Savings % question

[hunniebun]

This may be a dumb question...but when people say their savings rate is 50% - Do they mean 50% of their gross or net income?  I have to assume that it is net pay, but want to confirm.  I have been reviewing my pay stubs (which have been largely ignored for last 20 years) and my gross bi-weekly pay is 2956.31...but my take home after taxes, EI, CPP, Union dues, disability and death coverage is 1941.54...followed by 231$ for pension to leave a sum of 1710.42.  To save 50% of my gross pay is pretty much my net pay...so that really wouldn't work out so well. Also, do I include the 231 in the %savings rate?  It is 7.8% of the gross amount...but is 11.9% of the net.   My somewhat randomly suggested target for 2015 is 30% savings rate...but clearly this amount is very different depending on weather I am using net or gross.  Just wondering what people are saying when they claim a % savings rate.

[Kaspian]

Some use gross but I think most use net.  I use net.  There's no way to slap my gross pay into a site like Mint--which just uses the deposit I receive from a paycheque.  I also don't consider the income tax and union dues which automatically came off my paycheque as "spending".  ...Because I didn't spend it?

[nanu]

The last MMM post can answer your question: http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

In short, take home pay = gross + employer 401k matching (and similar stuff if employer adds to your HSA for example) - taxes - fees and such (union dues, etc')
Then your savings rate = (take home pay - spending) / take home pay

[ShoulderThingThatGoesUp]

Net makes more sense.

[rpr]

This may be a dumb question...but when people say their savings rate is 50% - Do they mean 50% of their gross or net income?  I have to assume that it is net pay, but want to confirm.  I have been reviewing my pay stubs (which have been largely ignored for last 20 years) and my gross bi-weekly pay is 2956.31...but my take home after taxes, EI, CPP, Union dues, disability and death coverage is 1941.54...followed by 231$ for pension to leave a sum of 1710.42.  To save 50% of my gross pay is pretty much my net pay...so that really wouldn't work out so well. Also, do I include the 231 in the %savings rate?  It is 7.8% of the gross amount...but is 11.9% of the net.   My somewhat randomly suggested target for 2015 is 30% savings rate...but clearly this amount is very different depending on weather I am using net or gross.  Just wondering what people are saying when they claim a % savings rate.

Different people use different methods. Use one that works for you. I prefer the one that Mr. MMM defined in the blog post

http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

[Philociraptor]

A fairly accepted practice is using gross pay minus taxes. Not sure what EI or CPP are, but they sound like costs (spending). Union dues and insurance are spending as well. Yes, I would count contributions to retirement plans as savings. So, savings % would be (Pension contributions, IRA contributions, other after-tax savings, etc) divided by (Gross pay minus federal, state, and FICA taxes).

[hunniebun]

A fairly accepted practice is using gross pay minus taxes. Not sure what EI or CPP are, but they sound like costs (spending). Union dues and insurance are spending as well. Yes, I would count contributions to retirement plans as savings. So, savings % would be (Pension contributions, IRA contributions, other after-tax savings, etc) divided by (Gross pay minus federal, state, and FICA taxes).

CPP is Canada Pension Plan
EI is employment insurance
Union dues, disability and insurance are mandatory (ie. I can't opt out even if I wanted to)...I wish I could on all accounts however!

Thanks for the input all!

[Philociraptor]

A fairly accepted practice is using gross pay minus taxes. Not sure what EI or CPP are, but they sound like costs (spending). Union dues and insurance are spending as well. Yes, I would count contributions to retirement plans as savings. So, savings % would be (Pension contributions, IRA contributions, other after-tax savings, etc) divided by (Gross pay minus federal, state, and FICA taxes).

CPP is Canada Pension Plan
EI is employment insurance
Union dues, disability and insurance are mandatory (ie. I can't opt out even if I wanted to)...I wish I could on all accounts however!

Thanks for the input all!

Gotcha. CPP would be savings. What does EI do? Medicare and social security pay for disability in the US, so disability insurance could be counted as a tax. Union dues are a cost though, not all jobs have them.

[caliq]

A fairly accepted practice is using gross pay minus taxes. Not sure what EI or CPP are, but they sound like costs (spending). Union dues and insurance are spending as well. Yes, I would count contributions to retirement plans as savings. So, savings % would be (Pension contributions, IRA contributions, other after-tax savings, etc) divided by (Gross pay minus federal, state, and FICA taxes).

