QoinSavings Rate: How Much of Your Income Should You Save?
A common target is to save 20% of your take-home income, and 10% is the usual minimum. Your savings rate is the share of income left after all expenses: (income − expenses) ÷ income. Judge it by the average of the last three to six months, because a single month swings with a bonus or a large bill.
What a savings rate is
Your savings rate shows what share of your income you kept over a period after all expenses.
Savings rate = (income − expenses) ÷ income × 100%
Earn $2,000 in a month and spend $1,520, and you keep $480. That is a savings rate of 24%.
The amount alone says little: $480 a month is a good result on a $2,000 income and a weak one on $8,000. The percentage lets you compare this year with last year, even if your income changed in between.
How much of your income to save
Three round figures come up most often. They are rules of thumb, and your own number depends on what you are saving for and by when.
| Savings rate | What it usually means |
|---|---|
| Below 0% | You spend more than you earn, and the gap comes out of savings or goes on credit |
| Below 10% | Little room for surprises |
| 10–20% | A solid habit |
| 20–30% | The usual target |
| 30% and up | Aggressive saving for a specific goal |
The 20% figure comes from the 50/30/20 rule in All Your Worth by Elizabeth Warren and Amelia Warren Tyagi: half of after-tax income goes to needs, 30% to wants and 20% to savings and paying down debt.
The same rates can be read as time. At 20% you spend 80% of your income, so setting aside one month of expenses takes four months. At 10% it takes nine months, and at 50% one.
| Savings rate | Months to save one month of expenses | Months to save a 3-month emergency fund |
|---|---|---|
| 5% | 19 | 57 |
| 10% | 9 | 27 |
| 20% | 4 | 12 |
| 30% | 2.3 | 7 |
| 50% | 1 | 3 |
The table assumes your income and expenses stay the same and leaves out interest. For how many months a fund should cover, see Emergency Fund: How Many Months Do You Need?
How to calculate your savings rate
Step 1. Add up your take-home income
Count the money that reached your accounts after tax: salary, freelance and side income, bonuses, interest, benefits, rent you receive. Leave out money that only changed places: transfers between your own accounts, a loan you took out, a refund for something you returned, money a friend paid back.
The OECD also measures household savings against disposable income, which is income after taxes. If pension contributions are deducted before your pay arrives, they are savings too, but the formula doesn't see them. To include them, add that amount to your income.
Step 2. Add up everything you spent
Count every expense in the period: rent, groceries, bills, transport, subscriptions, gifts, fees. A transfer to your own savings account stays out of expenses, and what you later buy with that money goes in.
Loan payments need a decision. The simplest method counts every payment as an expense, which is also what you get when you log payments as expenses in a tracker. The 50/30/20 rule puts minimum payments under needs and anything you pay above the minimum into the 20%. Both methods work. Use the same one every month, or you won't be able to compare the months.
Step 3. Divide, and use more than one month
Subtract expenses from income and divide by income. Then do the same for the last three to six months together, because a single month misleads. The month you pay annual insurance looks like a failure, and the month of a bonus looks like a triumph.
| Month | Income | Expenses | Saved | Savings rate |
|---|---|---|---|---|
| January | $2,000 | $1,520 | $480 | 24% |
| February | $2,000 | $2,200 | −$200 | −10% |
| March | $2,600 | $1,550 | $1,050 | 40% |
| April | $2,000 | $1,600 | $400 | 20% |
| May | $1,400 | $1,470 | −$70 | −5% |
| June | $2,000 | $1,500 | $500 | 25% |
| Total | $12,000 | $9,840 | $2,160 | 18% |
Month by month the rate runs from −10% to 40%. Over the six months it is 18%: $2,160 saved out of $12,000. Add up the amounts first and divide once. Averaging the six percentages gives about 16%, because a month with a small income weighs as much as a month with a large one.
If your income is irregular, use six or twelve months. If your income and expenses are in different currencies, convert everything into one currency first. Which rate to use is covered in Budgeting in Two Currencies: Salary in One, Rent in Another.
The savings rate calculator does the division for you and shows what your rate adds up to over a year.
In Qoin, the Insights dashboard shows your Savings rate for any day, week, month or year, with the income and expenses behind it, and a chart of the rate for each of the last 12 months. It also shows your Average saving per month over the last 6 months. Accounts can be in different currencies, and totals show in the currency you choose. Try the demo, no sign-up.
If 20% is out of reach for now
Start with a rate you can keep up. Saving 5% every month for a year sets aside more than saving 20% for two months and then stopping.
Raise the rate when your income rises. Richard Thaler and Shlomo Benartzi tested this in a workplace savings plan, where employees agreed in advance to increase their saving rate with every pay rise. Among those who joined, the average rate went from 3.5% to 13.6% over 40 months. Each increase was timed to a raise, so their take-home pay did not shrink.
You can do the same without a plan like that. When your income goes up, move the raise or part of it to savings on the first payday, and leave your expenses where they were.
How to raise your savings rate
There are two ways: spend less or earn more. On an income of $2,000 with expenses of $1,520, they do almost the same:
| Change | Income | Expenses | Savings rate |
|---|---|---|---|
| Today | $2,000 | $1,520 | 24% |
| Expenses down 10% | $2,000 | $1,368 | 32% |
| Income up 10%, expenses unchanged | $2,200 | $1,520 | 31% |
| Income up 10%, expenses up 10% | $2,200 | $1,672 | 24% |
A 10% cut in expenses and a 10% rise in income move the rate by about the same amount. A raise that you spend in full leaves it where it was.
- Set up an automatic transfer to savings on payday, so the money leaves before you spend it.
- Start with your largest categories. Ten percent off a $400 grocery bill is $40 a month, and a cancelled $8 subscription is $8.
- Send bonuses, tax refunds and gifts straight to savings.
- Calculate the rate once a month, on the same day.
Questions about savings rate
Is saving 10% of my income enough?
10% is the usual minimum. At 10%, an emergency fund of three months of expenses takes 27 months to build, and at 20% it takes 12. If 10% is what you can keep up now, stay there and raise it with your next pay rise.
Should I calculate my savings rate from gross or net income?
From net income, the money that reaches your account after tax. Your expenses are paid from it, so both sides of the formula count the same money. The 50/30/20 rule is based on after-tax income too.
Do loan payments count as savings?
In the simple formula every loan payment is an expense. The 50/30/20 rule counts what you pay above the minimum as part of the 20%. Choose one method and keep to it, so your months stay comparable.
What if my savings rate is negative?
A negative rate means you spent more than you earned in that period, and the difference came out of savings or went on credit. One negative month after a large planned purchase is normal. If the average over three to six months is negative, find your largest expense categories and cut there first.
What should I do with the money I save?
A common order is a small starter emergency fund, then high-interest debt, then a full fund of three to six months of essential expenses, then longer goals.
How often should I calculate my savings rate?
Once a month. Judge it by the average of the last three to six months.
Common mistakes
- Dividing by gross income while your expenses come out of take-home pay.
- Counting a transfer to your own savings account as an expense.
- Judging by a single month.
- Averaging monthly percentages when you should add up the amounts and divide once.
- Changing how you count loan payments from month to month.