How to Calculate your Savings Rate

I had a graduate email me the other day to thank me for getting him on the path to saving early (awesome email!)

He had one question though: How do you calculate your savings rate?

I then realised that I’ve never really explained in a post how you should calculate your savings rate and how I’ve set up the SNSS (Saving Ninja Super Spreadsheet) to calculate that figure. 

So, here it is!

How should you calculate your savings rate?

There are two things that I care about most when it comes to calculating your savings rate – or anything else for that matter – and that is simplicity and mathematical function

The calculation needs to work with any and all Math. It should be possible to plug any variables into the formula and for it to work out of the box, straight away. 

It also needs to be simple. Anyone should be able to figure out their savings rate with minimal thought, whether they own a home, rent, have a pension, don’t have a pension – the calculation should be the same. No airy-fairy “My savings rate is N minus mortgage payments, plus equity, minus pre-tax pension payments divided by two.” It should be the same calculation no matter what assets you own or which company pension plan you are enrolled in.

Keeping it simple

The SNSS expects you to know what your average expenses are for the year. The budgeting strategy that I use, and I implore you to use as well, revolves around creating an annual budget at the beginning of the year and sticking to it as best as you can.

Doing this will allow you to allocate certain budgets to your ‘fun pots’ such as holiday and your ‘savings pots.’ It will also allow you to visualise the year before it begins and shift spending to allow more allocation to things like holidays or more to savings depending on what your current annual goal is. I’ve written a post about this method of budgeting here, and it’s vital you use this method if you want to make the most out of the Super Spreadsheet.

The benefit of budgeting for the whole year means that you don’t have to track your expenses every month, this allows you to keep your tracking simple and quick. You will, of course, lose a little bit of accuracy doing it this way, but that can be fixed.

I’ve combated the accuracy deficit by increasing my annual expenses to £12000 in the SNSS instead of the more accurate figure of £9356, this ensures that I have a little wiggle room when it comes to the uncertain expenses that crop up throughout the year. It also means that if I’m off-point, I’ll be under rather than over-calculating.

Don’t worry about all of your money

The Super Spreadsheet only cares about the money that you have invested, your monthly contributions, and your expected expenses (which you should have already figured out and added to the top of the SNSS in the ‘annual expenses’ input box).

If there is money that you have earned but not invested yet (or spent), don’t worry about it. With respect to ‘keeping it simple’, we can forget about this earning. It also isn’t useful when calculating things like ‘Years to FI’ as that assumes that everything you have saved is going to be compounding (other than your house equity).

For myself, a big chunk of my net income I don’t invest or spend. But that isn’t taken into account when calculating my monthly savings rate. I use this extra money to hoard into my Marcus account as an emergency fund. I then empty any excess emergency fund money into an ISA at the end of each tax year. This will skew my savings rate calculation for that particular month (maybe even making it go above 100%) but the ‘average savings rate’ located at the top of the SNSS records the running average for the whole 12 months, so you can use that figure to get an accurate representation of your real savings rate at the end of the year.

You should include your house in your savings rate

You should definitely be included your house in your net worth; that means that you should be including your equity payments each month in your savings rate as well.

If you were to sell all of your assets today, THAT would be your net worth…keep it simple! It doesn’t matter if you never plan to sell your home, or if you’re mortgage-free, it’s an asset.

Including your house equity (or any other equity for that matter) in your savings rate allows us to factor it into each mathematical calculation. If your home is mortgaged and your equity payments form part of your expenses, your savings rate will more accurately represent your future FI date with your home equity included. Read more into this argument here.

What’s the Math formula?

The formula simply needs two bits of information: your total expenses, and your total income – which is retrieved in the SNSS by combining your monthly contributions and your monthly expenses.

With these two figures we can do this calculation:

((Total Income – Expenses) / Total Income) * 100

So if your total income for the month is £4000 and you invest £3000 you’ll do:

£4000 – £1000 = £3000
£3000 / £4000 = 0.75
0.75 * 100 = 75

And voila, your savings rate is 75%.

