Savings to income ratio
Also written Accumulated savings to income ratio
Total accumulated savings divided by annual income — a measure of how prepared a household is for long-term goals such as retirement, expected to rise with age.
In plain language
The savings ratio tells you what share of this year's income was saved. The savings to income ratio asks a bigger question: after all the years of working so far, how much has actually been built up, measured in years of income?
It is a stock measure, not a flow. A client who saves 30% of income but only started last year will have a strong savings ratio and a weak savings to income ratio. The workbook describes it as a measure of preparedness to meet long term goals such as retirement.
Total savings here means the current value of investments and assets, after accounting for any outstanding loans taken to acquire them. A self-occupied home is typically not included.
How it works
The workbook example (GGN). Annual salary Rs 12,00,000. Accumulated investments — provident fund balance, bank deposits, mutual fund units, PPF, NSC — Rs 15,00,000. Savings to income ratio = 15 ÷ 12 = 1.25.
What level is right. It depends on age. When a person is young, expenses are high relative to income, much of the surplus goes into servicing a home loan, and accumulated savings are likely to be low. The ratio is expected to improve as income rises and expenses stabilise.
The workbook gives one benchmark: in the early 40s, at least 3 times annual income.
The consequence. Because income itself grows, a constant savings rate will not deliver a rising multiple on its own. The workbook's conclusion is that the annual savings rate has to be stepped up as income levels go up, so that savings reach a level suitable to age and stage in life.
Not to be confused with the savings ratio, which is savings per year ÷ annual income — the workbook's example is Rs 60,000 ÷ Rs 6,00,000 = 10%.
The formula
Savings to income ratio = Total accumulated savings ÷ Annual income
Total accumulated savings = current value of investments and assets,
net of loans taken to acquire them,
excluding the self-occupied home
A worked example
Illustrative figures.
Priya is 42 and earns Rs 18,00,000 a year.
| Holding | Value | Included? |
|---|---|---|
| Provident fund balance | Rs 14,00,000 | Yes |
| Equity mutual funds | Rs 20,00,000 | Yes |
| Fixed deposits | Rs 6,00,000 | Yes |
| PPF | Rs 8,00,000 | Yes |
| Flat she lives in, worth Rs 90,00,000 | — | No — self-occupied |
| Total accumulated savings | Rs 48,00,000 |
Ratio = 48,00,000 ÷ 18,00,000 = 2.67.
Against the workbook benchmark of at least 3 times income in the early 40s, she needs Rs 54,00,000 — a gap of Rs 6,00,000. Including the flat would have produced (48 + 90) ÷ 18 = 7.67 and hidden the problem completely; the flat is where she lives, not a pool she can retire on.
Now suppose Rs 5,00,000 of the equity funds had been bought with a loan against property that is still outstanding. The workbook nets such loans off: total savings becomes Rs 43,00,000 and the ratio 2.39.
Her annual savings ratio, meanwhile, might look healthy at 25%. The two ratios answer different questions, and only this one says whether the corpus is on track for her age.
Why NISM asks about it
Chapter 3 (Cash Flow Management and Budgeting), section 3.9.1, where it is taught alongside the savings ratio and the expenses ratio. Expect the GGN-style calculation, the exclusion of the self-occupied home, and the benchmark of three times income in the early 40s.
Common exam traps
- Savings ratio is a flow; savings to income is a stock. One divides a year's savings by income; the other divides everything accumulated.
- Exclude the self-occupied home. Including it is the easiest way to inflate the ratio.
- Net off loans taken to acquire the assets. The workbook uses current value after outstanding loans.
- The benchmark is age-linked — at least 3 times income in the early 40s. A low ratio at 26 is expected, not alarming.
- The PF balance counts, including the employer's contributions, even though the money is not in hand.
- A constant savings rate is not enough as income rises; the workbook says the rate must be stepped up.
Check yourself
1.What savings to income ratio does the chapter describe as suitable in the early 40s?
- a)At least 1 time the annual income
- b)At least 3 times the annual income
- c)At least 10 times the annual income
- d)The ratio does not depend on age
Show the answer
Answer: (b) At least 3 times the annual income
"A suitable savings to income ratio in the early 40s is AT LEAST 3 TIMES THE ANNUAL INCOME." The appropriate level depends on age: when young, expenses are high relative to income and much of the surplus goes towards servicing a home loan, so the ratio is expected to improve over time.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Savings ratioSavings relative to income, which the workbook says should ideally rise over the life cycle — read alongside a falling expense ratio and a debt-to-income ratio that peaks around a big loan.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- Expenses ratioAnnual recurring expenses divided by annual income — the share of a household's earnings consumed by regular living costs, and the exact mirror of the savings ratio.
- Liquidity ratioLiquid assets divided by monthly expenses including loan repayments — the number of months a household could keep paying its bills from short-term assets if income stopped.
- Personal balance sheetA statement of an individual's or household's assets and liabilities at a particular date, whose difference is net worth — the starting point for the personal finance ratios.
- Liquid assets to net worth ratioLiquid assets as a share of net worth — read against the timing of the household's goals, so a low figure is right when goals are distant and a higher one when they are near.
- Financial assets ratioThe share of an investor's total assets held in financial form — shares, deposits, mutual funds — rather than physical form such as gold or real estate, expressed as a percentage.