How to Calculate Your Savings Rate

The formula

Your savings rate is the share of after-tax income you keep. The formula is (after-tax income − spending) ÷ after-tax income × 100. The numerator is your monthly savings; divide by the income and you have the rate as a percentage. The worked example below uses $6,000.00 a month in and $4,500.00 a month out.

Step 1 — Write down your after-tax income

Use take-home pay — the money that actually lands in your account after tax. The worked example uses $6,000.00 a month. If your pay varies, use a three-month average.

Step 2 — Add up your monthly spending

Everything you spend in the month: rent, food, transport, bills, and fun. The worked example spends $4,500.00 a month, or $54,000.00 a year. A bank statement is more honest than a guess.

Step 3 — Subtract to find your monthly savings

Monthly savings are income minus spending: $6,000.00 − $4,500.00 = $1,500.00 a month, or $18,000.00 a year. If the number is negative, you are spending more than you earn.

Step 4 — Divide by your income to get the rate

Divide the monthly savings by the after-tax income and multiply by 100: $1,500.00 ÷ $6,000.00 × 100 = 25.00%. That is your savings rate.

Step 5 — Work out your independence number

The independence number is 25 times your annual spending: $54,000.00 × 25 = $1,350,000.00. It is the portfolio that supports your spending at a 4% withdrawal rate.

Step 6 — Work out the years to reach it

At a 5% real return with year-end contributions, $18,000.00 a year reaches $1,350,000.00 in 31.94 years. That is what a 25% rate means: about 32 years of saving at this pace. A 50% rate takes 16.62 years; an 8.33% rate takes 55.16 years.

The worked example

Income $6,000.00 a month, spending $4,500.00 a month. Monthly savings $1,500.00, annual savings $18,000.00, annual spending $54,000.00. Savings rate 25.00%. Independence number $1,350,000.00. Years to reach it 31.94 at a 5% real return. The same example on the calculator: savings rate calculator.

How the numbers change

Spending $3,000.00 a month instead of $4,500.00 gives a 50.00% rate and 16.62 years to FI. Spending $5,500.00 a month gives an 8.33% rate and 55.16 years. Earning $10,000.00 a month instead of $6,000.00 gives a 55.00% rate and 14.44 years. Spending is the bigger lever: cutting $1,500.00 a month of spending moves the rate from 25.00% to 50.00%, while earning $1,500.00 more a month moves it only to 33.33%.

Working backwards

Want a 40.00% rate while spending $4,500.00 a month? You need $7,500.00 a month of income — at $7,499.00 the rate is 39.99%. Want to reach FI in under 20 years at that spending? You need $7,903 a month — at $7,903 the years are 19.9973, and at $7,902 they are 20.0011. Want a $2,000.00 monthly saving on $6,000.00 of income? Spend $4,000.00 a month.

What the calculation leaves out

The rate is a snapshot, not a plan: it ignores taxes on the savings, investment risk, the fact that spending changes over a lifetime, and the fact that a 5% real return is an assumption, not a guarantee. At a 7% real return the worked example takes 27.09 years instead of 31.94; at a 0% return it takes 75.00 years. Use the rate to see where you stand, then check the calculator for your own numbers.

What to do next

Work out your own rate on the savings rate calculator, then try the savings rate to retirement chart to see the years for your rate. If the rate is under 20%, start with the spending: the worked example shows that cutting $1,500.00 a month of spending halves the years to FI.