Your Personal Savings Rate or PSR is the percentage of your income that you are actually saving every month. Sadly, some folks don’t even know what “saving” is.

They assume that if they sock away $5,000 a year in an RRSP they’re doing a great job of saving. But if you had to borrow the money to make that RRSP contribution, you haven’t saved a nickel until that RRSP loan is paid off. And if you stuck money in your retirement plan and then promptly upped your line of credit or credit card balances by a similar amount, you’ve saved squat.

To actually save a dollar you have to take that dollar out of your cash flow. Putting it in a TFSA and then spending it on a credit card doesn’t count. You must make the commitment that current expenditures will not exceed current income. You’ve got to spend less money than you make.

Your PSR is a measure of how much money you save out of the money you make.

First, write down your monthly net income. That’s the money that is actually hitting the bank in a month – so it’s your gross less taxes and whatever other deductions you may be paying. If you have a fluctuating income then you’ll have to do a little more work. Grab your bank statements for the past six months and add up all the deposits you have made. Ignore transfers. Include all the money that went into your account including your pay, commission, bonuses, support you received, repayment of medical costs or business expenses, and government payments like child, retirement, and disability benefits.

Keep in mind that if you belong to a company pension plan or have amounts taken off your paycheque for savings each month, to make this calculation work for you add those amounts back into your income so they will factor into your savings rate.

Once you’ve totaled up your deposits for the past six months, divide your total by six. That’s how much you bring in on average every month.

Next, figure out your monthly spending. Notice I didn’t say “expenses.” You’re actually going to have to look at how much went out, not what you thought went out. It doesn’t matter what you spent it on. If it went out, count it. Include what you spent on your credit card, using your debit card, by writing cheques, by accessing your line of credit, or in cash.

Then, subtract your monthly spending from your monthly income.

This is simple math. Take the amount you earn on average each month and subtract the amount you spend on average each month. That will give you your monthly savings.

Finally, calculate your PSR. Divide your monthly savings by your net monthly income and multiply by 100. If you end up with a negative number, then you’re spending more than you make. If your answer is a positive number, you have the money to save. So does your TFSA, RRSP, RESP or other investment account reflect your savings potential?