Do You Save: My Formula For Family Savings Rate

In the personal finance community, you will often hear people state that their family savings rate is…you fill in the blank. I have stated a couple times in previous posts that our family savings rate was 40% in 2017. What does that even mean? Is that before taxes or after? Does that include retirement savings?

I will detail the formula I use to determine our family savings rate. Then you can determine if you are saving more or less than the average American family. But before we get to look at that formula, let’s look at where the average American savings rate currently sits.

What do Americans currently save?

The personal savings rate, in America as of February 2018 is 3.4%, according to the Bureau of Economic Analysis. This figure is shown as a percent of disposable personal income (DPI). DPI is money that can be saved or spent after taxes are subtracted from earnings.

Example: A family (married filing taxes jointly) earns $80,000. This places them in the 22% tax bracket for 2018.

$80,000 x .78(tax rate% – 100%)=$62,400 Disposable Personal Income

With the after-tax income(DPI) of $62,400, in this scenario. This family now gets to decide whether to spend or save the income(DPI). With the personal savings rate of 3.4% as of February 2018, this is what this typical family would save.

$62,400 x 0.034(personal savings rate in Feb)= $2,121.60 annual savings

This hypothetical family making $80,000 per year, saving the 3.4% average saving rate, saves $2121.60 per year. Said another way, $60,278.40 (96.6%) of the $62,400 that was earned after taxes, was spent. Let that sink in for a second. This family spent 96.6% of all the after-tax money they earned.

The personal savings rate has been trending downward for decades. In 1971 the personal savings peaked at 13.3%. Since that point, it has fallen to a low of 2.6% in 2005. After 2005, the savings rate has trended sideways and currently sits at 3.4% (as of Feb. 2018).

My family’s savings rate

I have stated our family savings rate is 40%. Undeniably, 40% is a big number, but by what path did I get to 40% is the question? Is that 40% of gross income or net income? 40% of pretax income or post-tax income? These numbers matter in terms of consistency and authenticity. My 40% savings and your 40% savings could be vastly different if we used different math to get to our answer.

Here is a couple of great articles on the topic of savings and saving for retirement.

The Average Savings Rates By Income ∼ The Financial Samurai

The Shockingly Simple Math Behind Early Retirement ∼ Mr. Money Mustache


To clear up the confusion I want to outline my formula for our family savings rate.

Calculate Your Family Savings Rate
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My savings formula

Savings ÷ income = family savings rate.  Simple enough!

What is more complicated is figuring out what is income and what is savings for the purpose of the calculation.

Let’s look at what is included in savings.

  • 401k or 403b
  • savings accounts
  • Stock or investment accounts
  • Health Savings Account contributions (HSA)
  • I do not count flexible spending accounts or 529 accounts

Let’s look at whats included in income.

  • take home pay (after tax pay)
  • dividends and interest
  • rental income

As you can see this calculation gets into the weeds pretty fast, in terms of what counts as income and what does not. I find I have the easiest time calculating family savings rate around tax time. I do my own taxes and I have easy access to this data while filing taxes. I only calculate my family’s savings rate once per year looking backward at the prior year.

Here is the difficult way to calculate income (for the number crunchers)

Look at your 1040 tax return form:

  • In line 22 of your tax return, you will see your family income. Take this number and add back in pay that was held out of your paycheck for your 401k or HSA plan.
  • In line 44 you will see the tax you paid for the prior year.

Income(line 22) + 401k and HSA savings − tax (line 44) = income for the equation

The savings variable is slightly easier to calculate. Just add up all of your taxable and nontaxable savings for the prior year. Plug the income and savings numbers into the formula and you have your family savings rate for the prior year.

Now if it seems to confusing or cumbersome to find income the way I described above, there is another way.

Here is the easier way to calculate family savings rate.

Find your last pay stub from 2017. It will tell you what your net income was for the year. Now add in any money withheld from your pay for your 401k and HSA. This is your income for the year (DPI). Be sure to include income from other jobs or your spouse. Admittedly, this may be an easier way to find disposable personal income than sifting through a tax return.

There may be slight variations in the results of these two means of calculating family savings rate due to the various withholdings from your paycheck by your employer.

