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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: themush on July 18, 2013, 10:06:57 PM

Title: Shockingly Simple Math question
Post by: themush on July 18, 2013, 10:06:57 PM
Hi,

Question about this post: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

We're currently saving 47% of our take home pay. I'm also contributing to my 401k - 5% from me, 4% employer match.  My wife contributes 13% to 401k.

Does this mean 47 + 9 + 13 = 69% savings rate? And I'm currently ~8.5 years from retirement?
Title: Re: Shockingly Simple Math question
Post by: napalminator on July 18, 2013, 10:23:29 PM
are the 401k savings amounts based on your gross pre-tax pay, or your after-tax/"take-home" pay?  that's the key point. 

if you want to figure it out, put everything in dollar amounts, not percentages, and work with that.
Title: Re: Shockingly Simple Math question
Post by: Lans Holman on July 18, 2013, 10:34:33 PM
Also, you can't take a percentage based on both of your pay (the 47) and add it to a percentage of your pay and then a percentage of hers.  They need to be percentages of the same thing.  The dollar amount approach sounds good.
Title: Re: Shockingly Simple Math question
Post by: pom on July 19, 2013, 04:41:17 AM
It's probably more like 47 + 9 x (your pay/total pay) + 13 x (her pay/total pay) so probably something in the order of 57%-59% depending on your respective pay.

Anyway 8.5 is a guideline only, the calculation has a few underlying assumptions that may or may not pan out. Take it as a good ballpark estimate.
Title: Re: Shockingly Simple Math question
Post by: matchewed on July 19, 2013, 04:46:40 AM
I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.
Title: Re: Shockingly Simple Math question
Post by: ToeInTheWater on July 19, 2013, 05:12:07 AM
from the article:

Quote
** 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.

when applying the "simple math" you need to use this definition of "take home pay"

so for matchewed's example:

gross:        100K
less taxes:  (15K) (guess)
take home:  85K

savings:  50K + 10K (in 401k) + 4K match (assuming it's vested) = 64K. 
believe you can also count mtg principal payments as well.

simple math savings rate:  64K / 85K = 75%

-------------

just re-did the calcs for ours.  using the same 100K for the gross using 2012 actuals.

gross:             100K
tax:                 ( 23K)
take home:        77K

savings: 
401Ks            14.4K
mtg princ:      23.3K
savings:         37.7K

savings rate:  37.7 / 77K = 49%

projected '13: 61%

b


Title: Re: Shockingly Simple Math question
Post by: oldtoyota on July 19, 2013, 07:11:32 AM
Is this what you need? I asked a similar question and got this handy formula in reply:



Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.
Title: Re: Shockingly Simple Math question
Post by: MissStache on July 19, 2013, 07:45:44 AM
Is this what you need? I asked a similar question and got this handy formula in reply:



Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

HOLY CATS!  That's the best calculation I've seen.  Simple indeed.   Thank you!

Title: Re: Shockingly Simple Math question
Post by: velocistar237 on July 19, 2013, 08:36:35 AM
This is what goes into the model in the shockingly simple math post:

savings rate = (annual savings)/(annual savings + predicted annual retirement expenses)

(Annual savings excludes interest income.)

Current expenses are a good proxy for retirement expenses, and oldtoyota's formula is a good one for estimating savings rate from current numbers.

In your case, if you and your wife both earn the same amount, and you pay 10% taxes, then your actual savings rate by oldtoyota's formula is about

(0.5*(0.09+0.13)+0.9*(1-0.05-0.13)*0.47)/(0.9*(1-0.05-0.13)+0.5*(0.09+0.13)) = 54%

That's about 15 years to retirement starting from zero net worth, maybe a little less with a mortgage, but my guess is that your savings rate will go up to 60-75% in a few years. You could very well retire in less than 10 years if you keep at it.

Out of curiosity, will getting one number rather than another change what you actually do? Do you have a target retirement year?
Title: Re: Shockingly Simple Math question
Post by: KatieSSS on July 19, 2013, 08:52:55 AM
Is this what you need? I asked a similar question and got this handy formula in reply:



Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.
Title: Re: Shockingly Simple Math question
Post by: oldtoyota on July 19, 2013, 09:21:58 AM
Is this what you need? I asked a similar question and got this handy formula in reply:



Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

Sounds great! When you are done with the loans, you can send that money to retirement! As you know. I just said it because it makes me happy. =-)
Title: Re: Shockingly Simple Math question
Post by: KatieSSS on July 19, 2013, 09:37:09 AM
Is this what you need? I asked a similar question and got this handy formula in reply:



Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

Sounds great! When you are done with the loans, you can send that money to retirement! As you know. I just said it because it makes me happy. =-)

Yes, I almost wrote something like, "And when I'm done paying those loans off then that money can go towards retirement!"
Title: Re: Shockingly Simple Math question
Post by: themush on July 19, 2013, 09:51:45 AM

Out of curiosity, will getting one number rather than another change what you actually do? Do you have a target retirement year?

