I’d like to advocate in favor of a savings ratio rather than a savings rate, because I think it’s actually more transparent, easier to calculate, and emphasizes the tremendous importance of spending less. By savings ratio, I mean the ratio of what you save every year to what you spend every year. The savings ratio is a bit easier to understand because all money that comes and stays in goes to the numerator, and all money that goes out goes to the denominator, nothing goes to both. You don’t need to fuss with exactly defining income; it’s just everything that came and stayed in divided by everything that went out. This has the added benefit of focusing on overall expenses instead of overall income which, as we have seen from a few threads lately, can be disheartening for those of us on the lower end of the income scale. Plus, we tend to define FI by what our net worth or passive income level is in relation to our yearly expenses, so why not give our savings ratio in terms of our yearly expenses as well? The savings ratio frames our conversation in the same terms whether we’re talking about budgeting and cutting expenses or the amount we need to save to reach FI.
Furthermore, lowering your expenses and saving the difference will both increase the numerator and decrease the denominator of the savings ratio which has a huge impact and is really confidence boosting whereas with the savings rate you must increase your income in order to affect the denominator which will usually have a greater impact than only cutting expenses and only affecting the numerator. Additionally, while the yearly increase of your savings rate can sort of peter out once you get to a certain level of spending/income, your savings ratio will continue to increase noticeably even with modest improvements in spending and income.
I know it’s a bit less intuitive than the savings rate, but I really like thinking in terms of my savings ratio. For instance, instead of thinking that I had a savings rate of 60% this year, I can frame my savings in real terms as I saved 1.5 times my yearly expenses this year. Both statements mean the same thing, but I find the latter much more satisfying.