Have you ever wondered how efficiently you are using the money you earn?
There are many different calculations you can use, but one that’s very helpful is called The Power Percentage. The Power Percentage is a formula that was created by financial planner, Peter Dunn to help determine how efficiently you are using your income and how ready you are for retirement.
We’ll look at an example to see how a Power Percentage score is calculated. The first step is to determine your Gross Monthly Income. This is the amount you earn in a months’ time before taxes. In the example we’ll use $5,000 as a gross monthly income amount. If you earn by commission you can add your previous 12 months’ commissions plus your base salary and divide it by 12.
The next number you need for the formula is the amount of money you are saving each month. Your savings may be going to different places: an IRA or 401k, a 529 plan, savings or checking accounts, or an investment account. In our example we are going to use $500/monthly into a retirement account with a $250 employer match. We are also going to add $150 to a 529 account and $150 to an emergency savings account. Don’t include anything you that you plan on spending in the near future such a vacation fund, Christmas fund, or new car fund.
If you have a mortgage we also want to add to the savings total the amount of principal that is being reduced from your mortgage each month. In our example we will use $400. Finally we’ll add to the total any other debt reductions you are making each month whether you are paying off student loans, medical debt, … Everything is Bold in the below chart was added together to give us a total monthly savings of $1650. We then take that amount and divide it by our gross monthly income ($5000) to get a Power Percentage of 33%.
Power Percentage = Total Monthly Savings / Gross Monthly Income
|Gross Monthly Income
|Employer Sponsored retirement
|Total Saving and Debt Reduction
There are four levels of scoring.
Level 1: 0% to 10%. (Not Good)
Level 2: 11% to 20% (OK)
Level 3: 21% to 34% (Pretty Good)
Level 4: 35% and above (Excellent)
33% Is quite good but still can be improved. Why might you have a low score when figuring out your power percent? You may not be earnings enough income to support your current lifestyle You also may just not be saving enough each month. There are many different scenarios that could be happening. If you would like help calculating your score I would be happy to help. Once you have your score you can measure how different changes to saving and spending over time improve it.