It shouldn't change anything too much - I'd just been working with the cash savings alone. We're just now getting out of credit card and car debt. We have some student loan debt that we'll be working on, but I'd like to start investing alongside that as to not miss roth contributions. But really, we both want to be done working as soon as possible and the idea of boosting our savings rate by 20% was really exciting.
Title: Re: Shockingly Simple Math question
Post by: backyardfeast on July 19, 2013, 11:52:44 AM
Quick follow-up question, probably obvious, if you'll excuse the newbie. :)

Many of us are starting from negative net worth and our "savings" $$s are actually paying off debt.  Do the "years to retirement" numbers apply right away?  Or do we wait until we are at zero net worth to start counting?  Confusing, because mortgage principle is considered savings, but I'm not sure that student loan pmts, etc (although generating a return in the short term, and technically moving us closer to our goals) are actually accumulating the wealth and compounding benefits that the simple formula assumes?

Thanks!
Title: Re: Shockingly Simple Math question
Post by: velocistar237 on July 19, 2013, 11:58:56 AM
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.
Title: Re: Shockingly Simple Math question
Post by: steveo on July 19, 2013, 03:25:15 PM
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

This makes sense to a point for me. I think I have to start from the point of paying off the mortgage in full because I need to live in a house. So for me mortgage paid off then save for retirement.

I might be being a little conservative here but I think it is the safer approach.
Title: Re: Shockingly Simple Math question
Post by: themush on July 19, 2013, 03:53:47 PM
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

Would this mean that early retirement is more easily achieved by buying a house? I'm a renter at the moment.
Title: Re: Shockingly Simple Math question
Post by: matchewed on July 19, 2013, 04:12:08 PM
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

Would this mean that early retirement is more easily achieved by buying a house? I'm a renter at the moment.

Not necessarily. It all depends on the math behind it. There are areas in the country where renting will be more cost effective even over the long term. There are areas where buying a house will be more effective. This depends on many factors such as your time frame of where you want to buy/rent and what the market for renters and buyers is like.
Title: Re: Shockingly Simple Math question
Post by: Eric on July 19, 2013, 04:18:09 PM
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

Would this mean that early retirement is more easily achieved by buying a house? I'm a renter at the moment.

Not necessarily. It all depends on the math behind it. There are areas in the country where renting will be more cost effective even over the long term. There are areas where buying a house will be more effective. This depends on many factors such as your time frame of where you want to buy/rent and what the market for renters and buyers is like.

Right.  If you live somewhere where rent prices are much cheaper than mortgage payments, in NYC or SF for example, it's probably more advantageous to rent.  If you live somewhere where rent prices are similar to mortgage prices, then it's generally more advantageous to buy.
Title: Re: Shockingly Simple Math question
Post by: velocistar237 on July 19, 2013, 05:06:36 PM
By the way, you can still use the equation here (https://forum.mrmoneymustache.com/share-your-badassity/question-about-the-mmm-calculations/msg105520/#msg105520) with negative net worth, just set AoE negative. To account for interest rate differences, it's probably better to just use a spreadsheet.
Title: Re: Shockingly Simple Math question
Post by: CorpRaider on July 19, 2013, 07:37:24 PM
Can I just use the reciprocal or invert the spending rate over the take-home and just include debts as negative net worth to get there?  Seems simpler to to me.  Controlling the spending is the real point of emphasis here, right?
Title: Re: Shockingly Simple Math question
Post by: velocistar237 on July 19, 2013, 08:09:06 PM
Can I just use the reciprocal or invert the spending rate over the take-home and just include debts as negative net worth to get there?  Seems simpler to to me.  Controlling the spending is the real point of emphasis here, right?

Sure, if the time horizon is short, or for a conservative answer, you can ignore ROI.

T = (1-SR)/SR*(1/SWR-AoE)

For zero AoE and SR of 50%, it overestimates by 8 years for a 4% real return.
Title: Re: Shockingly Simple Math question
Post by: dragoncar on July 19, 2013, 11:38:23 PM
All this math it too complicated.  I prefer the following method:

1) "Just one more year"
2) Goto 1
Title: Re: Shockingly Simple Math question
Post by: velocistar237 on July 20, 2013, 06:02:38 AM
All this math it too complicated.  I prefer the following method:

1) "Just one more year"
2) Goto 1

while AoE < 1/SWR
    save
endwhile
Title: Re: Shockingly Simple Math question
Post by: ender on July 20, 2013, 06:11:47 AM
I am very content with my savings rate - I currently save between 401k (including company match), HSA, Roth IRA, and cash savings about 60% of my pretax salary.

Calculations in this thread put that closer to 75% (!).

Only going to go up for the time being as any raises I get are going to go directly into the 401k until that is maxed.
Title: Re: Shockingly Simple Math question
Post by: oldtoyota on July 20, 2013, 07:58:59 AM
I think the post by MMM is amazing, helpful and possibly revolutionary. I've done a LOT of reading over the years starting with fool.com many moons ago when the RE guy (john??) was using the boards heavily.

What I never heard about and never learned was how important savings rate as a percentage of take-home pay was to an early retirement date. What I mostly heard was that stocks were important and keeping costs low was important.

I will always be grateful to MMM for this post. That said, it seems people have a lot of questions about it and I think including the formula above would really help people out. If any of you talk to MMM, please consider suggesting that. I mention this because I think this is a VERY important topic and people need to understand it 100%.

Title: Re: Shockingly Simple Math question
Post by: oldtoyota on July 20, 2013, 08:02:30 AM
All this math it too complicated.  I prefer the following method:

1) "Just one more year"
2) Goto 1

This reminds me of BASIC. Anyone else a former or current computer nerd?

10: LET retirement equal one year
20: IF retirement equals 500,000 THEN GOTO 10

Or something like that. It's been a long time.

