How to Calculate Your Savings Rate the Right Way

100% savings rate
Financial Planning

I recently got interviewed by the FI community on Instagram, and one of the questions the content curator asked was, “How much is your savings rate?” to which I responded with 40%. But in all honesty, I grabbed the number out of thin air.

I’ve been religiously tracking my annual spending and overall net worth, but I never actually sat down to calculate my savings rate— until now.

Of course, the best time to do so is the start of the new year when the previous year’s income and expense data are fully available.

This post explores how I calculate my household savings rate and why it matters.

Why calculate your savings rate

As the chart below shows, if you save 50% of your income, you’d be able to retire in less than 15 years. Save only 10%, and you’ll be working for 50+ years— the rest of your life! This chart assumes a conservative 8% return on investment.


Formula derivation

Strictly speaking, savings is money that you don’t spend. Networthify’s calculations are based on a very simplistic formula:

Savings = Take-Home Pay – Spending


Take-Home Pay = Gross Pay – Taxes

Then we can calculate your savings rate:

Savings Rate = Savings / Take-Home Pay

Very straightforward indeed, but there’s a couple of wrong assumptions:

  • It assumes all savings happen after income taxes have been paid. In reality, tax-deferred employer-sponsored accounts like your traditional 401(K) or 403(B) are pre-tax savings.

  • It also assumes that money you don’t spend all goes towards investments when it could be for future consumption like a new Tesla.

Networthify is a fantastic tool. But I remember my high school teacher once scolded the class for making bad assumptions. To quote, “Whenever you ASSUME, you are making an ASS between U and ME!”

Revised formula

Taking my HS teacher’s point into consideration, the revised calculations would be the following:

Savings = Pre-Tax Savings + After-Tax Savings


Take-Home Pay = Gross Pay – Pre-Tax Savings – Taxes

But there’s another problem.

Since the savings component is now comprised of both beforetax and aftertax contributions, it makes no sense to use the take-home pay as the denominator to calculate the savings rate. To resolve this, we’ll add the pre-tax savings to the number.

The resulting savings rate calculation would be the following:

Savings Rate = (Pre-Tax Savings + After-Tax Savings) / (Take-Home Pay + Pre-Tax Savings)

Note that we don’t want to factor in taxes. Otherwise, this would put someone in the 37% tax bracket at a huge disadvantage. Ideally, the savings rate should be applicable to everyone regardless of income.

Substituting our real-life numbers

Of course, this post won’t be complete without using our household numbers. That’s the beauty of following a blog instead of reading a Yahoo Finance or CNN Money article written by a paid writer using made-up numbers.

Pre-tax Savings, $59,253.92 (401K, 403B, HSA contributions, plus employer matches)

Examples of pre-tax savings include Traditional IRA and 457 accounts.

Since my wife and I turned 50, we stashed a combined $13,000 in “catch-up” contributions, bringing our 2021 contributions to $26,000 each. 

After-tax Savings, $50,038.53 (Roth IRA, 529, and brokerage contributions)

Arguably, additional payments to mortgage principal may be considered an after-tax saving as many look into their house as an investment. I don’t only because we have a paid-off mortgage.

Take-home Pay, $112,996.38 (paychecks and others)

Other income may include interests, dividends, or income from a side hustle. Mine is close to nada! For simplicity, I don’t add dividends because they get automatically reinvested. And who earned substantial interest this year, anyway?

Now that the totals are available, lets recalculate…

Savings Rate = ($59,253.92 + $50,038.53) / ($112,996.38 + $59,253.92)


Our Household Savings Rate = 63.45%

We have a bigger savings rate this year, thanks to the “catch-up” contributions!

Final thoughts

Along with your net worth and spending, your savings rate is one of the most valuable tools you can use to track your progress. It’s particularly handy in predicting how long it will take you to become financially independent.

You may be contributing more to your retirement accounts this year, but that doesn’t necessarily mean that your savings rate is higher than last year if you recently had a big raise. Unlike other metrics like net worth, your income is a factor in the equation.

Readers, I wish you all hit your savings goal in 2022!

See also: The Road to Riches Starts Here, Track Your Net Worth

Me, hitting all my goals (turn volume on, and watch).

No Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Dave Ramsey is Right: Payoff Your Stupid Debt Instead of Chasing that 401(k) Match
Financial Planning
Dave Ramsey is Right. Pay Off that Stupid Debt Before Chasing that 401(k) Match

When it comes to paying off debt, there’s only one name that comes to mind: Dave Ramsey. For decades, he has taught millions of people through his podcast and radio show, a process for getting out of debt and building wealth, which he calls the “Baby Steps.” He has helped …

FIRE Calculator
Financial Planning
Introducing… MB50 Financial Independence Calculator

How can you tell if you’re Financially Independent? There are a lot of misconceptions about this subject. Your 21-year-old who left the house for good is nowhere near F.I.— He simply transferred his dependence from you to his employer. Being a multi-millionaire won’t necessarily make you financially independent either. Financially …

Net worth update
Financial Planning
Net Worth Update: Seven Years Later

Seven years ago, in August, I launched this blog with a net worth shy of $1M. On Labor Day the following year, I posted our very first net worth update. I thought sharing our net worth was a motivational boost to myself and other financial voyeurs who are on a …