Savings rate is the percentage of money you save (and invest) versus your total income. It can easily be computed by dividing your monthly savings amount by your monthly income. Read further down below why I compute my savings rate.
I don’t usually earn this high but here’s an actual computation of mine for the month of August 2020.
Total Income = 53,914.50
Total Saved and Invested = 16,241.50
Savings rate = 30.12%
It simply means that I have saved 30% of my income in August. I am a big believer of the phrase “It’s not how much you earn but how much you save”. Doesn’t matter if you earn six digits per month if you just use it to buy mindless purchases. In order to build wealth, you need to save/invest as much as you can.
Why Is Your Savings Rate Important?
I only discovered computing your savings rate this year and it has been a gamechanger for me. I am more in line with my goals ever since I tracked my savings rate. Here are some benefits in tracking your savings rate.
- It provides me a quick overview of where my money is going.
- It lets me know how much I’m contributing to my financial goals.
- It makes me proud to see this is how much I saved versus how much I spent.
By trying to maintain a 25% savings rate per month, I was able to save and invest 76, 625.41 as of August 2020. Some people also use savings rates as a way to determine their retirement amount. I won’t go into too much detail about that because computing for my retirement amount hurts my brain. Chill With Money introduced me to this reddit thread about computing your FIRE amount which leads me to this thread discussing why savings rate is important for retirement. Go ahead and click the links if you want to know more.
What is included in my Savings Rate?
I use my net income or my take-home pay in computing my savings rate. This is already less of my SSS, Philhealth and Pag-ibig contributions. It makes it easier for me to just deduct them. I am currently paying for a St. Peter’s memorial plan and a Sunlife VUL and I include everything I contribute here to my savings rate. I include this because my future self will be using this. Whatever my future self will be benefiting, I include it in my savings rate computation. I also include whatever amount I send to my savings and investment accounts. Here’s a breakdown of my savings rate for August.
If your company has a retirement plan and you know its value, include that amount as well.
How much should I save exactly?
If you ever heard of 50-30-20 budget, it tells you to save about 20% of your total income. I personally don’t follow this because sometimes my fixed expenses go beyond 50% but I try to maintain a 25% savings rate each month. Revisit your spending and saving in the past few months and find out what your average saving is. For example, at the beginning of the year I tracked my cashflow and it helped me determine that I have an average of 25% savings rate. After that, I try to maintain that rate. Some are a hit, some are a miss but I try my best.
Do you see now why you need to compute your savings rate? I don’t see a lot of Filipinos talk about savings rate so let me know your thoughts!