury items, and your ideal retirement. Creative Financial Group specializes in helping clients develop a realistic and actionable financial plan that focuses on critical aspects like personal savings rates. Reach out to our professional team today to find out how we can be of assistance.