Savings rates say it all

Maybe this is not the right time of the year to talk about savings rates but… who am I kidding, it is always the right time to talk about savings rates, especially in the FIRE/dividend growth community. So, what I have the done this last couple of evenings is look at all my expenses in 2016. That was a little bit of an effort as I went back through the credit and debit entries on my checking account. But before I reveal what I have found, some words of introduction are in order. Here’s how it works at my family. My wife and I have a joint checking account. However, I am the bread winner at home which means that my wife does not have a job for which she gets paid. Don’t get me wrong, she does have a job as she for example takes care of our two kids which I think is more challenging than what I do for a living but that’s not the point. The point is, that part of my salary goes to our joint account. That amount is relatively fixed as it covers all of the expenses for the kids, food etc. Also, as I am the only one with a salary in my household but I take care of four people and a dog, I would argue that our savings rate will be lower than some of yours. Is that a fair comment or am I making excuses already? Because, excuses I need to make as you will see in a minute (I even involve the poor dog!). Another factor affecting my savings rate is that I sometimes have to make expenses for my job which I then get paid back later. However, I have not yet adjusted my savings rate for my work related expenses. So, some of the very bad monthly savings rates are explained by those expenses. Another question I had to you fellow bloggers, is how you deal with large expenses. For example if you have been saving for a new laptop or so, do you deduct it from your savings rate when you buy it in the end? For now, I have calculated my savings rate as income left for the month after all monthly expenses have been paid divided by the post income tax monthly salary. And here comes the shaming result:


The first half of the year looks pretty bad. But for reasons already mentioned above it’s not that bad. It’s still not good but it’s not as bad. Another reason is that I also get extra salary in May which is called holiday money. That is essentially a full extra monthly salary which in my case is paid in May. Your employer reserves essentially part of your monthly salary already in the year leading up to May. This is a relatively standard thing in the Netherlands. So, what you see in the chart above is me paying for holidays for which I get reimbursed in May. The reimbursement ie the additional pay is however not reflected in my savings rate. But what is the sad, sad conclusion from the above chart is that my savings rate if at all existent, is too low. I need to work on this and I will.

But why are savings rates important at all? Well, for most of you I hardly have to explain this but I will anyways 🙂 so here it goes:

  1. The more you save, the more passive, dividend or investment income you can generate with those savings.
  2. The more you save, the lower your monthly costs are.
  3. The lower your monthly costs are, the earlier your investment income will cover those costs and the earlier you will achieve financial independence.

Another blog, actually explained this very well. They even called their article ‘The Shockingly Simple Math Behind Early Retirement’ and I could not agree more. So, save more! is the message to myself from this blog article. Because if I don’t save more, I will never reach financial independence and early retirement. What about you, do you know what your savings rate is? There is actually a really nice website from the OECD where you can see the I guess average household savings rate for various countries. This is potentially a nice tool to compare yourself to other households around the world. A few examples taken from there are Germany 9.7% savings rate, Netherlands 6% savings rate, United States 6% savings rate and United Kingdom -0.2% savings (?) rate. There is of course a multitude of reasons why countries differ from one to another with respect to savings rates but nevertheless, this is a nice background for your own savings rate. I for one sure intend to increase mine to be able to retire early. So, how do we compare? What is your savings rate? Is your household comparable to mine (4 people, 1 income)? Do you have some advice on how I could increase my savings rate? All comments are welcome.

6 thoughts on “Savings rates say it all

  1. Great post, I’m always interested in how people calculate savings rates. Personally, I like to amortize certain costs that will benefit multiple months. For example, I prepaid for a bundle of 20 yoga classes last month. Given that I only go once a week (or 4 times a month), I allocate that cost over the times I go even though I already paid for it. It kind of smooths out my savings rate so it doesn’t look so up and down haha.

    Thanks for the OECD link. 30%+ savings rate in China? That’s crazy!


    • Hi Andrew,
      thank you very much for your comment. I think it makes a lot of sense to smooth larger purchases. Especially when you exactly know how long you will benefit from the larger expense like your example of the yoga classes. But for things like holidays or when I do not know how long exactly I will benefit, for example a new computer or so it makes it a bit more difficult and subjective. What I did not write in the blog above, was that as long as I keep my savings rate fully cash based, it is actually cross checked with whatever number the balance on my bank account is at the end of the month. That way I make sure I did not forget anything.
      Yes, those household savings rates are crazy in some countries.
      Thank you for stopping by!


  2. The savings rate is absolutely key!!
    A high savings rate gives tremendous flexibility in life and decreases the financial risks of a household. The savings rate is the base to put the cash-generation and wealth-building process in place.
    Our savings rate for 2016 so far stands well above 58 %. I work full time, my wife parttime, we have two kids. Regarding calculation of the rate: take-home pay plus dividend and interest income in relation to our expenses.
    We were able to quite steadily increase our savings rate by first tackling the fixed cost block (insurances etc.) and to be more conscious regarding our spending habits.



    • Hi Financial Shaper,
      Thank you for your comment. Wow! A savings rate of 58%!! That sounds impressive. Well done!
      I will have better look at what I can do with my fixed cost block. For now I have addressed health insurance already but while the improvement is small, it will start in January already.
      Thank you for stopping by and I wish you and your family very happy holidays!


  3. Hi dib,
    It’s always interesting seeing how other people calculate their metrics. The most important thing is that whatever method you use works for you, clearly shows your progress and helps motivate you.

    I calculate my Savings Rate differently so mine won’t compare to yours. We’re also a two-income, zero children / pet household and I do all calculations based on my income alone. In November I reported a 52% Savings Rate. Using your calculation method changed the result to 58%.

    Why the difference? I had some extra bonus income from my job that I exclude since makes monthly comparisons harder. I also don’t count my actual monthly expenses but rather what I budget for living expenses instead. Since some expenses occur only once a year, this method lets me smooth out all the values allowing a better comparison. And if I saved money for a planned purchase but didn’t buy it yet, then I don’t show a ‘false’ higher rate. But then I’m personally more interested in showing the underlying improvements in my income than showing absolute high/low savings rates so this works for me.

    I am looking forward to watching your Savings Rate improve next year though and it’s good seeing some positive numbers in the last half of 2016!
    Best wishes,


    • Hi Dividend Life,
      Thank you for your comment. I really appreciatie it. I especially like how you account for non-monthly expenses or bigger ticket items for which you saved previously. I will think about whether I can do something similar.
      Thanks for stopping by and I wish you and your partner very happy holidays!!


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s