Looking for a little summer romance? Have a summer fling with saving money and you won’t have the heartache of breaking up after Labor Day. Smile.
I don’t fall in love often. The last time I succumbed to Cupid’s danged arrow was in 2001, when I met ‘The Carl’. Oh gush. Anyways. Fast forward 10 years and I’ve got the gush again, but this time it’s for a little calculation called the Personal Savings Rate (PSR).
Now, I’m the first to admit that comparing Cupid with a mathematical calculation is weird. But by the end of this article, I want you to see the value of knowing your personal savings rate and loving the idea of raising it high into the skies. Schwing!
Most of us are lousy savers.
You may be great in bed, but are you a great saver? Years of data suggests that North Americans are lousy at saving money (I can’t find any decent data for what happens between the sheets). Anyways, over the past 20 years Canadian households have seen a steady decline in savings, according to a recent study by the Vanier Institute of the Family. In 1990, the average Canuck household saved $8,000, for a savings rate of 13.0%. In 2010, that number dropped to 4.2%, averaging just $2,500 per household.
And Americans are just as lousy — at saving. Looking through the vast data published by the Bureau of Economic Analysis, American personal savings rates peaked in 1975 at 14.6%, hit rock bottom in 2005 at 0.8%, and sit at 5.5% today.
Really? Sure, times are tough and the economy stinks, but I think we all could do a little bit better, right? Knowing your own personal savings rate is a great place to start. Ready to get a little naked with your finances? Take these five steps for a spin to get up close and personal with your savings rate.
Step One: Total your monthly income.
Gather up your paystubs and take a good hard look at what you bring home every month. Add up your after tax income, bonuses, tips, commissions, and any other money you earn from a second job or a side-hustle gig. I work a few odd-ball jobs at the local farmer’s market over the summer months, so I use my Extra Income Spreadsheet to keep track of this cash.
When Carl and I first started this exercise, he got a little lazy by just adding up one month’s income. The results were bunk since he makes more some months, and less others. So add up at least three months worth of income (more is better) to get a good view of what you really make on a monthly basis.
Mathy Math: Add up three months income (after taxes). Divide by three to get your monthly income total.
$2,600 + $3,120 + $2,200 = $7,920
$7,920 / 3 = $2,640
Total Monthly Income = $2,640
Yeah, I love adding up my income too. This was the lovely part.
Step Two: Total your spending and expenses.
This is the part where Cupid’s arrow goes a little limp. Sorry to be a mood killer, but it’s time to be very very honest about your spending habits. How much money do you spend each month? What are your expenses? What do you spend your cash on? Are you hiding purchases from your spouse? Do you have a secret stash of cash for buying s$it? Yeah, raise your wallet if your halo slipped and your wings are clipped. Poor little Cupid.
Over the years I’ve written reams of stuff on how to track your spending and tally the costs. For an angel’s eye view, tally at least three months worth of credit card bills, bank statements, mortgage payments (or rent), and shopping receipts to get your monthly spending total. Don’t forget to include debt repayment costs, and semi annual (or annual) expenses like home insurance, life insurance, dentist visits, and trips. The real angels in this exercise will tally six months of bills for a realistic spending picture.
Mathy Math: Add up three months of bills and receipts. Divide by three to get your monthly expenses total.
$2,500 + $3,200 + $2,100 = $7,800
$7,800 / 3 = $2,600
Total Monthly Expenses = $2,600
Step Three: Calculate your savings.
With the tougher math behind us, it’s time to calculate your savings. The real test is how well you tallied your income and totaled your expenses. Not sure? Then review steps one and two before moving on!
Mathy Math: Subtract your monthly expenses from your monthly income.
$2,640 – $2,600 = $40
Total Monthly Savings = $40
Are you feeling the love yet? Those with positive bucks in the bank may be feeling smug at this point, while those sitting in negative territory are down in the dumps. Either way, don’t rejoice or dismay too much — the real value in this number is what you choose to do with it in the future.
Step Four: Find your Personal Savings Rate.
Time for the magic moment, people. Are you flying high with halos glowing or digging in the dirt with a pitch fork? Go ahead and plug your numbers into the Personal Savings Rate (PSR) equation:
Monthly Savings / Monthly Income = Savings Rate
Savings Rate x 100 = Personal Savings Rate
Mathy Math: Divide your monthly savings by your monthly after tax income. Take the result and multiply by 100.
$40 / $2,640 = 0.01515
0.01515 x 100 = 1.5%
Personal Savings Rate = 1.5%
Do you have a positive number, a negative digit, or the big goose egg? Regardless of your result, keep moving forward.
Step Five: Improve your score.
Ok, so why the heck should anyone love this dang number? This math stuff doesn’t exactly send the sparks flying. And eating chocolates, smelling flowers, and blowing kisses into the wind is way more fun, right? Well, think again. Turns out that the winged boy slinging arrows in all directions should really slug us with a balance statement every now and then, ’cause nearly half of all couples fight about money.
The New York Times reports that Money Fights Predict Divorce Rates, CBS says 45% of all couples fight about money, and Glamour Magazine (cough) says the proportion of couples who dish about dollars is closer to 43 percent.
So maybe, just maybe, taking the time to tally all these simple calculations could give you a shot at saving Cupid? And perhaps including your spouse (or partner) in the number fun would improve your relationship too. Did a bell ring? Did an angle get its wings?
Could greater savings increase a person’s happiness, and keep a couple closer together? Sure, why the heck not?
How to increase your savings rate
You know your score. You may even know your partner’s score. So now set yourself the goal of exceeding it by aiming a little bit (or a lot) higher. For example, a Personal Savings Rate of 1.5% is a start, but cut a little spending to raise that sucker to 2.0 percent. Download these Three Financial Goals Worksheet for some direction on how to set money goals.
Lastly, this whole blog is about cutting costs and finding savings. Pick any post, and save a few bucks. Pick this post: 50 Ways to Save $1,000 a Year, and save a lot more. I’ll leave the Cupid stuff up to you.
Your Thoughts: Do you keep track of your savings? How?
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