Investing Rate: A Different Take on the Savings Rate

You know what I love about personal finance?  That it is actually PERSONAL.  While there are core concepts that are universal, you have the ability to fine tune and tweak certain things to fit your particular financial situation.  For instance, some people use budgets for managing their finances.  While I did use a budget when I started my financial journey, I’ve come to a point where I don’t need one anymore.  In much the same way, I don’t monitor my savings rate per se.  Instead, I keep track of an investing rate.  In order to define what this is, we first need to discuss the difference between investing and saving.


Saving versus Investing

In personal finance, people often use the terms saving and investing interchangeably.  But in reality they mean different things.  I think of saving as putting aside money for short-term goals.  Examples of these include building up an emergency fund or saving for a future expense (i.e. car, vacation).  I would consider anything under five years to be a short-term goal.

I think investing, on the other hand, is setting aside money for long-term goals.  Examples would be funding your retirement or paying for your child’s college education.  I consider long-term goals as having time frames of 10 years or more.

Although the distinction might seem like nitpicking, I think it is an important one to keep in mind.  The time-frame of your goal can help determine how much risk you can take with your money.  And how much risk you can take will dictate which financial vehicles you would use for your money.  For instance, you would want to use low-risk options such as savings accounts, money market accounts, or CD’s for your short term goals.  The point isn’t rate of return and growth of capital but rather preservation of it.  With long-term goals, however, you can afford to take a little bit more risk.  Investment vehicles such as stocks, mutual funds, and index funds offer the potential for higher returns and growth of capital through the power of time and compounding.  Also, the longer time horizon gives you a chance to recoup any losses incurred along the way.


Savings Rate

In its simplest form, your savings rate is the ratio of the money you did not spend over how much you made.  Much like calculating your net worth, there can be a number of ways to figure out savings rate.  For this article, I’ll use calculations based on after-tax earnings with pre-tax savings factored in.  Let’s consider Mr. John Doe as an example.  He has an after-tax take home pay of $3,000 a month.  He is able to contribute $500 a month pre-tax to his company’s 401k.  His monthly budget, which we’ll assume is consistent every month, looks like this:

John Doe is able to save $500 a month


As you can see, he is able to save $500 a month after taxes.  Here’s how I would calculate his savings rate:

  • Add up all savings.  $500 (pre-tax) + $500 (after-tax) = $1,000
  • Add back the $500 of pre-tax savings to the take home pay.  $3,000 + $500 = $3,500 of after-tax earnings
  • Savings rate = total savings ÷ after-tax earnings = $1,000 ÷ $3,500 = 0.29 or 29%

A 29% savings rate is pretty good, especially since the average savings rate in the U.S. was 5.5% as of January 2017.  But if you look closely at Mr. Doe’s saving’s you’ll see that some of it is earmarked for future purchases.  While this money will help him accomplish his short-term goals, they do nothing for his long-term ones.


Calculating the Investing Rate

Another way to look at things would be to calculate how much he is investing.  To do this, we could categorize Mr. Doe’s savings as follows:

Investing rate instead of savings rate

As you can see, only 40% ($200) of his after-tax savings is going toward long-term goals.  To calculate Mr. Doe’s investing rate we would count money that he is “investing” and exclude anything that he is “saving.”

  • Add up all investments.  $500 in 401k + $200 in Roth IRA = $700
  • Keep after-tax earnings the same.  $3,500
  • Investing rate = total investments ÷ after-tax earnings = $700 ÷ $3,500 = 0.2 or 20%

That’s still pretty good compared with the national savings rate, but it’s almost a third less than his original personal savings rate.  Imagine if Mr. Doe diverts his $200 into savings instead of Roth IRA investments.  While his savings rate would remain unchanged at 29%, his new investing rate would be a much lower 14% ($500/$3,500).


Tracking My Investing Rate Works for Me

My finances are a bit tricky.  Tricky in that I have to set aside money for quarterly estimated taxes as well as annual taxes.  If I were to calculate my savings rate in the traditional sense, should I include this money as part of that calculation?  Should I count it as taxes withheld and consider the remaining money as after-tax take home pay?  Or should I wait until I file my tax return and back-calculate a savings rate based on that information?  Too many questions and scenarios for my little brain to process.  So I just take whatever I invest and divide that by how much I get paid.  Using this method, my investing rate for 2016 was 26%.  Not terrible, but there’s definitely some room for improvement.  We’ll see how things go in 2017…


Go With What Works Best for You

In the end, you should stick with what works for you.  If tracking your savings rate in a more traditional sense (i.e. money unspent versus money earned) fits with your financial situation and goals, then go for it!  The point is that you’re spending less than you make.  Personally, I keep an eye on my investing rate instead.  It gives me a more accurate assessment of how I’m doing when it comes to my long-term goals, specifically investing for retirement.


