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6 positive steps towards better savings rates

November 15, 2010

| MoneyRates.com Senior Financial Analyst, CFA

How do you stack up as a saver -- are you better or worse than the average American?

One way to tell is by comparing savings rates. According to the Bureau of Economic Analysis, the average personal savings rate in the U.S. rose to 6.1 percent in the second quarter of 2010. This is an improvement over the previous three quarters, though not necessarily cause to celebrate -- before the late 1990s, U.S. personal savings rates were routinely well above 6 percent. Still, if you are looking for a benchmark for comparison purposes, the second quarter's 6.1 percent savings rate is a good place to start.

So, how do you stack up? You won't know unless you measure your savings rate.

Raising savings rates: 6 steps

Saving money shouldn't happen randomly. You should have a plan, measure progress regularly, and adjust accordingly. These steps will help you do that.

  1. Measure your current savings rate. To measure your savings rate, take your total income after any taxes during the second quarter of 2010 (April, May, and June). This is called your Disposable Personal Income (DPI). Now look at any money you saved. You can back into this by subtracting expenditures from DPI, but the bottom line would be to look at deposits into your savings accounts or other savings vehicles, minus any withdrawals from those accounts. This is one reason why, even with low savings account interest rates, it is worth keeping savings in a separate account from checking -- it makes your savings easier to measure. Having figured out your savings for the period, divide that by your DPI. The result is your savings rate.
  2. Set a savings rate goal. Now set a goal for where you'd like that savings rate to be. This could be based on long-term retirement planning, or it can be as simple as just trying to improve over the prior period.
  3. Translate your goal into dollars. Now convert your savings rate to dollars. This means figuring out how much you expect to make and subtracting what you expect to pay in taxes. The result is a projection of DPI. Multiply your savings rate goal by this projection, and you'll know in dollar terms what you need to save during the period.
  4. Adjust your budget around your goal. Make deposits into your savings accounts your first priority, and adjust the rest of your budget accordingly.
  5. Monitor progress. With each paycheck, make sure that your savings are accumulating at a rate that will put you on track towards meeting your goal for the period.
  6. Measure results and reset your goal. At the end of the period, calculate your savings rate to see how you did. Now set a goal for the next period -- ideally, a goal that raises your savings rate again.

Much of this process is methodical, but most worthwhile goals are achieved step-by-step rather than in one big move. Saving for retirement, for instance, is such a big undertaking that it is hard to imagine accomplishing it any other way than step-by-step. The bottom line is that if you start by improving your savings rates from one year to the next, you'll find after a while that you are making progress towards your goal.

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