Title: Re: Shockingly Simple Math question
Post by: arebelspy on July 20, 2013, 08:54:42 AM
Yup, I thought of the same thing, but unfortunately it had us working until we die.  Poor programming instilled by society.

Velocistar got us out of that loop though with a fancy while statement!
Title: Re: Shockingly Simple Math question
Post by: notquitefrugal on August 14, 2013, 08:56:31 PM
This appears to be the most recent topic about savings rates. Not to be overly pedantic, or to beat a dead horse, but:
1. I pay self-employment tax (and pay my own quarterly estimated taxes) on 100% of my earnings. I know the average of what my quarterly taxes are, and can just deduct that every month when calculating my "savings" rate, even though it doesn't correspond to my cash flow. (Not really a question, just an observation/explanation. If I'm cheating or looking at this the wrong way, please let me know.)
2. If I sell an asset, such as a vehicle, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?
3. If I receive a cash gift, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?
Title: Re: Shockingly Simple Math question
Post by: steveo on August 14, 2013, 09:25:18 PM
Quick follow-up question, probably obvious, if you'll excuse the newbie. :)

Many of us are starting from negative net worth and our "savings" $$s are actually paying off debt.  Do the "years to retirement" numbers apply right away?  Or do we wait until we are at zero net worth to start counting?  Confusing, because mortgage principle is considered savings, but I'm not sure that student loan pmts, etc (although generating a return in the short term, and technically moving us closer to our goals) are actually accumulating the wealth and compounding benefits that the simple formula assumes?

Thanks!

I am paying off in my opinion a massive mortgage. I compute my savings rate as total savings and mortgage payments (including interest) / after tax income. This comes out at 67% for me. In saying that I think that I can really only start to compute how long to FI I have to go when the mortgage is completely paid off (hopefully 3 years time).

My goal is to increase that savings rate and as it increases and the debt gets paid off soon enough I will be FI. I don't really care how long it takes. The point to me is to increase my savings rate as much as possible. I also have 3 young kids who are really expensive. Over time I think the costs will decrease with regards to the kids so the savings rate should increase over time naturally.

I also have monetary goals that I am aiming for that consist of paying off the mortgage, get say $800k retirement funds and $200k of spend whenever I want money. Once I meet these goals I'm completely FI. Then I decide if I want to retire or work less or take more holidays or whatever.
Title: Re: Shockingly Simple Math question
Post by: dragoncar on August 14, 2013, 10:21:50 PM
This appears to be the most recent topic about savings rates. Not to be overly pedantic, or to beat a dead horse, but:
1. I pay self-employment tax (and pay my own quarterly estimated taxes) on 100% of my earnings. I know the average of what my quarterly taxes are, and can just deduct that every month when calculating my "savings" rate, even though it doesn't correspond to my cash flow. (Not really a question, just an observation/explanation. If I'm cheating or looking at this the wrong way, please let me know.)

It's not cheating.  I don't do this kind of manipulation because I only really care about rolling 12 month averages anyways (it's not like any particular month is indicative of my actual savings or expenditures).  But if it works for you, go for it.

Quote

2. If I sell an asset, such as a vehicle, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?

I'd count it as a negative expense, although again... it probably doesn't make much difference.

Quote
3. If I receive a cash gift, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?

I think yes.  I include gifts and other windfalls as "income"
Title: Re: Shockingly Simple Math question
Post by: Christof on August 14, 2013, 10:31:05 PM
1. I pay self-employment tax (and pay my own quarterly estimated taxes) on 100% of my earnings. I know the average of what my quarterly taxes are, and can just deduct that every month when calculating my "savings" rate, even though it doesn't correspond to my cash flow.
I deduct any business expense and taxes from my income before calculating my saving rate. Since I'm a business owner, too, and my monthly income and fluctuates heavily, I use a rolling 12 month average to calculate the saving rate. In addition I'm tracking monthly expenses to notice signs of lifestyle inflation and to optimizing spending.
Title: Re: Shockingly Simple Math question
Post by: Dulcimina on August 15, 2013, 07:26:52 AM
I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?
Title: Re: Shockingly Simple Math question
Post by: matchewed on August 15, 2013, 07:28:26 AM
You're correct I wasn't careful with my math.
Title: Re: Shockingly Simple Math question
Post by: Mr Mark on August 15, 2013, 09:43:12 AM
The mmm calculation must start at zero net worth. Else, imagine you have massive debts and save 100% of income. You are clearly not FIRE ....

I think
- the employer match should count as both a savings $ and and extra income $
- in the end it's about saving like crazy to get a stash big enough to provide all your required income. The equation is just a rule of thumb. Getting worked up about exact saving rate when far from FIRE or even worse, hair on fire in debt, is a distraction.
Title: Re: Shockingly Simple Math question
Post by: arebelspy on August 15, 2013, 12:36:35 PM
The mmm calculation must start at zero net worth. Else, imagine you have massive debts and save 100% of income. You are clearly not FIRE ....

I disagree.

The only way to save 100% of income is if you have 0 spending, or some other source that covers all expenses.  There are scenarios of that where you are FI.

On to the debt part: if you have debt that requires payments, you can't have saved 100%, so that's a moot point.  And if you have debt that doesn't require repayments, why can't you be FIRE despite the debt?
Title: Re: Shockingly Simple Math question
Post by: Mazzinator on August 15, 2013, 02:29:32 PM
Quote
Quote from: KatieSSS on July 19, 2013, 08:52:55 am
Quote from: oldtoyota on July 19, 2013, 07:11:32 am
Is this what you need? I asked a similar question and got this handy formula in reply:



Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

I'm with you!! Debt up to my eyeballs..

