This simple formula will show you if you're on track to buy a home or retire early
This story is part of CNBC Make It's One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.
If you have a big money goal in mind, such as buying a home or retiring early, you should have a solid understanding of where your money is going, including how much you're actually saving.
An easy way to figure out how much of your money can go toward building wealth is by calculating your savings rate, which is the percentage of your income that you keep each month, versus the amount that you spend.
It shows you how much of your income is left over after expenses — money that you could be putting to work.
But before you can calculate your savings rate, you'll need to gather a few numbers.
First, determine the amount you bring in each month, including your take-home pay from any full- or part-time work, plus any additional cash you earn from side gigs.
Next, figure out how much you spend. This should include any expenses that aren't automatically taken out of your paycheck, such as your mortgage payment and student loans. You should also include any discretionary spending, such as dining out, travel and streaming services.
Now, you can plug it into the savings rate formula. Here are the steps:
- Subtract your expenses from your income.
- Divide that number by your income.
- Multiply by 100.
Say you earn $3,000 a month from your 9-5, $500 from your side gig, and your expenses add up to $2,500.
Your total income — $3,500 — minus your expenses comes to $1,000. When you divide that by $3,500, you get 0.2857.
Multiply that by 100 and your savings rate is approximately 28.6%.
Keep in mind that this is a simplified version of this calculation. If you contribute to a retirement fund pretax, earn an employer match or already figure other savings into your monthly expenses, you'll need to account for those as well.
If you earn an employer match, for example, you can add that amount to your monthly income since it's part of the compensation you receive from your employer. You can also add any pretax contributions you make to a retirement account to your income if you want to see the total amount you're saving, rather than just the amount of your take-home pay that's left after covering your monthly costs.
It may also be helpful to use an online calculator that does the math for you.
Knowing how much you're currently saving gives you a starting point to calculate how close you are to reaching certain goals and how long it will take you accomplish them. If you're aiming to put away enough to retire in the next 20 years, you can estimate how much you'll have based on your current savings rate and understand if that's actually a reasonable goal.
You may also realize that you're burning through your earnings more quickly than you would like. If that's the case, you may want to look for ways you can trim your expenses.
Keep in mind that when your income or expenses fluctuate, your savings rate will too. It's worth recalculating any time you earn a raise or adjust your budget to make sure you're still on track to reach your goals.
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