Author Topic: How to calculate your >50% savings rate  (Read 3411 times)

Retireme32

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How to calculate your >50% savings rate
« on: February 25, 2014, 08:15:05 AM »
Hello Fellow Mustachians,


I have a question for you.  Everywhere we talk about FI, the bottom line is that to truly get to FI in a short time, you have to be at a minimum over 50% savings rate and preferably 70-80%.  My question is when I"m figuring out my 70-89% savings rate am I doing this all after tax or can I count my pre-tax contribution to my 401k? I mean I will be factoring in my savings from that account when I retire so I should be able to count that at part of my 70-80% correct? And then does that mean that we were always talking about 70-80% of our gross salary? that was the goal or 70-80% of our take-home? I feel like it's impossible to do 70-80% of my gross b/c taxes takes so much of that to begin with even after 401k.  How are you guys viewing this calculation? Thanks!

matchewed

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Re: How to calculate your >50% savings rate
« Reply #1 on: February 25, 2014, 08:17:04 AM »
Yes.

:)

Calculate it in such a way that is consistent and makes sense for you. Everyone's scenario is different. We're not your benchmark, your savings is.

golfer44

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Re: How to calculate your >50% savings rate
« Reply #2 on: February 25, 2014, 08:18:30 AM »
Here's how it was noted in the MMM blog:


** definition of take-home pay: gross income minus all taxes. Remember to add back in any 401k or other savings deductions to the paycheck you see, since these are really part of what you are “taking home” – you just happen to be saving it automatically.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Retireme32

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Re: How to calculate your >50% savings rate
« Reply #3 on: February 25, 2014, 08:29:14 AM »
Wow you guys are fast. I had forgotten about that article. I did read that a while back.  Thanks!

Spork

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Re: How to calculate your >50% savings rate
« Reply #4 on: February 25, 2014, 08:37:25 AM »
Yes.

:)

Calculate it in such a way that is consistent and makes sense for you. Everyone's scenario is different. We're not your benchmark, your savings is.

Exactly this.  I can tell you exactly how *I* do it if you want.*  And I think it makes sense.  But I've also heard other folks explain different mechanisms that have a consistent and logical argument to them.  Do it the same.  Save as much as you can.  Use the percentage as a score of "now" vs "some other time" and not a score of "mine" vs "yours".

*How I calculate:
percent = ((income - expenses) / income ) * 100
income is gross income.   And ALL of it.  (stock dividends are income, too.)
expenses is ALL expenses (and tax is an expense)
401k contributions come out of income... but are not an expense (hence, part of savings)
employer matches are income

I also exclude a few things... for instance I have income categories like Rebates or gifted money or ... well, various things I don't count on repeating on a regular basis.  Using them as a basis for savings calculation would skew it.  I'd rather be conservative.