To be able to compare and interpret the savings rate, it is important to define what income we are talking about – gross, net or else?

To compare the savings rate across geographical and income level boundaries, I derive the savings rate from net income after taxes and health insurance.

Social insurance is also deducted from income, but contributions to a pension fund, for example, are not included in the savings rate and I do not even see them as part of my savings.

People often talk about savings rate or savings ratio. But before one can set the savings rate or interpret and understand it, one needs to define from what income and what does it include. In order to compare apples with apples in the future, I define the composition of the income and the savings rate derived from it. The idea is to keep the whole thing as general as possible, i.e. as unified as possible about income classes and geographical boundaries.

We start with the gross income (GI), then define the net income (NI) from which the net income after taxes and health insurance (NIATH) is derived. Finally, we define net income after taxes, health insurance and rental expenses (NIATHR).

The distinction between GI, NI, NIATH, and NIATHR is made because, depending on the geographical region, certain deductions may or may not be made before the wage is paid. In Germany, for example, taxes are deducted directly from the gross wage, while in France, taxes are paid from the paid wage after receipt of the tax invoice.

Gross income (GI)

The GI contains all theoretical inflows. Theoretically, because the actual income received may be lower, as some deductions have already been made automatically.

Net income (NI)

We receive the NI after deduction of social security contributions such as pension fund contributions and unemployment contributions from the GI.

Net income after taxes and health insurance (NIATH)

NIATH is determined by deducting health insurance and taxes from the NI.

Net income after taxes, health insurance and rent (NIATHR)

We get the last parameter NIATHR if we deduct the expenses for living from NIATH. It makes no difference whether we are talking about rent or mortgage interest or amortization. The amount to be deducted includes rent, interest and utilities and extra costs.

A short summary can be found in the table below:

Example % of GI % of NIATH
Gross income (GI) 5’000 100%
Social security (500) 10%
Net income (NI) 4’500 90%
Health insurance (100) 2%
Tax (1’400) 28%
Net income after tax and health insurance (NIATH) 3’000 60% 100%
Rental (or Mortgage interest rate, monthly downpayment) (1’000) 20% 33%
Net income after tax, health insurance and rental (NIATHR) 2’000 40% 67%
All other spendings (1’000) 20% 33%
Savings (Savings rate) 1’000 20% 33%

From my personal point of view, in order to be able to compare the savings rate, NIATH is the decisive parameter. Deductions such as social security, taxes and health insurance are handled differently in different countries and can also vary in size depending on income class. In addition, you have little or no influence with regard to savings potential.

My personal example:

  • Savings rate January to May 2018
    • From GI: 23% savings rate
    • From NI: 26% savings rate
    • From NIATH: 48% savings rate

It is not about pushing the savings rate higher to make it look better (after all, it does not help me to push it higher, I want my money working for me and the result won’t just be better because the savings rate looks better 😉 ), but about making the savings rate comparable.

If you deduct these items from your gross income, you have the net income that you have under your own control for the most part. Therefore, the savings rate derived from NIATH is probably the most meaningful in terms of the savings performance of each individual.

Anyone who has paid close attention has probably noticed that contributions for the “official” retirement are not included in the savings rate. Why? Normally, you can only access your pension fund contributions when you retire at some point between your 60th and 70th birthday. But if I am financially independent already at 45, I am no longer relying on my pension fund assets. Therefore, this is at most a nice bonus in the future. Besides, who knows what will happen in 15 to 20 years’ time when it comes to pension fund assets. That’s why I prefer to do my calculations without them – and when I get something back at 65, it’s even nicer.

Do you see any way to improve the savings rate definition? Or do you have another view on it – and why? Let me know.