Author Topic: Case Study: Raising my Savings Rate to 50% from 35% but wait, my calc is wrong  (Read 5227 times)

Emergo

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My Second Case Study
Annual Salary of $64,000
27 Years Old
Male
Houston

BREAKDOWN

$18,000 = 401k Contribution, Tax Deferred ($778 biweekly, for my first week of 2016 I accidentally contributed $1,300 so it lowers my monthly for the rest of the year)
$18,000/ $64,000 * 100 = 28.13% into 401k

$5,500 = Roth IRA
$5,000/ $64,000 * 100 = 7.13% into Roth IRA

$6,400 = Tithes
$6,400/ $64,000 * 100 = 10% into Tithes

$5,041.25 = Taxes
Annual Sal: $5041.25/ $64,000 * 100 = 7.88% into Average Tax Rate

$11,000 = Gas, Car Insurance, Rent, Misc. ($900 per month)
$11,000/ $64,000 * 100 = 17.19% into Gas, Insurance, Rent, Misc.

$4,800 = Food ($400 per month)
$4,800/ $64,000 * 100 = 7.5% into Food

% Total of Annual Spent so far = 77.83%

100% of annual - 77.83% = 22.17% = $14,188.8 Goes to Extra Curricular
35.26% = currently going into Savings/ Investments in 401k, Roth IRA

Planned Expenses for 2016:
Maybe a trip out of town. (Could cost up to $1,500)
I want to have a home gym vs having a Planet Fitness membership monthly rate of $20 (Could cost up to $900. Power Rack, Rings, Weights, etc.)
A Tablet (Could cost up to $500)
New Tires (Could cost up to $400)

If I want to raise Savings/ Investments to 50% from 35.26%, 15% or $9,600 annual, $800 monthly must go to Taxable Accounts


Paycheck bi-weekly = $2,078.91
minus $778 = 401k
minus $220 = Roth IRA
minus $400 = taxable accounts
minus $200 = food for two weeks
minus $450 = Gas, Car Insurance, Rent, Misc. for two weeks
minus $220 = Tithes
= $-189.09 (why am I in the negative here? Where did my calculations go wrong?)

Please help with my case. I have no idea how I'm in the negative with my bi-weekly when I computed everything.

Also, please advise areas where I can reduce payments. Please note, some are pretty conservative numbers. Example: I don't think I actually spend $100 every week for food, maybe once a month I do.


EDIT::

I caught my error, $800 taxable accounts should be $400 instead since it's biweekly. But even then, I think I'm still in the negative.
« Last Edit: January 23, 2016, 11:53:05 PM by Emergo »

iamlindoro

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$18,000 = 401k Contribution, Tax Deferred ($778 monthly, for my first week of 2016 I accidentally contributed $1,300 so it lowers my monthly for the rest of the year)
$18,000/ $64,000 * 100 = 28.13% into 401k

Paycheck bi-weekly = $2,078.91
minus $778 = 401k
minus $220 = Roth IRA
minus $400 = taxable accounts
minus $200 = food for two weeks
minus $450 = Gas, Car Insurance, Rent, Misc. for two weeks
minus $220 = Tithes
= $-189.09 (why am I in the negative here? Where did my calculations go wrong?)

You say $778 monthly up top, and count it against yourself bi-weekly at the bottom.  However, $778 per month, even with the extra contribution, is not going to get you to $18,000 after a year, and $778 per paycheck will result in overshooting it by several thousand.  28.13% of your paycheck would be $584.80.

ETA: You don't mention federal and state taxes in your subtraction.  Are you calculating based on your take-home?  If so, your calculation is way off, because the 401k is pre-tax.  Your calculation should be gross - pretax deductions - taxes = net, then subtract expenses.
« Last Edit: January 23, 2016, 11:50:42 PM by iamlindoro »

Emergo

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$18,000 = 401k Contribution, Tax Deferred ($778 monthly, for my first week of 2016 I accidentally contributed $1,300 so it lowers my monthly for the rest of the year)
$18,000/ $64,000 * 100 = 28.13% into 401k

Paycheck bi-weekly = $2,078.91
minus $778 = 401k
minus $220 = Roth IRA
minus $400 = taxable accounts
minus $200 = food for two weeks
minus $450 = Gas, Car Insurance, Rent, Misc. for two weeks
minus $220 = Tithes
= $-189.09 (why am I in the negative here? Where did my calculations go wrong?)

You say $778 monthly up top, and count it against yourself bi-weekly at the bottom.  However, $778 per month, even with the extra contribution, is not going to get you to $18,000 after a year, and $778 per paycheck will result in overshooting it by several thousand.  28.13% of your paycheck would be $584.80.

ETA: You don't mention federal and state taxes in your subtraction.  Are you calculating based on your take-home?  If so, your calculation is way off, because the 401k is pre-tax.  Your calculation should be gross - pretax deductions - taxes = net, then subtract expenses.

