Savings Rate: Am I saving enough?

The savings rate is generally defined as the percentage of net income (after taxes) over a given period that is designated for future consumption. It can be measured individually, or on an economic level across a population.

This will include money allocated towards retirement savings, emergency savings, taxable brokerage accounts, etc. Typically speaking, your savings rate does not include money directed towards debt payments.

Simply put, your annual savings rate % is your annual net income minus your annual spend. If your net income is $100k and you effectively saved $20k over the year through different accounts, your savings rate is 20%. Pretty easy right? Sometimes it’s a bit more complicated, let’s dig in!

Let’s break open that MFC! For the sake of this example, we’ll look at the monthly savings rate. Having a monthly savings rate goal is what will propel us to reach those long-term goals.

Alright, let’s say we filled out the MFC! and we have a net income of $7,000 per month. Just for fun, I filled one out using some random numbers. Looks like our monthly fixed costs are a bit on the higher side, but nothing to be overly concerned about. We are aggressively paying down debt, so that debt payment column will free things up in the future.

If we wanted to get more hardcore on the budget, we would add every expense, get extremely intentional with our spending, and change that 10% column to $0. But for right now, let’s just leave it there.

Now, obviously, we want to look right at the monthly savings:

So, our monthly savings rate is only just over 7%? Nope, keep scrolling down, looks like we are putting away some money each month into a Roth IRA.

Hang tight! We are also putting $1,000 per month in our tax advantaged 401k. It’s not going to pop up on the MFC!, so you can log in to your account to see the $ amount that is being deposited each month. It can also be found on your latest paycheck, whichever is easiest to access.

I hope you have a company match with yours, but for the sake of figuring out your savings rate, please do not include any kind of match. You might not have that particular job for the next 20 years; will you increase your savings rate by 5% when you decide to change companies? Probably not. Personal finance is behavior based, let’s get in the habit of reaching that monthly savings rate goal on our own.

Side note: if you are lucky enough to be offered a company match, you must do whatever it takes to get it. There’s almost no situation that I wouldn’t recommend someone take that free money. If your company matches 100% on 5% of your income, you put in a minimum of 5%. If your company matches 100% on the first 3%, then 50% on the next 3%, you contribute a minimum of 6%. More on retirement savings in a later post.

This month we are going to allocate that Freedom Total $ directly towards debt payments, so it will not be counted towards our monthly savings rate.

So, based on a net income of $7,000 we are saving the following:

• 401K: $1,000
• Monthly Savings: $500
• Monthly Investments: $500

This would total $2000 of our $7000, which puts us at a monthly savings rate of 28.57%! Wow, that’s awesome!

What’s more awesome? If we keep aggressively paying down debts, let’s say we’ll be debt free in a year. At that point we’ll have an additional $1000 per month in our Freedom Total $ column, which will mean $2,786. If we decide to aggressively fill up our emergency savings with this amount, our savings would be $4,786 of our $7,000. That’s a monthly savings rate of 68.37%!!!! FIRE here we come!

Obviously, the above is an oversimplification of how to factor your savings rate. We are going to have certain unexpected expenses, and particular financial obligations, over the course of a year. Maybe you got sick and have a hospital bill to take care of. Maybe your car is on the fritz and had to get a new alternator. Things like that will pop up, don’t sweat it! Adjust the plan as life strikes and keep striving!

Notice that the examples I put above were not a Christmas gift for your nephew, or buying a brand-new car, or a vacation 3 months from now. Things that you can see coming months in advance can be, and should be, planned for. You simply take the expected cost, divide by how many months out you need to purchase, and add that number to one of the columns under monthly savings.

The below graph is from FRED Economic Data, which is pulled from the U.S. Bureau of Economic Analysis.

Since 2000 America is showing a measly savings rate varying below 5% to 10%. In general, the Savvy Solo is going to be aiming for their own personal savings rate to be much higher than this. But wait, what’s that huge spike in 2020?

Oh yea, the end of the world. COVID-19 forced almost all of us to stay inside and not spend on frivolous things. In April 2020, America was showing a savings rate of 32%! Then we show it falling as things started to clear up, and another spike in March 2021 (when round 2 of COVID-19 struck) we were at 25.9%!

What’s up with that huge dip in 2022? Most major cities started opening up, Americans are going to America, and revenge travel took over. In June 2022, the savings rate plummeted to 2%. We (myself included) started going out to eat, shopping more, and going to that bucket list destination after being cooped up for two years.

Fair enough, the summer of 2022 has stats that are to be expected. Here we are in the latter months of 2024, and the savings rate is back to a pitiful 4.8%. Now, I’m a firm believer that personal finance is personal, everyone has a different path to reach their goals. That said, it feels like we are all just falling back into our old tactics, and not improving our financial health.

We, as a nation, literally showed that we are capable of a savings rate of 32%. Do we not have enough self-control to do it without an apocalypse upon us? Or is it because we actively don’t see the value of a higher savings rate? Maybe it’s because we don’t have financial flexibility high enough on our list of core values.

Whatever the reasons may be; I challenge you, Savvy Solo, to rise above the ordinary and live the extraordinary life you always dreamed about. Regardless of what others are doing, it’s more important to worry about what’s going on under your own roof.

You might be in a situation where you are currently at a savings rate of 5% and there’s no way around it. That’s OK! As long as this is a temporary situation (even if it’s a year or two long), and the goal is to get that savings rate up! However, if you are at a 5% savings rate because you are “keeping up with the Joneses,” it might be time to re-visit the MFC! and see where your priorities really lie.

Sometimes it’s fun to compare yourself to others. I wouldn’t bring up national averages if that wasn’t the case. It doesn’t hurt to take a macro look at things like this from time to time.

That said, at the end of the day, it’s far more important to stick to a plan that is on track with your personal goals. Check out my post on How To Approach Savings for some tips if you are having trouble getting started.

The Joneses might have two new cars, a home renovation going on, and a trip to Europe planned at the end of the year. Good for them! Don’t let their actions influence the direction of your finances. They might be making a million dollars a year, they might be planning to work till they’re 75; or worse yet, they might not have a plan and end up in a sticky situation in the coming years.

You don’t know their situation, but you do know yours. The Savvy Solo will plan according to their own goals, and remain impervious to what others are doing.

Be strong.

Be remarkable.

Be extraordinary.

Stay classy Solos! ✌️