Sweet!!! Looks like we are around 48% although i feel like we are cheating with our super duper low taxes (dh is military)

Thank you MMM community!!!!
Title: Re: Shockingly Simple Math question
Post by: Mr Mark on August 15, 2013, 03:18:48 PM
The mmm calculation must start at zero net worth. Else, imagine you have massive debts and save 100% of income. You are clearly not FIRE ....

I disagree.

The only way to save 100% of income is if you have 0 spending, or some other source that covers all expenses.  There are scenarios of that where you are FI.

On to the debt part: if you have debt that requires payments, you can't have saved 100%, so that's a moot point.  And if you have debt that doesn't require repayments, why can't you be FIRE despite the debt?


Yes. I was making a broader point. It's about net worth.

 If you had a huge huge debt, say 10 million, interest free but requiring regular repayments, and you earn 100k but live on 5k, yes, you technically have a superhigh savings rate 95% all directed at principal reduction, but are not financially independent.
Title: Re: Shockingly Simple Math question
Post by: arebelspy on August 15, 2013, 04:15:23 PM
Yes. I was making a broader point. It's about net worth.

 If you had a huge huge debt, say 10 million, interest free but requiring regular repayments, and you earn 100k but live on 5k, yes, you technically have a superhigh savings rate 95% all directed at principal reduction, but are not financially independent.

Gotcha.  Yes, the simple math starts with 0 net worth.  If you are in debt, first calculate how long until you're out of debt, then it applies.  If you have some stached already before coming across the simple math, you have to calculate from that point.

Given that expenses fluctuate, income fluctuates, and thus savings rates will fluctuate, it's clearly more illustrative than prescriptive.
Title: Re: Shockingly Simple Math question
Post by: Mr Mark on August 15, 2013, 04:23:51 PM
It just sometimes seems many of our members are deep in the hole, with debt, of sometimes many types. In this situation it's easy to fret about the details, rather than the real decisions you can make now to make things better, and the actual goal - significant net worth.

Savings rate is just a tool. A metric.
Title: Re: Shockingly Simple Math question
Post by: arebelspy on August 15, 2013, 04:29:34 PM
It just sometimes seems many of our members are deep in the hole, with debt, of sometimes many types. In this situation it's easy to fret about the details, rather than the real decisions you can make now to make things better, and the actual goal - significant net worth.

Savings rate is just a tool. A metric.

Maybe.  About 14% of forum members have a negative net worth: www.mrmoneymustache.com/forum/welcome-to-the-forum/mustachian-net-worth/

I don't know if that counts as "many" members or not.

I agree that savings rate is just a tool/metric (then again, so is net worth).  I would posit it's easier to focus on savings rate, since it's not as overwhelming.  Being at -60,000 in net worth could seem like a huge mountain to climb, and have someone quit.  But trying to raise a savings rate from 20 to 25% (and higher, in subsequent months) is a tangible and achievable goal.

On the other hand, I'd imagine some would agree with me, and some with you, as there's no "right" answer, but it depends on the person and personality type involved.  Whichever works better for you, go for it.  :)
Title: Re: Shockingly Simple Math question
Post by: Mazzinator on August 15, 2013, 05:03:15 PM
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.
Title: Re: Shockingly Simple Math question
Post by: Zaga on August 15, 2013, 05:07:53 PM
This is a great discussion!  We were at approximately zero net worth in the beginning of 2012, so our savings rate from that point forward would be a good place to start estimating our time to FI, and maybe RE.  That, plus the calculation I recently added to my spreadsheet, are very helpful.
Title: Re: Shockingly Simple Math question
Post by: Eric on August 15, 2013, 05:16:53 PM
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]
Title: Re: Shockingly Simple Math question
Post by: arebelspy on August 15, 2013, 06:13:14 PM
Sure.  It's still not a perfect calculation (someone spending 20k making 40k with a 50% savings rate is way more badass than someone making 200k and spending 100k for the same 50% savings rate), but it's a decent starting point.

You're just competing against yourself though, so with that in mind, it's a great way to track month to month, because it takes into account both your badassity in cutting expenses as well as your badassity in earning extra income.
Title: Re: Shockingly Simple Math question
Post by: oldtoyota on August 15, 2013, 07:57:14 PM
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]


I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more $$ making $$.

Title: Re: Shockingly Simple Math question
Post by: steveo on August 15, 2013, 08:54:06 PM
I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more $$ making $$.

I agree with this completely. I don't think you can compare my savings rate when I have 3 kids to a single person or couple with no kids. It is though a way for me to gauge how much I need to live off compared to how much I am saving and therefore a guide to when I can retire.
Title: Re: Shockingly Simple Math question
Post by: Eric on August 16, 2013, 10:14:55 AM
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]


I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more $$ making $$.

I took the notion of competition from what I quoted, about gauging badassity and comparing yourself to badass guidelines.  I guess that doesn't have to be a comparison to others, but if it's not for competition, then I'm still really confused as to why anyone would spend time figuring the savings rate number out.

