Savings Rate (Sr)
6min video
Learn about the Savings Rate (Sr) and its importance in your financial health in our latest video. Follow our series on financial vital signs for more insights on achieving financial wellness.
Video transcript:
Your Savings Rate is one of the most important vital signs to gauge financial health. Like how a doctor monitors your blood pressure or heart rate to assess your physical health, your Savings Rate is a leading indicator of your future financial health because it correlates with achieving financial independence.
Let’s talk about first how to calculate it. You divide your total annual savings by your total personal income. For example, let's say you make 200,000 a year and save $20,000/yr into a 401(k), not counting the employer match, $10,000/yr into a brokerage: Your Savings Rate (Sr) would be 15% in that case.
In reality, most of us struggle to save money for the future because of a behavioral tendency called "Present Bias." This means we tend to give stronger weight to payoffs closer to the present; most folks prioritize spending before saving, just like Jerry Seinfeld describes.
You are both morning and night guy, and finding the right balance between maximizing life today and the delayed gratification of saving is a solvable equation using this vital sign.
Housing, food, family size, education, and more can all affect your ability to save. And on top of that, the modern economy has made it easier than ever to spend money. We traveled out of the country recently and heard multiple times the news stations talking about the almighty American consumer, that notoriety is global, and that we Americans love to spend money. Don’t get me wrong; I’m not going to sound like most advisors that say you need a budget and guilt trip you for buying a new iPhone or go to Starbucks too much; I’m just as much a part of the consumer economy as you are. But acknowledging that Subscription services, and doorstep delivery of anything, are all tempting distractions from saving – that’s why the antidote to that is Automating your savings.
Here's why - most of the wealth I see is accumulated in two places by the time someone gets to retirement: their home equity and their 401k through work. Why? Well, it makes sense because that’s where the savings are automated: money comes right off your paycheck into the 401k, and you pay your mortgage every month. So let’s use this to our advantage, and if we review your cash flow and ascertain that you may have $1,000/mo leftover, you can push these funds automatically to the most appropriate account. You will pay yourself first and have guilt-free spending on whatever is leftover, knowing that neither the night nor morning guy has been compromised.
So what’s an appropriate savings rate? Generally, average savings rates fall between 10% and 30%, and understanding the correlation between future retirement income, age, and upcoming purchases can help you determine if your Savings Rate is appropriate. It's important to note that everyone's Savings Rate is highly individualized. Depending on income, lifestyle, and financial goals, what is appropriate for one person may not be appropriate for another. Here are some overall benchmarks to at least provide a starting point.
Finally, we should question what accounts you should be saving to for a tax perspective, what you should invest in and how aggressive you should be, whether you're utilizing the full employer match, and what your savings frequency should be. The idea is that every dollar goes to work for someone, and just want be sure that your hard earned dollars are working as hard possible for you. Consistency is critical, and the more automated you can make your savings contributions, the more salient the saving behavior will become. And remember to ensure you have sufficient liquidity for emergencies, which is another vital sign we will tackle in another video.
I hope this guide has helped you to understand your financial health better and given you a way to triage it using a vital sign like savings rate. For my clients, you should all be receiving your reports. If you could take a moment to review & confirm the accuracy of your income and the automated savings you have set up for the year within your app, that’d be great!
As always – stay on point.
Take care!