Readers, do you keep track of your savings rate or investing rate?  Are they the same thing?  Am I getting too caught up on semantics?  Share below!


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15 thoughts on “Investing Rate: A Different Take on the Savings Rate

  • March 2, 2017 at 4:02 pm

    Interesting take on an investing rate, SRGO.

    I don’t really track my savings rate or investing rate, but I think they would be different as a person can decide whether or not they want to invest their saved money. An investing rate would be useful when tracking how it would go when aiming for long-term goals, such as retirement, which you said.

    • March 3, 2017 at 11:18 am

      Thanks for stopping by, SP! I also think saving and investing have some fundamental differences. Right now I’m focused on my long-term goals, so I’m more interested in how much I’m investing rather than saving for the short-term. Thanks for the comment!

  • March 2, 2017 at 6:05 pm

    Nice explanation on the difference between savings and investing.

    We don’t seem to focus on our savings and investing rates, rather we set ‘raw dollar’ targets for each bucket every month. We have automated recurring savings for short term goals and automated investments into our Vanguard and Fidelity brokerage accounts. As you suggested, very different purposes (and risk tolerances) for these accounts.

    • March 3, 2017 at 11:23 am

      Thanks, Mr. N2S. I like the “raw dollar” targets. Gives you specific goals that you can shoot for. I aim for target amounts each month as well, but I also like to see if I’m being consistent with my investing (as a ratio to my earnings) since my monthly salary can fluctuate depending on how much I decide to work.

  • March 2, 2017 at 6:13 pm

    I am one of the dummies that use savings and investing rate interchangebly and definitely shouldn’t. When I say that I save 65% of my take home pay. That usually means that I also invest 65% of my take home pay but on top of that I also contribute to my 401k which means that my investing rate is probably a little bit higher than that.

    For me I guess I use the savings rate to say I could save it in cash for something I really want to buy or invest it. But I think I may need to alter how I use the words moving forward.

    • March 3, 2017 at 11:26 am

      You are certainly not a dummy, MSM! I think everyone uses the terms interchangeably. That’s an awesome savings/investing rate you have. It must feel nice that all of your unspent money is going toward long-term goals. Thanks for stopping by!

  • March 4, 2017 at 7:25 am

    This number may not be 100 percent up to date but the concept is intact. If you just place all of your money in savings, inflation will erode away your savings at roughly 3-5% per year when measured over 50 or 60 years. It kind of shows the importance of getting any long term money working a little harder.

    • March 5, 2017 at 7:03 pm

      Thanks for the comment! I agree. Money that you’re “saving” suffers from inflation risk and loss of purchasing power over time. Money that’s “invested” works harder, as you said, and has the potential to outpace inflation and grow your wealth over time. Thanks for stopping by!!

  • March 5, 2017 at 3:05 pm

    I call it my savings rate but for me it’s really an investing rate. I don’t calculate a savings rate when it comes to vacations, home improvements, or other short term spending goals because for me that’s just delayed spending. My main focus is my long-term investments as that is what will allow me to retire early.

    • March 5, 2017 at 7:13 pm

      Thanks for the comment, GFY!! I’m there with ya on the long-term investment goals. For me, I do need to make sure I’m saving enough every month for quarterly and annual taxes, so my savings rate in the traditional sense is different from my investing rate. Thanks for stopping by!

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  • March 7, 2017 at 4:52 am

    Interesting take SRGO! Personally I haven’t made the conscious decision to separate saving from investing, mostly because almost any money I put away is for long term and therefore “investing”.

    • March 8, 2017 at 12:41 am

      Thanks for stopping by, FPMD! I think it’s great that almost all of your “saved” money is going toward long-term investments. Thanks for the comment, and for the share on your site!

  • March 8, 2017 at 11:37 am

    Love it!
    There is a big difference between savings and investing and they are often confused. A lot of people “save money” by buying smarter or on sale or something. I then ask ok, “good, where is the savings? Is it invested?” and they have no idea. Usually it actually just got spent on something else.

    • March 8, 2017 at 3:53 pm

      Thanks for stopping by, doc! I hear you on the whole buying things on sale to “save money.” If what you bought isn’t a necessity, then you really didn’t save any money. Plus, like you said, any savings is usually spent on other stuff. Thanks for the comment.

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