Now, you might ask what does it matter if we use gross vs. net income. The truth is it really doesn’t matter. Both gross and net income will get you to a ballpark estimate of what your family is saving. However, if you want to be consistent with the Bureau of Economic Analysis and there calculation of disposable personal income, you should use after tax income.

The bottom line is having an exact savings percentage is not as important as knowing a general idea of what your family is saving. Is it 5, 10, 15, or 20%. That is more important than knowing that you save 16.75% or 16.85% of your disposable income.

What percent of Income should you save?

Saving 10% of your income has long been the gold standard of savings rates. The thinking behind this calculation is that, if you start saving 10% of your income at age 20, with an 8% stock market return, at age 65 you will have enough of a nest egg to last 30 years in retirement.

Bank Rate has a great retirement calculator here.

There are several assumptions in that rule of thumb.

  • Many people do not start their 401k at age 20.
  • Many people don’t save 10% of their pay.
  • There is no rule that the stock market will return 8% for the next 45 years (it did in the past but might not in the future).
  • You could live longer than 30 years in retirement.

If you didn’t start your 401k at age 20, if you are not sure what the stock market return will be for the next forty years, or if you are not sure how long you are going to live, raise your hand. My hand is definitely up. I do not know these things. For example, waiting five years and starting your 401k at age 25 can reduce your retirement nest egg by up to 40%. That is crazy!  The only way to overcome these unknown variables is to save more.

What should I save?

I think you take the conventional wisdom, of saving 10% and double it. Yes, I said it. An American family needs to save 20% of their income for a chance at having a comfortable retirement. Okay before you get all like, “that is impossible.” Take a deep breath. You can get to 20% savings slowly.

Remember, the most successful people in this country found solutions to impossible problems.

If you ratchet up your retirement savings to 20% tomorrow, assuredly you would feel the sting on the next paycheck. But what if you raised your contribution by 1% per month until you reached 20%? That would be less painful. Or, if the next time you received a raise or a bonus, you increased your retirement contribution. Along the gradual path to saving 20%, you slowly filter out the spending that was keeping you from saving 20% in the first place.


There it is. Everything you should know about your savings rate. Hopefully, I didn’t lose anyone with the math.

If you are saving more than 3.4% of your take-home pay, give yourself a pat on the back. You are doing better than most of America. However, realize that you most likely need to save more than 10% of your pay throughout your working career to have a reasonably comfortable retirement. So go on, log into your retirement account and increase your contribution by 1% today.

If you found this post helpful, please, do me a favor and share this post on Pinterest or Facebook. 99.99% of the world has no idea that I wrote this blog post.


Here are some of my other posts you may like:


10 thoughts on “Do You Save: My Formula For Family Savings Rate

    1. Calculating personal savings rate in a post-tax fashion makes the calculation slightly more difficult but I think it gives you better results. If nothing else, it makes for a better comparison to the Bureau of Economic Analysis numbers. Thank you for reading and your kind comments.

  1. That 40% savings rate is awesome! Definitely jealous here. It’s crazy (and sad) how low the average personal savings rate is now. I can’t wait to be out of the expensive apartment I’m in now and up my savings even more. Great post man!


    1. It hasn’t always been 40%. Small changes like you are making, like finding cheaper housing or paying off a car, have made all the difference. Keep at it. I bet you are above 3% though😉

    1. For reals, Right! It would be interesting to see if the rise of social media and internet marketing coincides with increased consumer spending (decreased saving) over the last 20 years. Just a thought.

  2. Eek. That 3.4% savings rate gives me heart palpitations. I hate to see people wasting their entire lives working because they didn’t save enough. I have family members who are probably saving less than 3.4% and it makes me very, very concerned for their future.

  3. Tell me more about your 529. What do you categorize it as if it’s not savings? I ask not because I have the right answer, but because it’s just this line on our budget that says “529”. It seems like it’s savings, as much as my short-term savings line item might be (I know it’ll be tapped within the year), but it also seems like a bill I’m paying in advance LOL

    1. It is a great question to ponder. You are right 529 money feels like savings. But like you say, it is really just prepaying a bill. I don’t include 529 savings in my family savings rate calculation because that money will never be added back to the budget in the future. 529 savings has only one purpose (trying to entice my two children to go to college). I also don’t include 529 savings in net worth calculations for the same reason. I sure appreciate you reading my post and asking such a thought-provoking question. Thank you, Penny.

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