Fixed the biweekly error up top.

That is weird, my company took $778 from me this week and i set it at 27% already. So youre right and that should be lower.

I am really lost with what you said at the last part. I thought i included the taxes already. Just when i thought i had it figured out...

Emergo

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How i calculated my taxes:

What Adjusted Gross Income means:

$64k - gross income
-$18k - 401k (deductible)
-----
$40.5k - Adjusted Gross Income <------
-$4,050 personal exemption (deductible)
-$6,300 standard deduction, if greater than itemized (deductible)
----
$36,700 - Taxable Income

What marginal tax rate means:

Tax is taken from the first
$0-$9,275 earnings you have by 10%
$9,276-$37,650 by $15%
$37,651-$91,150 by 25%
$91,151-$413,350 by 33%
$41,351-$415,050 by 35%
$415,051+ by 39.6%

So with my taxable income of $36,700,
I am taxed by the first $9,275 * 0.10 = $927.50
Then $36,700 - $9,275 * 0.15 = $4,113.75
Together with $927.50 = $5,041.25
Annual Sal: $64,000/ $5041.25 * 100 = 7.88% = Average Tax rate

iamlindoro

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That is weird, my company took $778 from me this week and i set it at 27% already. So youre right and that should be lower.

I am really lost with what you said at the last part. I thought i included the taxes already. Just when i thought i had it figured out...

You are subtracting from 2078.91.  2078.91 x 26 pay periods = 54051.66, so I am presuming this is your net take home (does your state not have income tax?).  The thing is, you shouldn't be subtracting 401(k) from this amount, because it comes off the gross amount, not the net, thus reducing your taxable amount.  The subtraction of this amount at the wrong time and the current overcontribution are what are making your number negative.

MDM

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I caught my error, $800 taxable accounts should be $400 instead since it's biweekly. But even then, I think I'm still in the negative.
If you use the case study spreadsheet, how do the numbers look?  You can take a biweekly amount X and enter it into the monthly column as =X*26/12.

Emergo

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That is weird, my company took $778 from me this week and i set it at 27% already. So youre right and that should be lower.

I am really lost with what you said at the last part. I thought i included the taxes already. Just when i thought i had it figured out...

You are subtracting from 2078.91.  2078.91 x 26 pay periods = 54051.66, so I am presuming this is your net take home (does your state not have income tax?).  The thing is, you shouldn't be subtracting 401(k) from this amount, because it comes off the gross amount, not the net, thus reducing your taxable amount.  The subtraction of this amount at the wrong time and the current overcontribution are what are making your number negative.

Ok, going by that I get:

Yes, I live in Texas so no income tax.

So gross pay period biweekly = 2461.56 minus pretax deductions of 692.307 (401k bi weekly) - federal taxes (this is the one i already computed in my original post of $5041? Will end up negative again with this...


MDM,

This is what I get on the spreadsheet, but I'm not sure if the amounts I put in are dependable.

Federal tax   $399    2015 rates, S, stand. ded., 1 exempt.   $4,793
State/City tax   $0    Guess, using 0.00% * Fed. Taxable   $0
Soc. Sec.   $330.67    Assumes 1 earner paying   $3,968
Medicare   $77.33       $928
Self-employment Tax   $0       $0
Total income taxes   $807    $372.65    $9,688.94

My brain is going to explode again. Ugh.

Please help anyone.

iamlindoro

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So gross pay period biweekly = 2461.56 minus pretax deductions of 692.307 (401k bi weekly) - federal taxes (this is the one i already computed in my original post of $5041? Will end up negative again with this...

OK, that is the correct order.  If you are now getting a negative number, then your expenses are too high, and you will need to reduce them.

McStache

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My Second Case Study
Annual Salary of $64,000
27 Years Old
Male
Houston

BREAKDOWN

$18,000 = 401k Contribution, Tax Deferred ($778 biweekly, for my first week of 2016 I accidentally contributed $1,300 so it lowers my monthly for the rest of the year)
$18,000/ $64,000 * 100 = 28.13% into 401k

$5,500 = Roth IRA
$5,000/ $64,000 * 100 = 7.13% into Roth IRA

$6,400 = Tithes
$6,400/ $64,000 * 100 = 10% into Tithes

$9,400 = Taxes
Annual Sal: $9,400/ $64,000 * 100 = 14.68% into Average Tax Rate
<-- Updated based on your update from case study calc

$11,000 = Gas, Car Insurance, Rent, Misc. ($900 per month)
$11,000/ $64,000 * 100 = 17.19% into Gas, Insurance, Rent, Misc.

