When it comes to planning your financial future, it’s common to look at how much your investments are making or your employee benefits. One number can give you a birds-eye view on your overall situation: your personal savings rate.
Australian money photo by Shutterstock
Simply put, your personal savings rate is the percentage of your income that gets put towards your savings/investments and not spent. Calculating your savings rate can quickly tell you what you need to prioritise. If you’re saving 2 per cent of your income and can’t afford anymore, you may need to either reduce expenses or find a better-paying job. If you’re saving 4 per cent, but blowing 12 per cent on entertainment activities, it might be time to re-balance. As personal finance blog DQYDJ (Don’t Quit Your Day Job) explains:
More appropriately, I like to direct people to savings rates by age group and savings rates by income. Those calculators give a (still rough, but more refined) estimate of how others in your demographic are saving. If you’re 30 years old it’s better, for example, to compare yourself to 30 years olds than 65 year olds — you have completely different goals. Ditto for folks with wildly different incomes.
Your personal savings rate is obviously not the only piece of information you should be paying attention to. But it can be more important than other numbers that get more attention. How much you save is the foundation that all your other long-term financial health is built on.