This same formula can, of course, be used for your yearly income and expenses, but I just calculate the average from 12 months of savings rates to get my true savings rate at the end of the year.

What should I build?

Go and check out the Super Spreadsheet to check it out for yourselves. If you don’t want to subscribe, contact me and I’ll send it to you. I’ll be making it available to everyone when the site renovation is finished anyways.

I’m also planning to add some more features to the spreadsheet at the end of the year. What would you like to see? Do you want a way of interactively simulating compounding with graphs presentations similar to the ones I showed in this post, or are there any additional fields that you would like me to add?

Let me know in the comments below!


23 thoughts on “How to Calculate your Savings Rate

  1. I’ll give you a compliment sandwich on this one.

    First of all, love the simplicity, it’s awesome! And far easier than the complicated way I used to have to work out all of our expenses and whatnot each month (tracking every pound, very tiresome, have now stopped doing it).

    However this only works if you never go over budget doesn’t it?

    The obvious reply is “Don’t go over budget” but that just doesn’t happen for most people, as things crop up. You have a lot of wiggle room baked into this system but that’s because you are a very high earner and a very low spender. A good system for many, but not all, of the FIRE lot, but this won’t do the business for someone trying to scrape together 10% savings rate as a max figure per year, they will need to know where every penny of income and expense to hit that goal.

    Thinking about it further, I’m not 100% sure this will be very accurate for high earners due to the “extra income” thing. I could estimate my expenses at say 1K/month, and then invest my 3K/month, but if I’m earning 8K/month I could really be spending 2, 3, 4 or even 5k/month and still hit my 1K/3K initial estimate. 1k/3k works out to 75% as in your example but if you are really spending 5K that is totally wrong, it is really actually 37.5%.

    I’m not saying it is very likely that you would be spending 5K without realising it, and thinking you are only spending 1K, but the way to test these sorts of “assumption” based systems is to take them to their limit and see if they break, and I would say that is pretty broken.

    I think there is every chance a person using this system would end up spending more than they budgeted but because they’ve hit their savings goal give themselves a pat on the bum regardless.

    If the SR goal is high enough and the budget overspend is low enough this will likely not dent their FI plans in the slightest, but if the SR rate goal is a lower one, and the overspend starts to creep up a bit, then they whole “years to FI” calculations can go up pretty quickly, and they will be in for a rude awakening when they pull the plug and realise their pot doesn’t actually cover their real (not estimated) expenses.

    Eeek sorry one other thing is that calculating averages with percentages doesn’t work!
    Look at this if you fill up your ISA with a big chunk at end of the year (have limited to 4 months just to show example):
    1k/3k – 1k/3k – 1k/3k – 1k/20k
    75% – 75% – 75% – 95%
    Average of percentages is 80%
    Actual figures should be 4k/29k = 87%

    Obviously in this instance you would have underestimated which at least is a buffer, but I’d rather be accurate whether over or under. Also if your SR can be all over the shop during the year averaging them will be far less accurate.

    Final part of the compliment sarnie… I love you man! 🙂

    1. Always keeping me on my toes TFS! 😉

      I agree with everything you said. For me personally, I’m hoping that I can keep well below the 12k figure, although it’s kind of arbitrary as I’m planning to overshoot it anyways, I’m just keeping track of it to see when I’m officially ‘FI’ (unless of course, I spent loads extra! :D) For others, and me as well really, a yearly figuring out of what you spent vs your budget is probably necessary at the end of the year, you’ll then hopefully be able to see your true figure and re-adjust for the following year.

      A nice way to do this without keeping track of your total expenses would be to just analyse how much you made for that year, and check out your spreadsheet to see how much you’ve invested, then see what the difference would be. If you can’t account for it, it’s probably some kind of forgotten expense and you’ll have to increase your margin more.

      Nice spot with the averages! I just assumed it would work when I created it. I’ve now updated the formula to look at total income and total spent (so far in the year) to get the percentage. You’re right, it does go way up!

