Do we need a standard formula for savings rate?


Hopefully I’m not repeating an old thread here…

How do YOU calculate your savings rate?

I take my net income after expenses and add 401k contributions, HSA contributions, 529 contributions, IRA contributions, and mortgage principal for home plus rentals. That’s my numerator. Denominator is total net (after tax) income.


There is an old thread on this topic, but the old thread likely got buried and is not easy to find anymore, and I think it’s always an interesting topic.

I calculate my savings rate as:

Numerator: Change in net worth for the period

Denominator: After-tax income + before tax savings automatically deducted from pay (i.e. RRSP contributions and employer match [I’m in Canada, RRSP is approximately equivalent to a 401K])

There’s obviously a bit of an issue here because the change in net worth includes some market changes and income (i.e. dividends) that aren’t included in the income number. However, these are small enough at this point in my journey that I’m not very concerned about it. At a later point it will likely make more sense to change the numerator to total contributions + principal reduction of any debt.

I see this a lot, and I’m always curious - why don’t you include your before-tax savings (i.e. 401K, HSA) in your denominator? Assuming these are deducted directly from a paycheque, they wouldn’t be included in your net (after tax) income, but they are technically a part of your income, just a part that gets saved before it hits your bank account.


The formula that I use is:

(Pre-tax deductions + Post-tax savings) / (Post-tax income + Pre-tax deductions)

Pre-tax deductions = Traditional 401(k), Traditional IRA, HSA
Post-tax savings = Roth IRA, savings account, taxable account

Post-tax income = my net pay
Pre-tax deductions = Traditional 401(k), Traditional IRA, HSA


I start with how much I actually saved. 401K, HSA, 401K Match, investments, etc. Then, take my gross income and divide it. You maybe can deduct medicare/FICA from the gross income, but then subtract any company 401K match.

There was a time when I was still working, I was saving 2x+ my gross pay, including any medicare. Then I set a date to leave my job.


I actually wrote an article about how talking about “savings rates” is meaningless, because there are too many different formulas. So if I say I save 50% of my income, and you say that you only save 40% of your income, we can be saving the same exact amount with the same income but have different percentages. In fact, if you read the comments of the article, you’ll see that pretty much everyone has their own formula.

The article also inspired Early Retirement Now to talk about his savings rate - and how by working the numbers he could come up with a 90% rate.


@ChiefMomOfficer I think those posts were the reason I stopped watching my savings rate because it was worthless. I realized mine was high but I wasn’t actually saving where I should.

Everyone is doing it completely differently. If you are looking to use it to compare with others I think you missed the point. We don’t share networth and savings rates to compare, we do it to hold ourselves accountable and keep pushing to FI.


It’s useful if you use the same formula and compare it to your prior year/month savings, but I think some people do try to compare with others, and that’s where the different calculations hurt. I think of savings rate like I think of net worth - an interesting number, but not useful in and of itself. I find it more useful to set goals & measure my progress towards those goals.


I think they’re all pretty close. The only variable in my own calculation is that I add mortgage principal to the numerator, since I’m effectively “saving” that amount by accumulating an ever-greater share of an asset (my home). It’s a nice thing to help offset the angst over how much of your mortgage goes to interest. I think Mr. Money Mustache uses this formula.
Agree with BOAS too - this should be more for benchmarking our own personal progress, not for a “beauty pageant.”


I also use the MMM formula for calculating my savings rate, adding my mortgage principal back in. Like @budgetOnaStick said, everyone is using it to hold themselves accountable. To @ChiefMomOfficer’s point, if you’re using it to see where you stand in the fray, it’s meaningless since you can manipulate the numbers so much. But the only people we’re fooling are ourselves. For me, the savings rate is a great metric because I use it to compare my own family’s spending each year with our spending last year. In that respect, I think it’s really useful, because it’s a big overall view of how much we’re spending and how much we’re saving. I also have goals that we work towards, but because I’m such a spender, if I didn’t worry about our savings rate so much, I know I’d spend more. It’s a great extrinsic motivator for me. But each person needs his own method for tracking, IMO.


I think I linked to this in the other thread. My Excel based calculator calculates gross and net savings rates, which can be quite different (ours is about 50% and 78% respectively).