We all know the basic pattern of how this looks: You take home what’s left after a long string of deductions have been taken out. This is how much your employer said they’d pay you. What’s the difference? Well, by net pay, I’m specifying that I’m only counting the money that hit your bank account.Įvery time you get a paycheck, you see the gross pay at the top. The first thing that you’ll notice is that I swapped out the phrase “income” and replaced it with “net pay.” So let’s take a look at the adjusted formula that accounts for taxes and then I’ll go over what the changes mean. Any dollar you pay in taxes wasn’t yours to spend or save in the first place. Specifically, you want to completely remove taxes from the picture.
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That means you need to think about how to handle taxes.
When it comes to calculating what is arguably the most important number to your financial health, you want to be as precise as possible. Well, we’re not going to do that this time. It’s pretty common when talking about personal finance to just ignore taxes for the sake of simplicity.
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I use the free service Personal Capital to track my spending and income. So here’s our first way of re-writing the simple version of our formula: The first issue we need to tackle is what counts as saving? The answer is any money you earned that you didn’t spend. 212 it means you saved 21.2% of your income.Īnd don’t be pedantic. I’m just going to leave that bit off and assume you realize that if you get a savings rate of. Multiplying by 100 is necessary to express it as a percentage. Yes, if you want to be pedantic, you could point out that technically the correct formula is savings/income *100. So our most basic formula for savings rate looks like this: Your savings rate is just the amount that you saved expressed as a percent of the money you made.
If you stay to the end, I’ll give you a free Google sheet with the formulas built in so you can just plug and chug. In this post I’m going to walk you through how to calculate your savings rate like a pro. Your savings rate tells you where you’re going. You see, you’re net worth is just a snapshot of where you are. Again we noticed the importance of your savings rate. Later, we looked at one of the most popular metrics in personal finance: Net worth.
Money Mustache’s shockingly simple math behind early retirement, we observed that your savings rate is the most important factor in retiring early.
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