The average American puts less than 5% of his or her disposable income toward savings, an amount that many financial advisors say isn’t enough to ensure a comfortable retirement.
That’s according to a figure called the personal saving rate. Your personal saving rate, as determined by the federal Bureau of Economic Analysis, is the net amount of money you’ve saved as a percentage of your disposable personal income.
The average American personal saving rate has hovered around 5% for the past few years, according to the bureau. In June, the rate was 4.8%, up from 4.6% in May, the bureau reported.
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Carrie Houchins-Witt, a certified financial planner in Coralville, Iowa, says she encourages clients to save more like 10% to 15% of their disposable income, in different funds set aside for emergencies, retirement and other needs.
“I have seen too many people in their golden years being forced to work because Social Security income does not cover their basic expenses,” Houchins-Witt says. “And while I think it’s a great idea for seniors to be active and possibly working to keep busy, I don’t want them to have to rely on that income.”
There was a time when Americans were saving closer to what Houchins-Witt suggests. From 1950 to 2000, the American personal saving rate averaged about 9.8%. It peaked in May 1975, hitting a high of 17% before beginning to slide.
Savings bottomed out during the financial crisis of the mid-2000s, dipping to a low of 1.9% in July 2005.
Americans’ personal savings rate, 1959-2015
How to calculate your personal saving rate
To figure out your own personal saving rate, add up the following:
- Your take-home income for the month, including money you diverted to retirement accounts
- Your employer’s contribution to your retirement accounts
- Any interest or dividends
- Rental income
- Government benefits such as Social Security or unemployment insurance
- Any other income
Then add up the money you didn’t spend. Include:
- Money you’ve put into savings accounts
- Income you’ve put into retirement accounts, such as an IRA or your employer’s 401(k) plan
- Cash on hand, such as money in your checking account
- Any other unspent funds
Divide your total unspent funds by your total income, then multiply by 100 to get your personal saving rate.
Example: Say that, after adding all of your income together for the month, you come up with $5,000. You’ve spent everything but $500. Divide $500 by $5,000, multiply by 100, and you have a personal saving rate of 10%.
Why your personal saving rate matters
If your personal saving rate is low — and, to be clear, the national average is far below what financial advisors say you should be saving — that’s a sign that you may not be doing as much as you should to prepare for retirement, as well as for unscheduled expenses that may arise in your future.
For many families, accumulating some wealth is critical for things such as making down payments on homes, paying for the kids’ college tuition and maintaining a decent lifestyle in retirement.
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How you can save more
Houchins-Witt advises clients to begin by creating an emergency savings account with three to nine months’ worth of expenses in it. Having this emergency stash is top priority, she says.
“Scrimp and save every penny you can until it is fully funded,” Houchins-Witt says. “It may seem extreme, but you could even get an extra part-time job or sell some of your extra possessions to accelerate the pace.”
Starting out by creating a monthly budget will help show how much money you can afford to set aside for this, she says.
After you’ve built up your emergency fund, Houchins-Witt advises adding to retirement savings.
Be aware of any contributions your employer makes to company-sponsored retirement funds, like a 401(k) and, if at all possible, contribute at least as much as your employer will match. Many companies match up to 1% to 5% of your salary, Houchins-Witt says.
Whenever you get a raise, increase the amount you put toward savings, she adds. With the benefits of pretax retirement accounts like 401(k)s, you won’t miss the money as much.
And, finally, Houchins-Witt advises people looking to save more to set up an automatic savings plan. Having your bank automatically transfer a set amount to your savings account every month is a good way to make sure you’re saving even when you’re not thinking about it.
“It will just feel like another bill being paid,” Houchins-Witt says.
Saving for the future is one of the most important aspects of a healthy financial life. Keeping track of your personal saving rate, and taking some basic steps to boost how much you’re setting aside, can be important building blocks for a more comfortable future.
Updated Aug. 26, 2015.
Image via iStock.