First Post, quick question

[Steel_Rain]

Great Blog MMM.  I see a lot of reference to the Savings rate of folks here, my question is that (Savings)/(Gross Income) or (Savings)/(Net Income).  The reason i ask is that im trying to put numbers to my plan so my wife can wrap her head around what we need to do to get out of the rat race.  Thanks in advance.

Steel

[Lagom]

If you're talking about the ratio as described in this post: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/, then my understanding is that it is savings/net income. After all, your living expenses are paid with net income, so your retirement savings only need to cover that amount + taxes.

[Phoebe]

I think there are many ways to calculate this, and as long as you are consistent you will be able to track your progess.

I prefer to track based on (Savings)/(Net Income + 401K and HSA contributions).  If I track Net only I feel like I am not getting credit for mazing out my 401K and HSA, and if I track Gross then I feel like it is inaccurate because I don't even have the option of saving a large % of my income which goes to taxes.

Hope you find something that works for you.

[Lagom]

That's a good point about tax advantaged accounts, since you get to save that money from your gross income. Ultimately, while the math roughly works, things are a bit more nuaunced than implied in the (otherwise very excellent) post I linked. I always like plugging my retirement savings goal into various savings calculators and playing around with how long it will take to reach that amount at various savings rates. Thus, for example, if I want to accumulate $500,000 (of today's money) in 10 years, and I anticipate 5% real returns after inflation, I need to save approximately $3350/month.

[Steel_Rain]

If you're talking about the ratio as described in this post: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/, then my understanding is that it is savings/net income. After all, your living expenses are paid with net income, so your retirement savings only need to cover that amount + taxes.

I am indeed talking about that post :)  However, further reading answered my question.  And I quote :)  "If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock"

So, i will take the answer to be (Savings)/(Net Income) and by net income, i mean income less taxes not less 401k etc.  I am preparing a nice post here where you can all line up and punch me and the misses in the face, it will take more than one of you, as your arm is likely to get tired :)  The good news, is we are well on our way, but only because of a very high income, not becuase of any Mustachian habits to be sure.  Going to change that in 2013.

Steel

[Richard3]

I think there are many ways to calculate this, and as long as you are consistent you will be able to track your progess.

I prefer to track based on (Savings)/(Net Income + 401K and HSA contributions).  If I track Net only I feel like I am not getting credit for mazing out my 401K and HSA, and if I track Gross then I feel like it is inaccurate because I don't even have the option of saving a large % of my income which goes to taxes.

Hope you find something that works for you.

Wait, isn't a 401k a type of savings? Your formula at the moment reduces your savings rate the more you put in 401k. Did you mean minus? I'm not sure if that works or not. You could also calculate (savings / net income ) + (pre tax savings / gross income) to give you an overall rate. I think. I am a little fuzzy at the moment thanks to falling quite hard snowboarding.

Whatever formula you choose, stick to it, and see if the % goes up each month / year. That's the important thing.

Personally I am tracking:

Savings = [Work income] - [expenses]

So my savings rate is Savings / Work income.

[Steel_Rain]

I think there are many ways to calculate this, and as long as you are consistent you will be able to track your progess.

I prefer to track based on (Savings)/(Net Income + 401K and HSA contributions).  If I track Net only I feel like I am not getting credit for mazing out my 401K and HSA, and if I track Gross then I feel like it is inaccurate because I don't even have the option of saving a large % of my income which goes to taxes.

Hope you find something that works for you.

Wait, isn't a 401k a type of savings? Your formula at the moment reduces your savings rate the more you put in 401k. Did you mean minus? I'm not sure if that works or not. You could also calculate (savings / net income ) + (pre tax savings / gross income) to give you an overall rate. I think. I am a little fuzzy at the moment thanks to falling quite hard snowboarding.

Whatever formula you choose, stick to it, and see if the % goes up each month / year. That's the important thing.

Personally I am tracking:

Savings = [Work income] - [expenses]

So my savings rate is Savings / Work income.

My Formula is the same, yoiu just stated it better :)  the actual question i had was around net vs gross income and in my view net income is the one to use.  Hope you feel better post fall, i bounced myself off a tree when skiing one time.  Felt like i got worked over by an axe handle for days.

Steel

[Phoebe]

Yeah, I should have stated that better, but I define savings as anything I don't spend (HSA contributions, 401K, and money I put into an actual savings account or invest).

[Richard3]

My Formula is the same, yoiu just stated it better :)  the actual question i had was around net vs gross income and in my view net income is the one to use.  Hope you feel better post fall, i bounced myself off a tree when skiing one time.  Felt like i got worked over by an axe handle for days.

Steel

Yeah looks like I dodged any serious damage - little bit of a sore neck but that could equally be the horrible bed I sleep on.