You don't need to calculate your savings rate to spend less or retire sooner.  If you increase your savings or to attempt to save as much as possible, you'll do the same thing.  The actual savings rate number or how you'd calculate it doesn't matter, since you still need to actually accumulate a large enough stash.  And your FI stash size is based on your expenditures, not your savings rate.  Because of that, I keep very close track of my expenditures, but I don't care at all what my savings rate number is, since I'm going to attempt to save as much as I can. 

Therefore, I never really understood why people spend lots of time trying to figure out if they should add in mortgage principle or 401k, or what's the net and what's the gross or whatever.  There are tons of threads that talk about it, use formulas, debate what should be included, etc., but I don't see why it matters at all, since it's your expenditures that determine what your FI number is.

Am I missing something?  Other than motivation, what does calculating your savings rate do for you?
Title: Re: Shockingly Simple Math question
Post by: matchewed on August 16, 2013, 10:42:03 AM
Because the term competition requires more than the individual. With whom are you competing against? I certainly am not competing against you yet I still like the savings rate as a benchmark to see whether I am improving. That is not a competition it is just establishing a metric and determining if you are meeting your goals.

Also to your as you stated all that matters is your expenditures you are instantly discussing a savings rate just by mentioning expenditures, it is just not explicitly stated, it is derived from knowing your expenditures.
Title: Re: Shockingly Simple Math question
Post by: gecko10x on August 16, 2013, 10:44:48 AM
It tells you your *time* to retirement/FI.

If your savings are going up, you may think you're doing well. But if your savings *rate* is going down at the same time, then your expenses are going up faster than your income, so your FI date is moving further away.

All else being equal, etc. I think I got that right ;-)
Title: Re: Shockingly Simple Math question
Post by: Eric on August 16, 2013, 11:02:44 AM
It tells you your *time* to retirement/FI.

I get that part.  In fact, if I'm trying to introduce friends or family to MMM, I'll often use the Savings Rate article (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) because I think the concept is revolutionary and is incredibly eye opening.  But at the same time, it's still just a general guideline, and the closer you get to FI, the less relevant it becomes, as you'll use the size of your stash and your expenditures as related to that as your trigger mechanism and your savings rate will be irrelevant. 
Title: Re: Shockingly Simple Math question
Post by: Eric on August 16, 2013, 11:06:57 AM
Also to your as you stated all that matters is your expenditures you are instantly discussing a savings rate just by mentioning expenditures, it is just not explicitly stated, it is derived from knowing your expenditures.

I am trying to maximize my savings rate, that's true.  However, I don't care what the actual number is, because that's the part I find irrelevant.  Maybe it's just my way of looking at it.  I do *love* the concept though.  It's truly eye opening if you've never thought about it before. 
Title: Re: Shockingly Simple Math question
Post by: matchewed on August 16, 2013, 11:17:55 AM
How can you maximize but at the same time not care what the number is? Maybe it's my decade in the corporate world speaking but if you are not measuring how do you know if you are improving let alone maximizing? Maybe you're using a different metric but you are still using a metric.
Title: Re: Shockingly Simple Math question
Post by: Eric on August 16, 2013, 11:59:49 AM
How can you maximize but at the same time not care what the number is? Maybe it's my decade in the corporate world speaking but if you are not measuring how do you know if you are improving let alone maximizing? Maybe you're using a different metric but you are still using a metric.

I think the number itself is irrelevant.  It's only indirectly tied to your FI stash amount, in that it's a baseline to help you see when you might be FI.  However, it has no direct bearing, as your stash size for FI is based on expenditures.

Personally, I try to optimize each of my expenditures.  In this way, I'm optimizing my savings rate too.  But at the same time, calculating whether my savings rate is 43% or 48% doesn't matter to me, because I know I'm already saving as much as I can, because of the optimized expenditures. 

Again, it may just be a perspective thing, and like I said, I really like the concept.
Title: Re: Shockingly Simple Math question
Post by: velocistar237 on August 16, 2013, 01:14:58 PM
I think the number itself is irrelevant.  It's only indirectly tied to your FI stash amount, in that it's a baseline to help you see when you might be FI.  However, it has no direct bearing, as your stash size for FI is based on expenditures.

Savings rate is directly related to how long it takes to accumulate your FI stash amount. That's the brilliance of it: By increasing savings rate, you both reduce expenses, which lowers your required FI stash amount, and you increase your accumulation rate, which decreases the time it takes to get you to your stash amount. Double whammy. But, you know, you can ignore the second part if you prefer single whammies.

Personally, I try to optimize each of my expenditures.  In this way, I'm optimizing my savings rate too.  But at the same time, calculating whether my savings rate is 43% or 48% doesn't matter to me, because I know I'm already saving as much as I can, because of the optimized expenditures. 

You need to know the trade-off between material comfort and years of freedom to do a system-level optimization. That requires some knowledge of savings rate. For example, do you want to take on another roommate? How about two roommates? How about moving to a low COL area and starting a new, higher paying career? Dumpster diving? Living on the street? How would you know if it was worth it to you? You use savings rate to determine how much time it would add to your retirement, then decide between time and comfort level.

I think what you're actually saying is that you've reached an expense level that you're comfortable with, and you know generally that your savings rate is high enough to get you to financial independence in a reasonable time-frame. However, if your income dropped, or your career soured and drove you to a goal to quit in 3 years, a more precise savings rate would be pretty important for deciding your expense level.

Also, savings rate is a fun math problem. See attached.
Title: Re: Shockingly Simple Math question
Post by: oldtoyota on August 16, 2013, 01:40:27 PM
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]


I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more $$ making $$.