CPP is Canada Pension Plan
EI is employment insurance
Union dues, disability and insurance are mandatory (ie. I can't opt out even if I wanted to)...I wish I could on all accounts however!

Thanks for the input all!

Gotcha. CPP would be savings. What does EI do? Medicare and social security pay for disability in the US, so disability insurance could be counted as a tax. Union dues are a cost though, not all jobs have them.

Disability insurance would depend on if it's private or state-mandated; some employers in the US offer short and/or long term disability insurance that you would elect to pay.  That's separate from SSDI, so you would count that paycheck deduction as a cost.  Social security, and therefore SSDI, is obviously a tax though. 

EI would be like unemployment insurance?  That would again depend on if it's mandated or elective I would think?

[netskyblue]

I do gross.

I count everything as income, though.  Gross income from employer, plus their contribution to my 401k, bank account interest, cash gifts (usually minimal, but a few k this year due to wedding gifts), tax refund from previous year (just because I don't want to adjust previous year), credit card points redeemed for cash, etc.

Then subtract every expense - all spending, taxes withheld, HSA disbursements, health insurance premiums withheld from each paycheck.

What's left is savings, and it had better match my cash savings, plus 401k contributions, plus HSA contributions minus HSA disbursements.

Then divide that by "income".

(every penny in - every penny out) / every penny in = savings rate

[hunniebun]

EI or Employment insurance is the same as unemployment insurance...they just changed the name to sound more positive! LOL!  None of these deductions are optional (union, disability, death benefits) although many work places don't have them. It is kind of a racket actually.   Union dues total 2600$ per year which to me is insane in a country where most important issues are already addressed by laws such as work place health and safety etc.   In my 14 years I have paid over 35000 in union dues and am pretty sure I have not gotten any tangible return on that....but that is a whole other post. :)

I think to boost my morale I will use my net pay for calculations. It really doesn't change the outcome at the end of the day...it is just a number to put things in perspective.

[Cookie78]

EI or Employment insurance is the same as unemployment insurance...they just changed the name to sound more positive! LOL!  None of these deductions are optional (union, disability, death benefits) although many work places don't have them. It is kind of a racket actually.   Union dues total 2600$ per year which to me is insane in a country where most important issues are already addressed by laws such as work place health and safety etc.   In my 14 years I have paid over 35000 in union dues and am pretty sure I have not gotten any tangible return on that....but that is a whole other post. :)

I think to boost my morale I will use my net pay for calculations. It really doesn't change the outcome at the end of the day...it is just a number to put things in perspective.

I have all of the same deductions you listed, and I don't count them as expenses. Just net pay plus retirement contributions.
I am glad for my union though, especially after hearing about the rates of pay for my union exempt, higher educated than me coworkers.

[Prairie Stash]

CPP, EI, dues aren't optional, just think of them as meaningless deductions. That money was never yours anyways.

With net pay I add the amount back in I get from my RRSP contribution. Multiplying $2956.31 means you have an annual salary of 76864.06, 18% of that is $13,835 (your 2015 RRSP room, not including carryover).  Depending on your province you'll have various tax brackets, where I'm from it's 35%. That means if you max out the RRSP you'll get $4842.44 refunded in taxes. I wasn't sure how your pension worked, the numbers may need adjusting (employee vs. personal contribution).

Your Net pay was 1941.54, $50,480.04 over 26 cheques, plus your RRSP refund. This makes your net pay 55,322.48, by my accounting. As a mustachian you will of course minimize taxes paid.

[RapmasterD]

Around these parts, it's mostly net.

<<It turns out that when it boils right down to it, your time to reach retirement depends on only one factor: Your savings rate, as a percentage of your take-home pay.>>

Source: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

[nereo]

when I'm curious, I use net pay.
However, I typically ignore % of savings and instead concentrate on absolute savings.  my income fluctuates - but the amount I need for FI (my FI number) doesn't.  Don't get caught up with every nuance of your % savings rate and forget the ultimately it's about dollars saved. 
Seeing the forest through all the trees...

[slugline]

I like basing mine on gross pay for two reasons -- (1) Federal taxes are not completely fixed -- I like being reminded that there are provisions in the tax code that can make that number bigger or smaller depending on my choices. (2) It's a reminder to me that I need to account for taxes on my tax-deferred account withdrawals, as well as health insurance premiums as part of my retirement expenses.

Otherwise, I acknowledge that basing the savings percentage on net pay is the more popular, MMM-endorsed option. :)