Tracking your savings rate

In order to accomplish your financial goals (and some personal goals), you
need to save money, and you also need to know your savings rate. Your savings rate is the percentage of your past year’s income that you saved and
didn’t spend. Without even doing the calculations, you may already know
that your rate of savings is low, nonexistent, or negative and that you need to
save more.
Part of being a smart investor involves figuring out how much you need to
save to reach your goals. Not knowing what you want to do a decade or more
from now is perfectly normal — after all, your goals and needs evolve over the
years. But that doesn’t mean you should just throw your hands in the air and
not make an effort to see where you stand today and think about where you
want to be in the future.
An important benefit of knowing your savings rate is that you can better
assess how much risk you need to take to accomplish your goals. Seeing the
amount that you need to save to achieve your dreams may encourage you to
take more risk with your investments.
During your working years, if you consistently save about 10 percent of your
annual income, you’re probably saving enough to meet your goals (unless
you want to retire at a relatively young age). On average, most people need
about 75 percent of their pre-retirement income throughout retirement to
maintain their standards of living.
If you’re one of the many people who don’t save enough, you need to do
some homework. To save more, you need to reduce your spending, increase
your income, or both. For most people, reducing spending is the more feasible way to save.
To reduce your spending, first figure out where your money goes. You may
have some general idea, but you need to have facts. Get out your checkbook
register, examine your online bill-paying records, and review your credit card
bills and any other documentation that shows your spending history. Tally
up how much you spend on dining out, operating your car(s), paying your
taxes, and on everything else. After you have this information, you can begin
to prioritize and make the necessary trade-offs to reduce your spending and
increase your savings rate. Earning more income may help boost your savings
rate as well. Perhaps you can get a higher-paying job or increase the number
of hours that you work. But if you already work a lot, reining in your spending
is usually better for your emotional and economic well-being.