Your personal savings rate is one of the most important indicators of your financial health. The personal savings rate is simple: It's the amount you have left over every month after you've spent the money coming in.
To find out your personal savings rate, add together all the funds that come in over the month. Include wages and salaries, dividends, and any income from other sources, such as side-jobs or Social Security. Be sure to include any income you have automatically saved, such as IRAs or health care savings accounts (HSAs).
Then, add the total left in your accounts. How much didn't you spend? Include any money in IRAs, HSAs, or savings accounts here, as well as cash in your billfold. Divide that figure into the total income. In other words, if your total coming in was $4,000 and you saved $200, the rate is 0.5, or 5%.
Personal Savings: You Need It
Why should you pay attention to your personal savings rate? Because you need savings for many things in life! If buying a house is in your future, you should have a down payment saved. You'll get a better deal on mortgage rates and points the more you have saved. You'll also need savings for any repairs or remodeling. If your car conks out on the way to work, savings means you can afford a down payment on new wheels or even a good used car.
Mortgages and cars aren't the only reasons you need to save, though. Potential job loss is another. Companies often downsize without much warning — or much severance. Many financial advisers recommend keeping a three to six-month emergency cushion for just such emergencies.
And how about health care? What if you suddenly needed emergency surgery? Deductibles, copays, tests, and prescriptions can add up rapidly. Health care costs may be a reason you'd need savings.
Finally, Social Security is not going to pay for anyone's retirement — at least, not all the way. The system is already beginning to be viewed as a partial supplement to what one needs to live on past 65. You need to be saving for retirement.
For all these life events, it's important to save as much as you can, as early as you can. Savings accounts, bonds, and stock market investments all do their best work over time. The earlier you start to save, the more your savings can appreciate.
U.S. Savings Rates Need to Be Higher
For Americans generally, the rate is around 5.8%. That's low — investment advisers believe personal savings rates should be closer to 10% or 15%.
But, depending on your age and income, you may be significantly below the national average: 18% of people across the U.S. save nothing. Their personal savings rate is zero. And roughly 50% save roughly a measly 5%.
6 Ways to Raise Your Rate
So, how can you effectively increase your personal savings rate? Here are six easy ways.
1. Grab Employer Matches
Take advantage of employer matches, if available. If your company matches 401Ks or HSAs, take advantage of them as much as you can. It's literally free money in your savings.
2. Maximize Pretax Savings
Take advantage of pretax savings, if available. If your company offers pretax savings through an 401K, HSA, or any other savings/investment vehicle, use it! Pretax savings of even 2% are greater than after-tax savings of 2%. It adds up over time.
3. Think Utilitarian
Avoid being overly flashy with major purchases like cars. It may be nice to think of a red convertible — but if that adds up so you have no disposable income left, you may want to rethink the purchase. Would a serviceable car allow you to reduce monthly payments? Or, could you buy a used car and put money you'd earmarked for payments toward your personal savings rate?
4. Pare Back Your Budget
If you don't currently keep a budget, it's time to start one. Review your budget by category. What could you pare back without drastic impact? Could that Starbucks venti macchiato coffee every day be substituted with coffee brought from home? Could Netflix substitute for movies and dinner out?
5. Curb Impulse Purchases
It's great to be able to buy new fall shoes and DVDs that call your name. But it's also great to be able to look at your savings every month with pride. Cut down on impulse purchases. If you love shoes or the newest DVDs, look at catalogs to whet your thirst. But don't buy shoes until you need them. As for DVDs? Check the library.
6. Consider the Gig Economy
Would it be possible to have occasional work driving for a ride-sharing company, running errands, or taking care of pets or plants? Earmark any earnings for your personal savings rate.
Your personal savings rate has a major impact on your financial life. Take advantage of every way to maximize it. If you do, you'll be in much better financial shape than most of America is right now.