I took the notion of competition from what I quoted, about gauging badassity and comparing yourself to badass guidelines.  I guess that doesn't have to be a comparison to others, but if it's not for competition, then I'm still really confused as to why anyone would spend time figuring the savings rate number out.

You don't need to calculate your savings rate to spend less or retire sooner.  If you increase your savings or to attempt to save as much as possible, you'll do the same thing.  The actual savings rate number or how you'd calculate it doesn't matter, since you still need to actually accumulate a large enough stash.  And your FI stash size is based on your expenditures, not your savings rate.  Because of that, I keep very close track of my expenditures, but I don't care at all what my savings rate number is, since I'm going to attempt to save as much as I can. 

Therefore, I never really understood why people spend lots of time trying to figure out if they should add in mortgage principle or 401k, or what's the net and what's the gross or whatever.  There are tons of threads that talk about it, use formulas, debate what should be included, etc., but I don't see why it matters at all, since it's your expenditures that determine what your FI number is.

Am I missing something?  Other than motivation, what does calculating your savings rate do for you?

Yes, I think you are missing something. I also used to question why the savings rate mattered, so I *think* I know where you are coming from with this question.

Yes, you will need to accumulate a large enough stash. If you increase your savings rate, you are living on less. When you live on less, you can retire sooner.

The savings rate--as detailed by MMM and Nords--shows you that you can retire sooner if you save more. If you save 80%, you can retire a lot sooner than someone who only saves 10%.

It sounds to me like you are saying something similar when you say, "it's your expenditures" that determine FI. Yep. If you save more, you will have fewer expenditures.

Title: Re: Shockingly Simple Math question
Post by: oldtoyota on August 16, 2013, 01:41:58 PM
I think the number itself is irrelevant.  It's only indirectly tied to your FI stash amount, in that it's a baseline to help you see when you might be FI.  However, it has no direct bearing, as your stash size for FI is based on expenditures.

Savings rate is directly related to how long it takes to accumulate your FI stash amount. That's the brilliance of it: By increasing savings rate, you both reduce expenses, which lowers your required FI stash amount, and you increase your accumulation rate, which decreases the time it takes to get you to your stash amount. Double whammy. But, you know, you can ignore the second part if you prefer single whammies.


That is pretty much what I said up above. I think it's a confusing concept at first. 
Title: Re: Shockingly Simple Math question
Post by: Eric on August 16, 2013, 02:13:57 PM
I get it.  I understand that your savings rate directly affects how long it takes to reach FI.  I also get that cutting your expenses or increasing your savings is a double whammy, as your stash grows faster AND you need a smaller stash to live off of because your expenses are lower.

My question is why the specific number matters.  Maybe an example will help.

Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?  To me, there is no difference between those numbers, so I'm viewing the specific number as irrelevant, while at the same time, the concept or the act of increasing savings and lowering expenses is extremely important.

It's probably just semantics.  I promise not to disrupt any other savings rate threads with this.  I personally feel that figuring out whether my number is 50% or 58% is irrelevant.  But if it helps you all challenge yourselves and stay motivated to save, I'm glad it helps.
Title: Re: Shockingly Simple Math question
Post by: tomsang on August 16, 2013, 02:25:43 PM
Eric - Don't get all logical on us.:)  To me, I know down to the nearest 100th of a percentage, but I would be comfortable knowing to the nearest 10%.  To me, I see it as a light at the end of the tunnel marker.  If you calculate that you can retire in 5 years on day one it gives you more clarity when you are going to be FI than the alternative of I am going to save until I am FI.  Every year and up to five year, your estimates and timeline can be solidified.  So, yes knowing whether it is 50% or 58% probably doesn't matter.  Knowing whether it is 10%, when you think you are saving like 70% is probably something that you should know.
Title: Re: Shockingly Simple Math question
Post by: velocistar237 on August 16, 2013, 03:52:04 PM
Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?

You're considering a knowledge error rather than a truth error.

In navigation, if you have a course error and no estimation error, then you can use your knowledge to correct your course. This is like having a 30% savings rate, deciding that's too low, learning how to be more frugal, and ending up at 50%.

If you have an estimation error and no course error, then you might end up doing the wrong thing. You might have a 45% savings rate, but think you have a 55% savings rate, resulting in a difference of more than 5 years. If you knew your savings rate was only 45% instead of 55%, then you might learn how to be more frugal, but since you don't, you might not have enough motivation to keep reducing expenses. Everyone has their equilibrium point.

Or suppose it goes the other way. You want to retire before you have kids, but you're really feeling the pinch when you try to cut expenses. You think your savings rate is 55%, which won't get you to retirement until your late 30s, so you decide to work extra hours in your contracting business. In reality, your savings rate is 65%, so you didn't need to take on those miserable extra hours.
Title: Re: Shockingly Simple Math question
Post by: Mazzinator on August 16, 2013, 05:37:13 PM
I'm still a noob here, been a member ~6months or so..so keep that in mind. But my understanding was using a % (rather than an actual number) takes into account the 'variables' like income, COL, double income, single income, kids, no kids, etc.

It's better to say "save 15% of your take home pay and your average..but save 50% or even 70% and that's badass" than to say "you should live on $7k/yr or $27k/yr" or whatever (you get the point) because people (in say NYC) would think no way and give up.

