The personal savings rate is one of the main indicators of the health of personal finances. It allows us to determine the proportion or part of our income that we dedicate to savings.
Maintaining an adequate savings rate means being able to face the future and unforeseen events with greater availability of money. Also, income is being used wisely, avoiding superfluous and unproductive expenses.
The paradigm of frugality indicates that it is possible to live happily and fully without falling into excessive consumerism. Then, by adopting the principles of frugality in our lives, we can easily increase our savings rate.
How is the personal savings rate calculated?
To calculate the personal savings rate it is necessary to know the total income we generate in a period. It is necessary to consider both the active income and the liabilities that we have in our personal budget, after the tax.
Also determine the amount of money we save in that same period of time. Then all that is left is to divide the second value by the first, and represent the relationship in percentage.
What does the personal savings rate indicate?
The mathematical answer to this question is direct: the proportion of income devoted to savings. In other words, a rate of 20% indicates that of every net dollar of income, 20 cents is spent on saving.
Additionally, it functions as a general indicator of routine spending patterns. Thus, a personal savings rate of 0% indicates that the person tends to spend all of his or her income. And it is almost certain that in this case, the person is incurring a series of unproductive expenses.
How can the savings rate be increased?
The answer to this question is easily obtained by analysing how this indicator is calculated. We must increase the proportion of money we save for every dollar we earn as net income (income earned less taxes).
What are the benefits of an adequate savings rate?
If we can maintain an adequate savings rate for a long period of time, we will get some significant benefits.
Helps to rationalize consumption
The only way to have an adequate savings capacity is for us to manage our personal finances rationally.
And this implies that we carry out rational consumptions, avoiding unproductive expenses as well as unnecessary ones. The philosophy of saving is then strengthened in our lives, to the point of becoming a natural behavior.
Allows adequate growth of the savings fund
It is clear that the more money we can save, the more capital we will have saved.
Allows the development of financial skills
Planning a budget, monitoring expenses, relating income and expenses allows us to develop a series of financial skills. These will be very useful to us, especially if we save in order to invest in a personal venture. When the time comes to undertake, we will have developed skills that will link us to financial success.
In short, the personal savings rate is an indicator of current personal savings capacity. Experts recommend that we constantly save an amount equivalent to between 5% and 10% of gross income. With this, in addition to having a savings fund, we will be able to acquire habits that will allow us to improve personal finances.