What Are Savings? How to Calculate Your Savings Rate

What Are Savings?

Savings is the money you have left over after subtracting your expenses and spending from your earnings over a given period. Savings, therefore, represent the net surplus of funds you have after all your obligations have been paid.

Savings are generally kept as cash or cash equivalents (e.g., bank deposits), which are exposed to minimal risk of loss but come with correspondingly minimal returns. Savings can be grown through investing; However, invested funds are exposed to more risk.

Understanding Savings

Savings are the amount of income left over after spending. People may save for various life goals or aspirations such as an emergency fund, retirement, a child's college education, the down payment for a home, a car, vacation, or another future event.

If your bills and spending take most or all of your income, it's likely that you're living outside of your means. If you're not saving money, you run the risk of not being able to pay unforeseen expenses, causing you to incur more debt to pay for the emergency.

How to Calculate Your Savings Rate

Your savings rate is the percentage of disposable personal income you keep rather than spend on consumption or obligations.

Say that your net income is $25,000 a year after taxes (called your disposable income), and over the course of the year, you also spend $24,000 in bills and living expenses. Your total savings are $1,000. Dividing savings by disposable income yields a savings rate of 4% = ($1,000 / $25,000 x 100).

Savings vs. Investing

The words saving and investing are sometimes used interchangeably—for instance, saving for retirement in a 401(k) plan—but this usage is technically incorrect. Retirement "saving" is more accurately investing, since money put away in these accounts is used to purchase securities, such as stocks, bonds, and mutual funds. When money is invested, it has a higher risk of loss, but that risk is offset by positive expected returns over time. It's worth noting that invested funds are not insured from any potential loss, except losses (up to $500,000) from the failure of a Securities Investor Protection Corporation (SIPC) member brokerage. Funds in a savings account at a Federal Deposit Insurance Corporation (FDIC) member financial institution are insured up to $250,000 (per bank, per account category).

Additionally, savings are highly liquid and available for immediate use (e.g., using a debit card to make a purchase). Investments, on the other hand, must first be sold into usable cash. This can take some time, and you may incur transaction costs. Investments, by definition, entail some type of longer-term time horizon to allow the money to grow and appreciate.

The Bottom Line

Savings is the money left over from your disposable income after all your living and other expenses have been paid. Usually, you calculate it for a specified period, such as a month or a year. Often, people set aside savings for certain goals, including buying a home, paying for a child's college education, or growing a retirement nest egg.

To make your money grow faster, you may need to take a portion of your savings and invest it in securities, such as stocks, bonds, or mutual funds. It's best to have a financial plan that includes savings and investing for emergencies and to ensure a comfortable retirement.