At Fiscal Fitness, we’re all about planning and using those plans to make financial gains to your bottom line and in turn, your life. Whether your main goal is reducing your debt or building up your savings, both of those actions affect your net worth and your savings rate.
It’s often the people with millions and billions who go around talking about their net worth. After all, it’s kind of fun to say you’re worth a billion dollars, so we get it. Even if you’re not Warren Buffet (which let’s be honest, you’re probably not), knowing and feeling confident about your net worth is a good thing, even if you’ve got far fewer zeros in your number than a Buffet (Warren or Jimmy).
First, let’s start with what they are and how you calculate them.
How Do I Figure Out My Net Worth?
Your net worth is calculated by combining your assets (what you own) minus your liabilities (what you owe). Things like your savings accounts, 401(k)s, stocks and bonds, or property that is worth more than what you owe on it are your assets. Liabilities include any student loans, credit card debt, personal debt, and property that you owe more on that it’s worth.
The good thing is calculating your net worth is a fairly simple equation. Add your assets then subtract your liabilities. That’s your net worth.
There are plenty of online calculators that will even help you figure out your net worth. Or if you’re using an online budgeting platform like Personal Capital or Mint, your net worth is already built into your dashboard.
How Do I Figure Out My Savings Rate?
Figuring out your savings rate is slightly more complicated. But only slightly.
Your savings rate measures the amount of money you deduct or set aside from your income specifically to your long-term savings and retirement. You can look at it as the percentage or ratio of what you make and how much of what you make is saved toward your nest egg.
To figure out your savings rate, first, figure out how much you make annually. If you’re married, you’re likely going to want to calculate your rate as a couple, so combine your incomes to get a starting number.
Then compile a list of everything you’re contributing to your retirement or other long term savings accounts. That includes emergency savings, investments, or any non-earmarked savings accounts. For investments, make sure you’re including 401(k) contributions as well as 401(k) matches and pensions.
The important thing to remember with a savings rate, especially if you have multiple savings accounts (always a good idea) is that you’re not including any money you put into a savings account that goes toward paying for future expenses. For example, if you contribute $100/month to a savings account earmarked toward gifts, you can’t count that toward your savings rate. It’s not saved money. It’s money that will be spent.
To calculate your savings rate, take your total long term savings from the last calendar year, divide it by your total disposable income from last year, and multiply it by 100 to convert it to a percentage. This is the equation:
TOTAL SAVINGS / TOTAL INCOME * 100 = SAVINGS RATE
So for example, between your 401(k) contributions and additional savings you saved $25,000 last year. You and your spouse made a combined $150,000 in income. In this case, divide $25,000 by $150,000, giving you 0.1667%. Multiply that by 100 for a savings rate of 16.67%.
But I budget, why is knowing my savings rate and net worth important?
Budgeting helps you review your finances with a fine-toothed comb on a monthly basis. You can see more clearly when you’ve had a good or a bad month. If you’re not careful though, you can get too caught up in the minutiae of it all.
As financial coaches, we spend a lot of time talking through and working out the fine details. And the details are good. Without them, you might not ever consider whether that monthly Hulu charge is worth it. But if all you’re focused on is your month-to-month expenses, you can lose sight of your big goals. Knowing your net worth and savings rate helps you maintain a broad vision.
Play The Long Game
Sometimes we forget to see the financial forest through the trees, so to speak. Net worth helps see your overall position so you can track it and use it to set goals. The same goes for your savings rate. Both of these numbers provide a broader purpose to what you do with your money.
They also can serve as a really great motivator. You can begin to see how adding $50 a month to a long-term savings account can bump up your savings rate by a percentage point. And by adding another $50 the next year and so on, you can inch your savings rate without feeling a major shift in your finances. Similarly, by increasing a debt payment a little every month might help you pay it off sooner, and that debt being gone is going to make your net worth look a whole lot better.
Not every Fiscal Fitness client loves both their savings rate and net worth, but almost every client loves one of them. Instead of getting bogged down in tracking every dollar (we don’t necessarily advocate for that with the Fiscal Fitness Plan Ahead Budgeting Method anyway), you focus on a bigger purpose and have a clearer understanding of what it takes to achieve your goals. They can be enlightening numbers that show you the current state of your financial fitness in a whole new light.
If you want help figuring out your savings rate, your net worth and how to get on and stick to a budget that helps you increase both, check out our Power Planning session. You will leave this two-hour, one-on-one coaching session with a plan for your money that takes into account your next car payment as well as your savings rate and long term goals.