If you're minimizing your debt, putting money away for retirement and generally bringing in more than you spend each month, you're probably doing all right financially.
On their blog Money Sloths, Mike and Sophie, who use only their first names online and save up to 80 percent of their annual income, break down how to calculate your personal savings rate. That's "the amount of money, expressed as a percentage or ratio, that a person deducts from his disposable personal income to set aside as a nest egg or for retirement," according to Investopedia.
The formula is simple. "It's just your income, less your spending, divided by your income. Multiply by 100," the Money Sloths write.
They break it down into four steps:
- Calculate your income for a specific period
- Calculate your spending for the same period
- Subtract your spending from your income to figure how much you're saving, then divide this number by your income
- Multiply by 100
When calculating your saving rate, it's important to note that it should include your income after taxes, because you'll over-estimate your savings otherwise. Besides, "it's much easier to look at everything from an after-tax basis right now since your future hypothetical self will face the uncertainty of different tax rates — whether it's because you live in a different state or maybe you're retired and now sit in a lower tax bracket," say Mike and Sophie.