Your personal savings rate is simply the percentage of your income that you put away for long term savings. There may be some debate as to whether you should use your gross income (before taxes) or your net income (after taxes) when making the calculation. For example, someone earning $50,000 per year has a gross income of $50,000 and assuming roughly $10,000 in income taxes payable will have a take-home pay (or net income) of $40,000.
Again, your GROSS income is your income before income taxes and your NET income is your income after income taxes.
If this person was putting away $4,000/year for long term savings then their personal savings rate is either 8% or 10% depending on which number you use for your total income. Many people will use the rule of thumb that you should save 10% – they don’t really say of which number, but if you can manage it, try to aim for 10% of your gross income. For the example person above, this would mean saving $5,000 per year instead of $4,000.
10% is just a rule of thumb remember – if you can save more than that, even better. And no, it’s not easy. You may only be saving 5% right now, or perhaps even less. The average personal savings rate in the United States was negative in 2006. That means the average person spends more than they earn, which means they pile on more and more debt (or eat into savings or home equity).
As with many aspects of personal finance, this is mostly a psychological phenomenon. We have a tendency to spend what we earn, and most people will tell you that when they get their next raise, they will put it towards savings (or paying down debt), but in reality they have probably already decided what they will spend their raise on – which means they will never get ahead.
The personal savings rate used to be much higher but has steadily declined – due to easy access to credit, a lack of personal finance education in school and the glamourization by the media of spending excesses. If there is only one thing you need to do to be successful financially, it start with savings. Until you can get a handle on that, you don’t need to worry about investing (you’ll have nothing to invest).