Financial Ratios Part III: Savings Ratios
Savings Ratios are basically self explanatory. Savings ratios tell what percentages of both gross and net income are being saved each month.
Gross Savings Ratio = Total Savings / Gross Income
This is probably the most common financial ratio people calculate or track even if they don’t know they are doing so. Anytime you’ve got a 401(k) program (or similar profit sharing program) where you designate a percent of your monthly income to be invested, you are setting your gross savings ratio for the month.
For example, if you make $5,000 (gross) a month and make a $500 contribution to your 401(k) your gross savings percentage would be 10%. However, something you may want to keep in mind is that if your company has a matching program your ratio would actually be higher.
Assuming the same facts as above, with the additional assumption that your company offers a 50% match on the first 5% contributed, you would have an additional $125 of contributions ((5,000 * 5%) * 50%). With these additional contributions your gross savings ratio would equal 12.5% (625 / 5,000).
Savings Ratio = Total Savings / Net Income
Another way to look at savings as a percentage of your income is to compare it to your net income rather than your gross income. Although I prefer to track my savings as a percentage of gross income, there are situations where tracking savings versus net income may be more beneficial.
One reason that tracking the net savings ratio may be a better indicator of your overall savings percentage is because with some employers require a number of paycheck withdrawals that are out of the employee’s control. For example, if you are required to carry disability or life insurance through your company you may not look at these funds as truly disposable/discretionary income. When calculating your savings percentage you may not want to include these in the denominator.
A good rule of thumb is to keep these ratios above 10% and preferably above 15%. The higher the ratio the better.
*For an explanation of the other ratios I use, check out my other financial ratio posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth Ratios).
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[...] of the other ratios I use, check out my other financial ratio posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth [...]
[...] and how they are calculated check out my Financial Ratios posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth Ratios). Share and [...]