Let me start by asking you a simple but important question.
What is the single biggest factor contributing your financial prosperity and security?
Invariably your answer to the above question would have been, “Savings”.
However, in spite of the fact that most people know that their financial well being depends upon saving money but of late it has been found that people’s savings are decreasing. In fact, their savings ratio tends to be in the red zone.
Actually more than savings you got to know your savings ratio.Moreover, you have to guard your savings ratio so that it always remains in the green zone.
So, before taking up the topic in length, it’s important to understand what is meant by Savings Ratio.
In simple terms, Savings Ratio determines whether or not you are saving adequately for your future. It is the proportion of your income that you allocate towards your savings. It is determined in percentage terms. So to figure out Savings Ratio you have to divide your total monthly savings by your net monthly income.
Let’s take an example to make it clear to you.
Suppose your net monthly income stands at $5000, and your monthly savings stood at $1000 then your Savings Ratio can be determined by dividing $1000 by $5000 which comes out to be 20 percent. So, your Savings Ratio is 20%, which means you save 20% of your (net monthly) income.
After knowing what Savings Ratio is and how you can determine it, you can now easily figure out your own Savings Ratio.
So, what’s your Savings Ratio?
Here, it is important to ascertain whether your Savings Ratio lies in the red zone or not. By red zone, it means that your savings are not adequate to withstand your future commitments, requirements and aspirations. Ideally your savings ratio should never go below the 10% mark. However, some experts are of the opinion that savings ratio below 5% should be considered as red zone. Having said that, my opinion is that a Savings Ratio of below 10% should qualify in the red zone which means that every month at least 10% of your income should go towards your savings fund.
So you see that it is just not enough for you to save money. If you really want to fulfill your future commitments, goals and aspirations and want to live a joyous and satisfactory retired life, you require keeping your savings ratio well above the 10% mark.
However, when you compare the savings ratio among people, you get a widespread difference between various countries and regions. In some parts of the world, the savings ratio is well above 10% whereas in some parts, the average savings ratio is well below the 10% mark. The biggest example of poor savings ratio is America. According to a recent study, the average savings ratio in America stood around 7.5%. The top five countries with the highest savings ratio included Germany which netted savings ratio of 11.4%, Belgium with savings ratio of 12.2%, Spain with savings ratio of 13.1%, France with 16% savings ratio and the country with the highest savings ratio of 19.3% was Ireland.
So you see that for some countries (including America), savings is a problem while for others savings has become a part of life and has become one of the top most priorities of life (as seen by their savings ratio).
Here, one thing comes to the forefront, and that is why people in America are unable to save money and why people in countries like Ireland are saving a good amount of money. You should understand that savings help to build up financial assets, which you can use in various life stages such as your post retirement life.
Knowing the factors contributing to low savings ratio could help you to avoid them so that you can build a healthy savings ratio for yourself.
So why it is that America has anemic savings rate?
The primary reason for this is the fact that in America credit is easily available. When in need, people in America can easily borrow money, so they don’t feel the need of saving money. The next big reason can be attributed to the fact that about 30% of Americans has no savings account, and about 8% of Americans have no bank account at all. With no banking relationship, it becomes hard to build up wealth. Moreover, American banks don’t encourage small depositors and require them to maintain a minimum deposit which is quite hard for fragile savers. These are some of the top reasons why America has low savings rate.
Thus if you want to have a high savings ratio you should increase your savings. Moreover, maintaining a healthy relationship with a bank can help you immensely in building wealth. In this context, you should prioritize your future well being rather than opt for immediate gains. When it comes for savings or increasing your savings ratio you might have to forgo some of your spontaneous spending habits and moreover require reducing your overall monthly expenditure.
So, check up what’s your saving ratio and if it is below 10% then it’s high time for you to take corrective measures so as to increase your savings to earnings ratio and thereby lay the foundation of a financially secure future for yourself.