If you’re minimizing your debt, putting money away for retirement and generally bringing in more than you spend each month, you’re financially strong. It’s a very simple concept and stands for the amount of money that one saves at the end of every month expressed as a percentage of the monthly earnings.
We would now discuss about the “Savings Ratio”. So, what is savings ratio?
Just as the measure of our blood pressure gives us an idea about our health, in the same manner “Savings Ratio” gives us an indication about our financial health.
When calculating your saving rate, it’s important to note that it should include your income after taxes, medical expenses such as health insurance, Life Insurance, as well as property taxes and interest on any outstanding debt, including your mortgage, because you’ll over-estimate your savings otherwise.
So how is Saving’s Ratio calculated?
It is a very simple calculation.
All you need to do is divide your savings per month by the income per month.
Let’s say your income per month is Rs 100,000 and your savings per month is Rs 10,000
Then your Saving’s Ratio is (10,000/100,000)%=10%
Once you figure out your savings rate, you can get a sense of how close you are to financial independence.
How much should our savings ratio be?
The percentage of saving’s ratio depends upon one’s age. For a young person of 30 years who has lifestyle and EMI expenses a savings ratio of 10% would be good enough. As one grows older and as salary level goes up, the savings ratio of 25% would be reasonable. However, after 50 when one would’ve finished the EMI cycles a savings ratio of more than 30% would be healthy.
In contrast a savings ratio of less than 5% would suggest that one’s financial health is fragile.