$4,800 = Food ($400 per month)
$4,800/ $64,000 * 100 = 7.5% into Food

% Total of Annual Spent so far = 84.63%

100% of annual - 84.63% = 15.37% = $9,836.8 Goes to Extra Curricular
35.26% = currently going into Savings/ Investments in 401k, Roth IRA

Planned Expenses for 2016:
Maybe a trip out of town. (Could cost up to $1,500)
I want to have a home gym vs having a Planet Fitness membership monthly rate of $20 (Could cost up to $900. Power Rack, Rings, Weights, etc.)
A Tablet (Could cost up to $500)
New Tires (Could cost up to $400)

If I want to raise Savings/ Investments to 50% from 35.26%, 15% or $9,600 annual, $800 monthly must go to Taxable Accounts
[Here you are calculating savings rate with your gross income in the denominator, most people (including MMM) use net.  Using a calculation of net, your savings rate is already 41.33%.  To get to 50% with this calculation, another $400 per month needs to go to taxable.]


Paycheck bi-weekly = $2,078.91
minus $778 = 401k
minus $220 = Roth IRA
minus $200 = taxable accounts
minus $200 = food for two weeks
minus $450 = Gas, Car Insurance, Rent, Misc. for two weeks
minus $220 = Tithes
= $10(why am I in the negative here? Where did my calculations go wrong?)

Please help with my case. I have no idea how I'm in the negative with my bi-weekly when I computed everything.

Also, please advise areas where I can reduce payments. Please note, some are pretty conservative numbers. Example: I don't think I actually spend $100 every week for food, maybe once a month I do.


EDIT::

I caught my error, $800 taxable accounts should be $400 instead since it's biweekly. But even then, I think I'm still in the negative.

Emergo

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McStache,

Thank you for that.

Now my question is. Where is the additional 4k for taxes coming from? I know it's from the case study calc, but I'd like to know.

I see where I went wrong now. $2078.91 is not what I was getting each paycheck after taxes. What I had in my bank account is added onto that. I was looking my account all weird. Let me update this real quick.

Emergo

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Paycheck bi-weekly (after 401k contribution and taxes) = $1,300.91
minus $220 = Roth IRA
minus $200 = taxable accounts
minus $200 = food for two weeks
minus $450 = Gas, Car insurance, rent, misc. for two weeks
minus $220 = tithes
=$10

How do you calculate for net?
« Last Edit: January 24, 2016, 10:13:43 AM by Emergo »

Rewdoalb

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Target $150 for food per month and you'll get the extra slack you'll want for electronics, new tires etc.

Eat out less, when you do try to go places with no tip. Only drink water if out. Eat PBJ for lunch. If you drink alcohol, try to get wholesale prices and consume at home / friends houses instead of restaurants. Eat less meat.

You are doing great!

Gronnie

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McStache,
Now my question is. Where is the additional 4k for taxes coming from? I know it's from the case study calc, but I'd like to know.

FICA (What is FICA?)

Gronnie

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Target $150 for food per month and you'll get the extra slack you'll want for electronics, new tires etc.

Eat out less, when you do try to go places with no tip. Only drink water if out. Eat PBJ for lunch. If you drink alcohol, try to get wholesale prices and consume at home / friends houses instead of restaurants. Eat less meat.

You are doing great!

This. $400+/mo for food for one person is way too much.

Emergo

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McStache,
Now my question is. Where is the additional 4k for taxes coming from? I know it's from the case study calc, but I'd like to know.

FICA (What is FICA?)

Gotcha, so it's the taxes I computed in the original post plus medicare, social security.

But how to compute for net? I'd like to know how MrStache got 41.33%.

iamlindoro

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But how to compute for net? I'd like to know how MrStache got 41.33%.

Net is just:

Gross Pay
- Pretax deductions
----------------------
= Taxable Amount
- Taxes
----------------------
= Net Pay

Only you will know what all of your pre-tax deductions would be, and they should be on your pay stub.  They include things like 401(k), yes, but they also include things like health insurance deductibles, public transport pass programs, etc.

MDM

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Emergo, does it all make sense now?

If so, great!

If not, perhaps a new post with all your annual amounts might help.  Trying to compare bi-weekly, monthly, and annual amounts at the same time can be confusing.

Emergo

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Emergo, does it all make sense now?

If so, great!

If not, perhaps a new post with all your annual amounts might help.  Trying to compare bi-weekly, monthly, and annual amounts at the same time can be confusing.

Yeah, I believe I got it. My bad, the opening post was originally intended as notes for me only lol and I just copied and pasted it here for input. Thank you guys.

McStache

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McStache,
Now my question is. Where is the additional 4k for taxes coming from? I know it's from the case study calc, but I'd like to know.

FICA (What is FICA?)

Gotcha, so it's the taxes I computed in the original post plus medicare, social security.

But how to compute for net? I'd like to know how MrStache got 41.33%.

How I got it specifically is:
35.26% x $64,000 = $22,566.40 (amount you save in dollars)
$64,000 - $9,400 = $54,600 (your after tax pay)
$22,566.40 / $54,600 = 41.33% (your savings rate as MMM would calculate it)