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Are You Saving Enough to Build a Significant Net Worth?

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John Burnside

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If you are a well-established professional earning a meaningful salary, you have the potential to build a significant net worth.

 

There are many ways to build a net worth, but the most common way is to trim off a certain amount from your salary and invest in the stock market.  People invest in the stock market through their 401k at work, a personal IRA, a taxable account, or some other method.


That leads to a common question for busy and productive individuals,  “Am I saving enough?” 

 

This question can be answered by either:

1.     Establishing a dollar amount that is needed to reach your long-term goals.

2.     Determining a percentage of your salary that can be saved.

 

The best approach is to establish a dollar amount.  However, not everyone is ready to put on paper an actual end-goal and work backwards to come up with a hard figure.

 

The next best thing is to commit to saving a certain percentage of your salary. 

 

Ideally, you want to save at least 10%.  But more the better.

 

Taking the alternative savings route, evaluate the following:

1.     The percentage of your income that is currently being saved (“current savings”).

2.     The percentage of your income that could be saved (“potential savings”).

 

What is my “Current Savings Rate”?

The percentage of my income that is currently being saved.

 

Steps to make this calculation:

1.     Write down the dollar figure that went into your 401k and other investment accounts in the last month.

2.     Determine your monthly income.

3.     Divide #1 by #2.

Formula: (401k contributions + other investment account additions) / income

 

What is my “Potential Savings” Rate?

Potential Savings is the dollar figure that has the potential to be converted into Current Savings.  

 

 Steps to make this calculation:

1.     Document your monthly income (after tax but before 401k withdrawals).

2.     Subtract “Need Expenses” (housing, food from grocery stores, health care/ hygiene, clothing, and other fixed costs unique to your circumstances).

3.     Subtract Income from Need Expenses.

4.     Divide the total by your monthly income (#3 / #1).

Formula: income – need expenses / income

 

Next:

Calculate the difference between your ‘Current Savings Rate’ and your ‘Potential Savings Rate’?

 

Questions to ask yourself:

  • Am I currently saving 10%?
  • Can I kick it into overdrive and get to my Potential Savings Rate?

 

 

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