The Savings Ratio is the percentage amount of your gross income used for savings or investments. Having knowledge and understanding of your savings ratio allows you to manage your goals better and to be financially independent. Increasing your savings ratio will allow you to be able to generate more income and wealth.
If we take an example of Mr X, who earns £40,000 a year, the breakdown is as follows:
|Yearly (£)||Monthly (£)|
|Long Term Saving||8000||666.67|
|Short Term Saving||2400||200|
|Spend it money||4087.20||340.60|
|Saving Ratio (%)||22.53|
The table shows that Mr X has a gross income of £40,000 and he contributes 3% to his pension scheme. Therefore, he ends up with a net yearly income of £26,487.20.
The net yearly income is derived using the salary calculator website: https://www.thesalarycalculator.co.uk/salary.php
“Long Term Saving” is assumed to be 20% of gross income. This saving is a fixed amount that I think people should be committed to saving every month before spending any money. This transfer can be a standing order to a tax-free investment account, like an ISA account to invest into funds. In this case, Mr X’s Long Term Saving is £666.67 per month.
This saving leaves the “Actual Income” (the money that Mr X has available to spend). Mr X has £1540.60 to pay every month.
“Fixed costs” are the costs that you need to pay every month or yearly. These can include council tax, broadband costs and electricity costs. Mr X pays £1000 every month to these fixed costs.
“Short Term Saving” is money that should be put aside for holidays or emergencies throughout the year. Usually, this money found in an easy-access bank account or a government easy access bond, like NS&I premium bonds. In Mr X’s case, he puts away £200 for such occasions.
“Spend it amount” money is what’s left. This money can be spent on anything you want and needs to last for that month. Mr X’s “Spend It amount” is £340.60,
The Saving Ratio is the money you save for the long term (includes pension and long term saving) ad calculated as a percentage of your gross amount.
Thes formula is:
Saving Ratio = ((Pension + Long Term Saving) / Gross Income) * 100
Saving Ratio = ((1012.80+8000)/40000)*100 = 22.53%
Now let’s look at ways in which you can increase this saving ratio.
If you can increase your income, this will allow you to save more. The best way to increase revenue is:
- Ask for a pay rise or change jobs
- Get a side income on weekends or evenings
- Get a passive income such as blogging, selling courses or selling ebooks
Increasing Mr X’s income by just £1000 net income per year and saving will increase his saving ratio to 25.03%.
Increase your pension contribution
By increasing your pension contribution, you will save money without having to pay tax on it. If you are a higher earner, this could mean an additional increase of 40% of the saving via gross income rather than using your net.
Also, if your employer matches your pension contribution, this is an additional income for free. In this case, if the employer is matching Mr X’s 3% contribution, this would increase his savings ratio to 25.06%.
Reduce your fixed costs
If you decrease your fixed costs, you can save more. The following are some ideas of how to do this:
- Change your mortgage provider to reduce interest
- Change where you rent to a cheaper place
- Check if you can reduce your council tax amount with your local council
- Check if you can get more affordable insurance by comparing the market using online tools.
- Check if you can get cheaper energy price by combining gas and electricity providers or joining an energy club https://clubs.moneysavingexpert.com/cheapenergyclub
- Check if you can change your broadband provider to a more economical service
- Check if you can cancel subscriptions that you do not use any more
If you can reduce your fixed costs by 10%, when looking at the example above, Mr X will be able to save an additional £1800 which will help his saving ratio to increase to 25.53%.
Reduce your “Spend it” amount
The last way is to reduce your “spend it” money. I would not recommend doing this as restricting yourself from things which bring you joy is not the best way to live.
However, sometimes it is the only way. When I was saving for a deposit for a house – I stopped going on holiday, going out and eating packed lunch for two years. Making that sacrifice was worth the effort to meet my goals.
Hopefully, this blog post has provided you information on calculating your saving ratio and how to increase it. The most important concept is what the saving ratio represents.
If you can maintain your saving ratio at 20%, it will mean that in 5 years you will have one year worth of salary. If you can increase it to 25%, you will have one year worth of salary in four years. If you can reach 33%, it will mean you will have one year worth of salary in 3 years. By increasing your saving ratio, it will allow you to have greater financial independence quicker.
Is there anything else you can think of to help increase your saving ratio let me know in the comments below or on Twitter.