It mostly helped me because we move a lot and my dh income flucuates with each move. So in VA we were barely hitting 35%, but then we moved to a vhcola, so his pay went up but so did our expenses and rent (even though we downsized to about half the sq footage) BUT our savings rate went up. So it made it clear that we are in a better position now at 48%.

I'm not sure how we will figure out our future retirement expenses because we have no idea where we will live and how much they will be or exactly how mucch income we will be getting. So in this sense, using a % isn't necessarily accurate. But like i said, i'm still new here and maybe someone will shed sone light on this.
Title: Re: Shockingly Simple Math question
Post by: Mr Mark on August 16, 2013, 08:38:42 PM
Fair enough. It is a beacon. If your savings rate -  however calculated - is less than 20%, its a long road ahead by definition.

Saving rate is a very powerful metric, but I just want to stress the power is in the concept, not so much the details. And at the >> 85% savings rate the equation breaks down somewhat. (Because as you cross into FIRE you can now execute more opportunities to replace expenditure with self solutions, now that you have no job to go to. So the assumptions break down wrt expenditure and tax constancy across the boundary)

Calculating the data and your 'saving rate' consistently and looking at the trend is what counts. Saving rate going up - great. Building a growing stash of passive income? Excellent.

If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid house.

Great to see these sort of things being talked about. Happens it seems very rarely in typical day to day life....


Title: Re: Shockingly Simple Math question
Post by: jfer_rose on August 17, 2013, 06:52:35 AM


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement stache.

Am I missing something, or just misunderstanding the intent of these comments?
Title: Re: Shockingly Simple Math question
Post by: Zaga on August 17, 2013, 07:07:49 AM


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement.

Am I missing something, or just misunderstanding the intent of these comments?
I count my contributions as take home pay and savings, and the employer's contribution only as savings.

They should be added to savings, because they are being saved, even if in the case of the employer contributions I am not putting them there.

The employer contribution should not be added to take home pay, because there is no way I could get that in my take home check. 

My contributions COULD be in my take home pay if I did not contribute them (minus a few taxes, which I'm ignoring for this calculation), therefore they should be on the income side of the equation.

At least, that's how I see it.  This gives me a 42% savings rate for 2012 and a projected 49% rate for 2013.
Title: Re: Shockingly Simple Math question
Post by: jfer_rose on August 17, 2013, 10:04:53 AM


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement.

Am I missing something, or just misunderstanding the intent of these comments?
I count my contributions as take home pay and savings, and the employer's contribution only as savings.

They should be added to savings, because they are being saved, even if in the case of the employer contributions I am not putting them there.

The employer contribution should not be added to take home pay, because there is no way I could get that in my take home check. 

My contributions COULD be in my take home pay if I did not contribute them (minus a few taxes, which I'm ignoring for this calculation), therefore they should be on the income side of the equation.

At least, that's how I see it.  This gives me a 42% savings rate for 2012 and a projected 49% rate for 2013.


That's exactly the way I do it too. But that's not what these other few comments were suggesting.
Title: Re: Shockingly Simple Math question
Post by: dragoncar on August 17, 2013, 03:19:13 PM
Employer contributions are income too.  Anything that increases your net worth -- 401k contributions, employer match, gifts, etc.
Title: Re: Shockingly Simple Math question
Post by: Inquizator on August 18, 2013, 05:14:18 AM
I count my contributions as take home pay and savings, and the employer's contribution only as savings.

They should be added to savings, because they are being saved, even if in the case of the employer contributions I am not putting them there.

The employer contribution should not be added to take home pay, because there is no way I could get that in my take home check. 

My contributions COULD be in my take home pay if I did not contribute them (minus a few taxes, which I'm ignoring for this calculation), therefore they should be on the income side of the equation.

At least, that's how I see it.  This gives me a 42% savings rate for 2012 and a projected 49% rate for 2013.

Employer contributions are income too.  Anything that increases your net worth -- 401k contributions, employer match, gifts, etc.

Just to throw my $0.02 in... Personally, I don't include employer 401k match in my savings rate calculation. I'd never thought about it too in depth, but to me it seemed more important to see what portion of 'my' money I save (as you say, my contribution COULD be take home pay, but employer match could not...).

But, if I were to include it, I'd definitely put it on both sides of the equation. As a Math nerd, it just doesn't seem right to me to use a process that could indicate you save > 100%. If a formula is wrong at the extreme ends, it's probably 'wrong' in the middle too. Just doesn't seem mathematically correct to me to include it on savings but not income. If you are considering it as something you saved, then it should be income.

Of course, how you calculate savings rate is a personal decision and it really only matters that you're happy with it and it serves whatever purpose you use it for.
Title: Re: Shockingly Simple Math question
Post by: oldtoyota on August 18, 2013, 07:04:07 AM


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement stache.

Am I missing something, or just misunderstanding the intent of these comments?

I had the same question at some point. I am considering the contribution as both savings and income. Otherwise--like you said--the savings rate becomes artificially high. I will re-post this equation for any folks just joining the conversation:


Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib
Title: Re: Shockingly Simple Math question
Post by: teen persuasion on August 18, 2013, 11:16:11 AM
I'm trying to figure out why you all seem to ignore taxes and use take-home pay.  Our taxes could vary quite a bit, depending on how we invest (pre tax, post tax, taxable, HSA). 

