One of the most important financial ratios you can calculate is your savings rate. This number represents how much of your money you are using to improve your financial situation (as opposed to blowing it on other things). The higher your savings rate, the better. A high savings rate not only means you are in control of your cost of living, but it means you are taking financial strides forward every month.
To calculate your savings rate, start by adding up all the money you are contributing to your investments each month – this could be money going towards your company’s pension plan, an RA or your TFSA. Add any additional payments (over and above the minimum) which you are making towards debt. You should also add any monthly contributions you are putting towards building your emergency fund. (I wouldn’t include other savings, such as holiday funds or for a car service, since this money is going to be spent in the short term).
Once you have the monthly total, divide that amount by your total income (the total monthly amount which lands in your bank account). Multiply that amount by 100 to express your savings rate as a percentage of your total income.
For example, if someone earns R25,000 a month and contributes R2,750 to their TFSA each month, R850 a month to their emergency fund and is paying an additional R950 a month to settle their debts faster, they would calculate their savings rate as follows:
Some people like to use their gross income (i.e. before tax income) as their total income, and some people will not include their additional debt payments in the calculation. There may also be a case to be made to include your bond payment amount as one of your “investments”.
Any of these variations are fine, and it is best if you use something that makes the most sense to you. It’s important to be consistent in the way you do the calculation over time. That way you will know if you are making progress or not.
Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Tune in once a month and turn into a money mathemagician.