One commonly used strategy for saving is receiving a paycheck, paying expenses, and hoping there is something left over for savings when we’re finished. We’re not sure if it will be enough in the long run, but we hope. There is a better way. A formula exists that can be used to calculate the necessary savings rate needed to achieve long-term financial goals.
The savings rate formula:
Savings + Employer Match (if any) / Gross Pay= Benchmark
Calculate your monthly savings (any investment deductions from your paycheck, employer match, and any more you put into long-term savings accounts), then divide that number by your gross pay (pay before taxes). The ratio you are seeking is between 10 to 13 percent (depending on your goals). While this is a good ratio when you are young and beginning your savings and financial plan, as you get closer and closer to retirement this number will change (and one of the reasons you want to start saving and investing early).
Talk with your financial professional about your savings rate and the best way to achieve your financial goals. One of the best financial tips is to make sure you take full advantage of your employer’s match! If you don’t, you are literally giving away free money.