      That would have completely skewed my figures for next month, so thanks for that 🙂

  2. Just to hammer my point home with a more realistic example than the 75% / 37.5% I gave.

    A more realistic one would be a high earner to estimate 10k expenses/year but actually say be spending 15K. If you are a high earner already and then say have some extra income from say Matched Betting, which it’s really easy to earn an extra 5K/year, I am fairly certain 5K/year expenses could easily be lost in the ether and explained away or forgotten about because “hey I’m already hitting my 75% savings goal”

    However the difference in retirement pots needed to cover those expenses is:
    10K – £250,000
    15K – £375,000

    That’s a cool £125,000 more, we’re not talking pocket change here and that could easily mean another 3-4 years at work even for a high earner.

    Something to think about at least 🙂

    1. You’ve ruined the compliment sandwich! I’m now officially offended 😉

      Consider your point hammered. An end of year review (and adjustments for the following years budget) would definitely be needed to detect this problem. If you have a huge deficit and can’t figure out where it’s all gone, you’d definitely have to start micromanaging a bit more.

  3. Totally agree with Keeping it Simple Stupid.

    I haven’t looked at your sheet in detail yet, but I will when I get on a box with Excel installed. How do you handle gross/net income?

    Specifically asking as a large portion of my monthly investments are made gross due to salary sacrifice.

    1. Hey dude,

      I don’t handle the difference between gross/net.

      Everything saved (whether via salary sacrifice or otherwise – including employer match) is added to your total contributed, everything you’ve spent (after tax) is added to your expenses. I count your total income as what you’ve saved, plus what you’ve spent – tax is disregarded. I disregard tax to make it simple and to make the Math work, as I don’t expect to be paying tax in retirement. If you choose to contribute via salary sacrifice (thus increasing your savings amount due to paying less tax), your savings rate will still go up.

      I’m actually planning to re-write everything (including the macros if I can) in Google Drive. Mainly so I don’t risk the loss of data if my computer implodes! I’ll hopefully be doing this during Christmas.

  4. Good post and it’s made me think a bit.
    Savings rate is just a metric. The metric measures your performance but it is not your performance – it’s a guide and not a destination. If you focus on saving money and increasing your savings rate, you might skimp on home decoration meaning your house is worth less or on car maintenance and find a large bill down the line.
    (Income less Outgoings) / Income
    I’ve always just looked at what I’ve had as income that month and what I’ve spent that month. Keep it simple.

    For what it’s worth, I only count Mortgage INTEREST as an outgoing but do consider the capital repayment as for cashflow purposes. Changes in asset values are not part of the savings rate calculation and nor should they be.

    1. You’re one of the only other bloggers that I know that treats home equity as net worth.

      Saying that, you made me realise that in my budget I’ve included my total mortgage repayment. I’m also counting the equity as an investment each month, that’s got to be messing up my figures somewhat. If I am treating interest only as an expense, I should probably include that only in my budget. But you’re right, it’s nice to see it for cashflow purposes, maybe I’ll have to add a ‘true expenses’ figure.

  5. Regarding semantics and “Therefore the formula I use is: FISavings / (Expenses + FISavings) * 100.”

    I would say that logically, what you don’t spend you save and what you save you invest. So therefore Savings = Income – Outgoings
    Maybe it would be better to call me Savings Ratio my “Not Spent Ratio” as that is what it really is.

    (In my mind, what money I have is then invested/saved/mortgage paid off/P2P’d and the fees for those are counted/calculated but not counted as part of Spending.
    Simply if you had earned £50,000, spent £25,000 a year and had a £1m pot in ETFs paying 0.25% TER (i.e. £25,000 a year), would you say that your savings rate is 50% or 0%?

    1. I’ve not been including income from assets in my savings rate, doing so would drastically skew the figures (beyond a certain point). I’m using the savings rate simply as a metric to figure out how much I’m saving from my working income. As the stocks are likely to yo-yo up and down throughout the years, I don’t want it to make my savings rate data unreadable.

