Savings Rate

Why calculate your Savings Rate?

The whole point of determining your savings rate is that it provides you with an indication of how efficient you are with your income. And how you have been able to limit your expenses. Most folks, us included, track their savings rate on a monthly basis. We have our Saving Rate goal set on a yearly basis.

We tend to focus more on the Year-To-Date (YTD) Saving Rate than on the monthly Saving Rates. Monthly Saving Rates can swing significantly due to one-off incomes and expenses. The YTD Saving Rate gives a more stable overall idea of how you are doing in a given year.

How do we calculate our Savings Rate?

The calculation is quite simple:

(income – expenses)/income * 100% = Savings Rate

What do we use to Calculate Income?

To clarify our approach, we tend to use accounting rules to determine how to book certain expenses and incomes, but do deviate on occasion.

For our savings rate, we consider the following under our income (your situation can be different, it’s called personal finance for a reason!):

  • We only consider “after tax” income from employment, contract work and/or benefits (e.g. like child and healthcare benefits);
  • A tax refund is also considered to be income (as this fits with the first bullet on “after tax” income);
  • Investment ”income” from crowd funding is also included, primarily because these are actually cash flow items (and are minor in value);
  • Investment “income” (from stocks, bonds, ETF’s, Real Estate, etc.) is not included as this is re-invested, or is situated in tax sheltered pension accounts, and/or does not contribute to our personal monthly cash-flow.

We do not consider our pension deductions under income (but you can if you want). The reason is that is does not affect our monthly cash-flow. Nor cat it generally be controlled (e.g. moneys are managed by pension funds and generally cannot be accessed).

What do we use to Calculate Expenses?

For the expense side of the equation,  we use major expense groups include housing, transportation, food/personal care, holidays, child related and “other” items (to keep things simple). EVERY expense we make in these categories is added up and used for the calculation (i.e. every expense we have to be able to live life).

Some clarifications:

  • Only the interest of the mortgage payments is included in the expense section (the rest is yours and accumulates in your net worth);
  • Childcare benefits (kinderopvangtoeslag) is a negative expense in the Kid category as it is specifically provided as a reduction in costs;
  • Sales of items on Marktplaats (the local ebay, kijiji, etc.) are negative expenses in the “other” category (unless noted differently); and,
  • Banking fees for our checking account are included under the “other” category.

There are a few items that we don’t include in the expenses section (despite some being deducted from our checking accounts):

  • Costs made for investments (i.e. costs associated with purchasing real estate, costs for investment accounts, fees for purchasing stock of shares, etc.)

Then there is one more item that needs discussion: having to pay taxes at the of the year (i.e. a “negative” tax return). In the Netherlands we pay tax on wealth (Box 3 tax), when we finally start to pay taxes on our assets (has not happened yet as per 2015 tax year) these charges will not be included as expenses. This item, including the above exclusions, will be included/corrected in our net worth and Cheesy Index calculations.

Common Questions and Considerations Regarding the Savings Rate

Does your savings rate have to be between 0 and 100%?

The short answer for us is no. Why? Because there are three scenarios that can occur that can drive the formula beyond the 0% or 100% values, these are:

  1. Your income is 0 (cannot calculate a saving rate as you cannot divide by 0);
  2. Your income is smaller than your expenses; and,
  3. Your expenses are negative .

Scenario 1: no income (income is zero)

You can (temporarily) have no income because you have taken time off without pay, are unemployed without benefits, are starting your own business, etc. In such cases your Savings Rate cannot be calculated (cannot divide by 0), so arbitrarily you could consider 0% to be your saving rate. However this may not really be a correct representation of your situation. For example, you have no “income” but still having expenses. This will mean you are either financially independent and living off your assets or you are reducing your net worth (temporarily).

Scenario 2: your income is smaller than your expenses

In case of your expenses exceeding your income, the savings ratio would be negative. This can occur if you decide to make a large purchase like a car or a motorcycle. If you decide to move (nationally or internationally). Or you are just really bad with your credit card/debt card and need a kick on the behind to get yourself sorted.

Scenario 3: Your expenses are negative

In the case where you have negative expenses (yes, this is very much possible) you could have a saving ratio of more than 100%. How can you have negative expenses? For example,  few years back we sold a motorcycle, the proceeds from this sale were added as negative expenses in this expense section of the budget. Why? Because the original purchase was considered an expense in our budget. The sale price of the same item is therefore considered to be the negative expense. The difference between the two is considered the depreciation of the item. You can do this with any item you buy and sell at a later date.

However, be careful with the later, in certain countries they see the difference between buying and selling (assuming you sell an item for more then you bought it for) as income. In this case, the net difference should be added to you income. Any tax to be paid should be included as negative income in this case to properly account for the income.

Historical Savings Rates

 We dug into our financial history and reconstructed our historical savings rates in this post.


  1. Nice overview. I share your approach, only difference being that I do consider investment income as a contributor to my savings rate as I do not spend it but save it. I do reinvest it like you. Indeed, it is personal finance 🙂

    1. We have been considering doing a double savings rate, one with and one without investement. The first would show us how frugal we are living, the second would give us an indication of how we are doing overall. But this would have massive swings (monthly and even yearly), subject to the amount of (un)planned maintenance on our real estate. The latter would not really be of much use to us, therefore we decided to do our personal savings rate only, but will also start with a monthly/yearly real estate report (in addition to the dividend and cheesy index updates) to complete the picture. Yes, It’s personal 😉

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