#saving rate

{photo: Oxfam}

Amongst the surprising observations of MRW is that the TFP growth rate is negatively correlated with labour force growth rate – while positively correlated with saving rate (investment) and schooling.

The MRW Cobb-Douglas form clarifies how for a given level of GDP labour-augmenting TFP is interchangeable with labour. Most labour-intensive economies are also low income. Rather than…

If you're like me you've read many articles and books that tell you that you should be saving a specific percentage of your income (depending on the source it could be anywhere from 10-30%).  We all know this is true, if we didn't save a percentage of our income we'd end up pretty destitute when we got to a point where we couldn't work any more (or wanted to retire). But how do you calculate what percentage you are saving?  Or, better yet, how can you figure out how much you can even afford to save? How much you can save is called a savings rate, or a personal savings rate, or a household savings rate (for multiple income homes).  Want to figure out what your savings rate is?  Follow these steps:

*If you already track a budget in a spreadsheet these steps will be easier, if not it may take you a little longer to accomplish. 1) Calculate your monthly net income: - add up all your income sources over 6-12 months - these income sources could be salary, rental income, subsidies, etc. - if you are a member of a pension program that does deductions from your pay, for this step you will need to add those back in as a source of income (visit your pay stubs and add back in the amount they have removed for pension purposes)  - Once you have all this data totalled for 6-12 months you will divide the total by the number of months you calculated for. If you totalled data for 6 months, divide by 6; if you totalled data for 12 months, divide by 12. This will give you your average net monthly income. *Why do this for a 6-12 month period instead of just one month? Monthly incomes and spending can fluctuate quite a lot. By averaging over a 6 to 12 month period we are smoothing out the fluctuations to give a better representation of our true income, costs and savings.

2) Calculate your monthly spending: - add up all of your expenses over 6-12 months - this includes absolutely everything you spent money on using cash, credit, debit, cheque, line of credit, etc. - This can be a very eye opening step - be prepared! (now that so many people use debit and credit cards to make payments instead of actual paper money, most people don't even realize just how much money goes out every month, and because you don't see a finite pile getting smaller and smaller until it's gone it can be very easy to spend beyond our means) - Again divide this totalled data by 6-12 depending on how many months of data you have. This will give you your average monthly spending.

3) Do some simple math: - Subtract your average monthly spending (from step 2) from your average net monthly income (from step 1).  This will tell you what money you have available for saving. - If you happen to get a negative result, don't panic, but this indicates that you are living beyond your means. This is a BIG problem that you need to fix ASAP. (It's a 'hair on fire' emergency - to quote Mr. Money Mustache) You are going to have to figure out how to earn more, or how to spend less.  This can be tough, but your financial health depends on it (and your future self will thank you).

4) Calculate your savings rate: - Divide your monthly savings (from step 3) by your average net monthly income (from step 1) - Multiply by 100 and this is your savings rate

Now that you have your savings rate you know what percentage or your income you are currently capable of saving (this is how much you can afford to save while keeping you current spending habits); the question is are you saving it? It doesn't count if you are putting it in away to buy a new car, or TV, or to go on a vacation or buy a house.  Are you saving it for when you retire? (ie in an RRSP or a TFSA that you don't touch until retirement).  If the answer is no it's time to find out 'why not?' Starting to save earlier is the best way to make sure you'll have enough money in retirement to live comfortably; and the only way to take advantage of compound interest.  So start putting that money to work for you in an RRSP (or TFSA).  Get saving!

If your savings rate is under 10% you should also be evaluating your finances more closely (and some would argue the same if its under 20% or 30%).  It's time to spend less (or earn more) and increase the percentage so that you are saving a higher percentage of your income. Aim for 10% as a minimum, but my suggestion is that you work to increase your savings rate by a couple of percent a year until you reach at least 20%.  By increasing it slowly over a few years it will give you time to adjust your spending while you learn to live on less today so that you have adequate money for tomorrow (read: retirement).