      (Income – Outgoings) would probably be doable, it’s more or less the same as what I’ll get when I’ve invested ‘the rest’ at the end of the year. I’ve just liked to keep that emergency fund separate; so instead of tracking my emergency fund payments (if something happened) and seeing my savings rate bounce up and down, it’s kept flat; and I either get a bump at the end of the year, or don’t. Either way, it will be a true figure at the end of the year, no matter which way you track it – just one way requires less work (at the expense of more acute data tracking through specific events) – I’m more tracking for investment growth/after earning investments instead of trying to get a grip on my expenses (once a year for that is enough for me).

    2. Each month I save for other non FI items. Such as a wedding, a new car, paying off debt etc. It is really deferred spending. Therefore I exclude it from my savings ratio and I only look at what I save towards FI. Otherwise my FI savings rate would be artificially inflated.

    3. Each month I save for other non FI items. Such as a wedding, a new car, paying off debt etc. It is really deferred spending. Therefore I exclude it from my savings ratio and I only look at what I save towards FI. Otherwise my FI savings rate would be artificially inflated.

  6. Finally, tax should be considered an expense – even if you don’t think of it that way. says it best:
    I unapologetically continue to define Saving Hard differently than most personal finance bloggers. For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employer Pension Contributions minus Spending minus Taxes. Earn more and one is winning. Spend less or pay less taxes and you’re also winning. Savings Rate is then Saving Hard divided by Gross Earnings plus Employer Pension Contributions.”

    1. Nooo. I’d prefer simplicity over a little bit more accuracy. I’m not planning to pay any taxes in retirement (personal allowance + ISA), so it doesn’t affect my future predictions Math.

  7. I like seeing how other people calculate their savings rate and net worth. As long as they are consistent, I don’t think there’s a right or wrong, as long as it’s explained what you do and don’t include.

    I no longer bother tracking my net worth but my savings rate is basically what I save/invest from my net salary which drops into my bank account each month.

    Like you, the SR is just a metric to show how much of my normal wage I am saving/investing each month, I don’t include MB or the other income in the rate, although I do report these numbers in my updates so people can see where my money is coming from.

    1. Yeah, a lot of different ways 🙂 Just like with tracking matched betting!

      I will actually be including MB in my savings, but only when I invest it in the stock market. The earnings are going to help me max my ISA for the next few years (as I’ve only been putting in £1k per month from my salary).

  8. Interesting the different ways to look at it.

    If I use what I’m thinking of as the Savings Ninja method I end up with an SR of 72%, which makes me feel warm and fuzzy inside.

    If I use the Gentleman’s method and include tax as an expense I have an SR of 53%, not bad.

    If, look at SR from a net point of view, so not including taxes or pension contributions (because I’m aiming to retire before I can get my pension, although yeah I know I should only need enough to build a bridge to my pension) then I’m looking at 58%, slightly better.

    And if I go the net point of view without including my mortgage capital payments I’m only looking at 46%, which makes me feel sad.

    It’s fairly hard to choose the best method for me as I’m not certain if I’ll have paid my mortgage off before FI or how many years I’ll need to last before getting my pension as it depends on how the various different markets (equities, gold, housing) perform.

  9. I think all the methods have their merits and its a personal choice which one jives for you. That being said, the variability in results should be a central consideration. I think it’s a useful exercise to run it a few different ways and consider the figures in real terms. It’s obviously important to apply it consistently once you settle on the method that works for you and is realistic. You’d not want to be happily swanning along with the perception that you are saving 75% and x years to FI, when, if viewed differently, the figure is 30% and the journey is longer than first thought.

    1. In my current work, we don’t usually develop a project unless the low case is deemed to have an ROI of at least 10%. I’ll be treating FIRE in a similar way, where I won’t be pulling the trigger until I’m reasonably sure my FIRE will be successful in my low case scenario.

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