Your Savings Rate: How to Work It Out When Your Income Is Uneven
Your savings rate is what you kept, divided by what you took home, times 100. In the example below it comes to 21.7%, and working it out took four numbers.
It is the most useful single figure in personal finance, because it measures the one thing you directly control. Income depends on clients and markets depend on nobody. How much of each dollar you keep is yours to decide.
Most guides assume a salary. So here is how to find the figure when income arrives unevenly, what counts as saving, and why the yearly number is the one to watch.
What you took home is where the sum starts. Example data.
The short version
Savings rate = amount kept ÷ take-home income × 100.
Take-home income for an owner is profit minus tax.
Saving, retirement contributions and extra debt payments all count as kept.
Work it out for the year. A single month on uneven income tells you very little.
Step one: what you took home
For an employee this is the paycheck. For you it has to be worked out, because what clients pay still contains the cost of running the business and the tax you owe.
Line | Amount |
|---|---|
Received from clients | $94,000 |
Business expenses | $34,000 |
Profit | $60,000 |
Federal tax for the year | $12,900 |
Take-home income | $47,100 |
Take-home income is the figure to divide by. Using the $94,000 would make your rate look tiny, and using the $60,000 would count money that belongs to the IRS as though it were yours.
Step two: what you kept
Three kinds of money count, because all three raise your net worth.
Money moved into savings. Including the cushion you are building.
Retirement contributions. To an IRA, a SEP IRA or a solo 401(k).
Extra paid off debt. Only the part above the required payment, and only the principal. Paying a debt down and saving the same amount leave you equally better off.
Kept during the year | Amount |
|---|---|
Retirement contributions | $6,000 |
Added to the cushion | $1,800 |
Extra principal paid on a loan | $2,400 |
Total kept | $10,200 |
Your tax set-aside does not count. It is money you owe, and it leaves again in April.
Step three: the division
Sum | Result |
|---|---|
Kept ÷ take-home income | $10,200 ÷ $47,100 |
Savings rate | 21.7% |
So she kept a little over a fifth of what she took home. Whether that is high or low matters less than whether it is higher than last year.
Why the yearly figure is the one to watch
On an uneven income, monthly rates swing wildly and mean very little. Here are four months from the same year.
Month | Take-home | Kept | Rate that month |
|---|---|---|---|
January | $2,600 | $0 | 0% |
April | $5,200 | $1,600 | 31% |
July | $3,400 | $400 | 12% |
October | $4,800 | $1,400 | 29% |
January looks like failure and April looks like triumph. Neither is true. January was a slow month in which she sensibly kept nothing, and April caught up. The year is what tells you how she is doing.
This is also the best argument for keeping a share of every payment. A share taken as money arrives produces a steady yearly rate without asking anything of a slow month.
A rising net worth is the savings rate made visible. Example data.
A quick way to check your answer
Your net worth a year ago and your net worth today should differ by roughly what you kept, plus any growth on what you already owned. If the sum says you kept $10,200 and your net worth barely moved, something is missing. Usually it is a debt that grew while you were not looking.
Our post on net worth versus income follows that link in more detail.
What is a good rate?
There is no figure that suits everyone. It depends on your age, what you already have and how many years you have. A more useful test is direction: is this year above last year, and do you know why?
If your rate is | A reasonable next step |
|---|---|
Zero or negative | Find one repeating cost to remove, and build the first month of cushion |
Under 10% | Start a share of each payment, even 3% |
10% to 20% | Raise the share by one point each quarter |
Over 20% | Check that the cushion is full, then lean toward retirement accounts |
Three mistakes
Dividing by what clients paid. Use take-home income, after expenses and tax.
Counting the tax set-aside as saving. It is already owed.
Judging from one month. Use the year, or at least a quarter.
See the result, free
La Soglia, the free membership of the Money Mastery System, shows everything you own and everything you owe in one place, personal and business together, with no bank connection and no card. The change in that picture from one year to the next is your savings rate, with nothing left out.
Bring it to the Collective
Have you ever worked out your own rate? The Money Mastery Collective has a discussion feed open on the free membership. Try the four numbers and share what you found.
Questions we hear
How do I calculate my savings rate?
Divide what you kept during the year by your take-home income and multiply by 100.
What counts as savings in a savings rate?
Money moved to savings, retirement contributions, and extra principal paid on debt above the required payment.
How do I work out take-home income if I am self-employed?
Take what clients paid, subtract business expenses to get profit, then subtract the tax for the year.
Why does my savings rate change so much month to month?
Because your income does. Uneven income makes monthly rates unreliable, so judge by the year.
References
There are no outside figures in this post. Every number is our own worked example.
Start free with La Soglia
La Soglia is the free membership of the Money Mastery System. It gives you the Net Worth Tracker, where everything you own and everything you owe sits in one place, and the Money Mastery Collective. There is no card to enter and no bank connection.
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A note on what this is
This article is educational. The Money Mastery System is an educational tool, not financial software, and nothing here is legal, tax, investment or financial advice. The figures are illustrations, and the tax amount is a simplified example and not a calculation of anyone's tax. For guidance on your own circumstances, please speak with a qualified professional who knows them.
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