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Simple equation calculates financial health

By Mary Richards | Posted - May 1st, 2013 @ 8:06am



SALT LAKE CITY — A simple equation, taking into consideration income and savings, can reflect how financially healthy a person is.

The equation calculates a person's "gap," which is essentially the percentage of income put into savings. To calculate the gap, divide amount put into long-term savings by the annual net income for last year, then multiply it by 100. The product will show a personal savings rate for last year.

Sharla Jessop, vice president of Smedley Financial Services, said there's no magic number: what's more important is that it's consistent.

"If you set goals for more than what your budget allows, you will defeat your own plan, and you'll find months will go by without you saving anything," she said.

Calculate "the gap"
(Amount put into savings ÷ annual income) * 100 = personal savings rate

Recent reports show consumers are saving less. According to the Wall Street Journal, personal savings rates fell to 2.6 percent in the first quarter. In the last three months of 2012, the rate was at 4.7 percent. Savings rates have been on the decline since 2008 where they peaked at about 6 percent, but it's still drastically lower than it was in the 1970s when it hit just below 14 percent.

One way to increase the rate is by setting up an automatic deduction from paychecks, like a 401k. Jessop also recommends reevaluating the gap every year as income, debt or bills change.

"When you get to that point, rather than absorbing that into buying whatever you buy, you should reestablish a new limit for what you will save and increase that," she said.

The key to increasing financial wellness is increasing the personal savings rate. If consumers are spending more than they are earning, it could mean bad news for the future of the economy and for household financial stability. When people spend more than they save, the can often look wealthier than they are.

"You are judging typically by what you see in their driveway or their house or what toys they have. But that's not really a good evaluation of wealth and financial security," she said. "A better evaluation is what they are able to save."

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