Taxes are actually a net positive for us, so I'd expect to include them in the income side of the equation as well as the saving side (I fund our Roths with our refunds).
Title: Re: Shockingly Simple Math question
Post by: oldtoyota on August 18, 2013, 04:43:43 PM
I'm trying to figure out why you all seem to ignore taxes and use take-home pay.  Our taxes could vary quite a bit, depending on how we invest (pre tax, post tax, taxable, HSA). 

Taxes are actually a net positive for us, so I'd expect to include them in the income side of the equation as well as the saving side (I fund our Roths with our refunds).

I think it's because the taxes are just gone and you are not using them to live. They are gone before you ever see them. So, the point is the money you need to live on now and how much you need now. Since the taxes are never really your money and for your personal use, they are not factored into the equation.

Title: Re: Shockingly Simple Math question
Post by: velocistar237 on August 19, 2013, 05:46:15 AM
I'm trying to figure out why you all seem to ignore taxes and use take-home pay.

It's because only two things matter for savings rate: how much you save, and what your expenses are during retirement. You do not save your taxes, and you do not have the same taxes during retirement, so you exclude them. If you want to be more accurate, you can include an estimate of retirement taxes in your retirement expenses.

The during retirement part can make a huge difference. If you plan to have lower costs during retirement (moving, living in an RV, low-cost travel), then your savings rate is effectively higher right now, as far as determining time to retirement goes.
Title: Re: Shockingly Simple Math question
Post by: missj on August 18, 2014, 11:45:44 PM


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement stache.

Am I missing something, or just misunderstanding the intent of these comments?

I ageree with you.  I came to this thread cause I was thought my savings rate might be artificially high (60%) after reading the cool easy equation:

How to Calculate a Savings Rate: (use dollar amounts, not percentages)
Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib


I thought "cool. I get it. that is logical" and I recalculated and got 51% (which seemed closer to my instincts).

Now people are saying to NOT put it on both sides....what? So confused again, but the logical part of me believes that it belongs on both sides of the equation.

here is my next question.  If you want to track employer match (which for some of us will change our savings rate and therefore FIRE date quite a bit) shouldn't that ALSO be added to both sides of the equation (in dollars of course, not in % form)?

And finally, is there any way to get "credit" for my employer sponsored pension in this equation?  It will form a large chunk of my retirement income (roughly 1/3) but currently I cannot figure out how to calculate it, so I'm just ommitting it.
Title: Re: Shockingly Simple Math question
Post by: missj on August 19, 2014, 12:01:46 AM
Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?

You're considering a knowledge error rather than a truth error.

In navigation, if you have a course error and no estimation error, then you can use your knowledge to correct your course. This is like having a 30% savings rate, deciding that's too low, learning how to be more frugal, and ending up at 50%.

If you have an estimation error and no course error, then you might end up doing the wrong thing. You might have a 45% savings rate, but think you have a 55% savings rate, resulting in a difference of more than 5 years. If you knew your savings rate was only 45% instead of 55%, then you might learn how to be more frugal, but since you don't, you might not have enough motivation to keep reducing expenses. Everyone has their equilibrium point.

Or suppose it goes the other way. You want to retire before you have kids, but you're really feeling the pinch when you try to cut expenses. You think your savings rate is 55%, which won't get you to retirement until your late 30s, so you decide to work extra hours in your contracting business. In reality, your savings rate is 65%, so you didn't need to take on those miserable extra hours.
I get it.  I understand that your savings rate directly affects how long it takes to reach FI.  I also get that cutting your expenses or increasing your savings is a double whammy, as your stash grows faster AND you need a smaller stash to live off of because your expenses are lower.

My question is why the specific number matters.  Maybe an example will help.

Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?  To me, there is no difference between those numbers, so I'm viewing the specific number as irrelevant, while at the same time, the concept or the act of increasing savings and lowering expenses is extremely important.

It's probably just semantics.  I promise not to disrupt any other savings rate threads with this.  I personally feel that figuring out whether my number is 50% or 58% is irrelevant.  But if it helps you all challenge yourselves and stay motivated to save, I'm glad it helps.

I think I  actually understand BOTH of you perfectly (wow! light bulb moment for me)

so basically, eric is suggesting that if the information you gain from the equation is not actionable, then what is the difference?  and on some level he is totally correct.

Velocistar is suggesting that the perception that the information is not actionable could prevent you from optimizing.

But I have to award the debate points to Velocistar because if any of us believed that we couldn't affect this equation in some way by our choices and actions, then we wouldn't be in this thread or possibly even on this forum to begin with. 

A couple of scenarios in which case I could imagine it truly doesn't matter: A) you're in prison but you are earning money in some way (maybe you have a business, an annuity, whatever). Your expenses are essentially zero and you save 100% of your wages.  Substitute prison for "you're on a crabbing boat"  "antarctic research trip" "space station" or basically any situation where you have no opportunity to change your spending habits, but you are earning an income.

The other scenario that I could imagine where it actually doesn't matter is that you have a big enough "cushion" between your savings rate and your minimum retirement age that a few % points won't make one lick of a difference.  For example, you cannot retire from your company before age 55 or you lose your entire pension.  You're on track to be ABLE to retire at 40 years old with a 50% savings rate, but even if you achieved it you wouldn't be able to do it.  So there is enough flexibility built in that exact numbers won't affect your retirement age.

But for the rest of us, I think calculating an accurate number (for our purposes) and repeating that calculation in a consistent matter will be able to show us over time how we're doing, if we're making improvements if we have certain strengths or weaknesses, if we should consider taking on a part time summer job etc...