calculating the savings %?

[Jazzpolice]

Hello advanced mustachians!  Quick question…if I am saving 25% pre-tax dollars & 60% of the after tax, would you calculate this as saving 85% of your earnings?  Seems a little high which I wouldn't mind since I'm trying to "catch up" with my savings.
Thanks for any feedback!

[Joel]

Save as much as you can. At the end of the day the actual percentage is not actually that important.

[Mississippi Mudstache]

I figure it as total savings/gross income. Taxes are expenses.

[shuffler]

if I am saving 25% pre-tax dollars & 60% of the after tax, would you calculate this as saving 85% of your earnings?

No, I wouldn't.

If you were saving 0% pre-tax, and 100% post-tax, would you say that you were saving 100% of your earnings?  No, you wouldn't, because you're still paying tax, so you haven't saved all  of your earnings.

So you can't just sum up the two numbers.

... or, with maths ...
Let "pre" be your total pre-tax earnings, "tax" be the amount of taxes you pay, and "post" be what you have after taxes (i.e post = pre - tax).

Savings Rate = (0.25*pre + 0.60*post) / pre
             = (0.25*pre + 0.60*(pre-tax)) / pre
             = (0.25*pre + 0.60*pre – 0.60*tax) / pre
             = (0.85*pre – 0.60*tax) / pre
             = 0.85 – 0.60*tax/pre

… which is telling you that saying “85%” is too high, and you need to adjust it down by your tax-rate on the post-tax savings.

[Middlesbrough]

It depends where your money is going. I invest in a Roth 401k and a Roth IRA so I do expense/savings because it is a true representative of my retirement lifestyle vs. savings/income. If you contribute to pre tax vehicles, including taxes as an expense makes more sense.

[warfreak2]

It generally doesn't make sense to add percentages when they are percentages of different things. Do your maths in $.

It depends what you want the percentage figure for. If it's just for measuring your progress, then just do (total $ amount saved) / (total $ amount earned). Don't forget to include employer contributions to your retirement plan in both. As said above, tax is an expense like any other.

However, if you're calculating your time-to-FI using the Shockingly Simple Math, the assumption is that your expenses remain the same before and after FI, and obviously your tax expenses don't, so you shouldn't count them either coming in or going out. I.e. you calculate (total $ amount saved) / (total $ amount earned - tax). Actually, you should subtract all expenses which go away after you reach FI, not just tax.

Of course it gets much more complicated if you want to be more accurate, and at some point you should just ignore your savings rate and use a spreadsheet or a simulator.

[halfshellmeijin]

When I calculate mine, I only count money I receive in the denominator. This way it gives me an idea of how much of the money I recieve I spend. So although taxes are an expense, I have little control over it. This allows me to get a sense of how my actions are impacting my savings rate. That is the true goal I feel, how what I do affects my ability to reach financial independence.

So just for some clarification I do count employer matches to my 401k because I am the one adding money to the 401k and taking advantage of the match.

[arebelspy]

When I calculate mine, I only count money I receive in the denominator. This way it gives me an idea of how much of the money I recieve I spend. So although taxes are an expense, I have little control over it. This allows me to get a sense of how my actions are impacting my savings rate. That is the true goal I feel, how what I do affects my ability to reach financial independence.

So just for some clarification I do count employer matches to my 401k because I am the one adding money to the 401k and taking advantage of the match.

What counts as "money received" for your denominator?

It sounds like with your system you could save over 100%, which is weird...

[robotclown]

When I calculate mine, I only count money I receive in the denominator. This way it gives me an idea of how much of the money I recieve I spend. So although taxes are an expense, I have little control over it. This allows me to get a sense of how my actions are impacting my savings rate. That is the true goal I feel, how what I do affects my ability to reach financial independence.

So just for some clarification I do count employer matches to my 401k because I am the one adding money to the 401k and taking advantage of the match.

That's how I do it too.  My monthly income is the amount of pay that goes from my employer to my bank account.  I don't consider pre-tax income at all; it's an imaginary number unless you know a way to not pay taxes.

[arebelspy]

When I calculate mine, I only count money I receive in the denominator. This way it gives me an idea of how much of the money I recieve I spend. So although taxes are an expense, I have little control over it. This allows me to get a sense of how my actions are impacting my savings rate. That is the true goal I feel, how what I do affects my ability to reach financial independence.

So just for some clarification I do count employer matches to my 401k because I am the one adding money to the 401k and taking advantage of the match.

That's how I do it too.  My monthly income is the amount of pay that goes from my employer to my bank account.  I don't consider pre-tax income at all; it's an imaginary number unless you know a way to not pay taxes.

Then same question to you. :)

[robotclown]

Money received is simply net income from paychecks.  But, my employer doesn't offer a 401k match, so the numbers are pretty straightforward.  Trying to calculate that as well would muddle it up a bit.

[Rural]

I just calculate percent of gross saved because percent of net is complicated, and most of what we save is in pretax accounts anyway. So total added to savings of all varieties divided by total pay before taxes. Is good enough for me; I'm just calculating it for fun, anyway.

[frugalnacho]

I don't think it makes much sense to include the taxes.  The only taxes relevant are what you'll pay after you FIRE.  What the difference between one person making 100k and paying 50k in tax, and another making 50k and paying 0 tax?  They both end up with 50k in their hands.

[warfreak2]

I don't think it makes much sense to include the taxes.  The only taxes relevant are what you'll pay after you FIRE.  What the difference between one person making 100k and paying 50k in tax, and another making 50k and paying 0 tax?  They both end up with 50k in their hands.

OK, but by the same logic you shouldn't include transport to the job you won't be doing after you FIRE, childcare for the kids who will be adults by the time you FIRE, interest payments on the mortgage which will be paid off by the time you FIRE...

Also, if you're using a tax-deferred savings account, you will may still be paying income tax after FIRE. But probably at a lower rate. So maybe you should count part of the tax but not all of it?

I don't think tax is a specially-ignorable expense just because it isn't optional (also, by contributing more of your pre-tax income to retirement accounts, you can choose to pay less tax). Outside the context of the Shockingly Simpl(ified) Math which includes instructions on how to calculate your savings rate not including tax (and it's not really worth going into this detail for anyway), I don't think there's anything wrong with a simple 1 - expenses/income, counting all expenses. It doesn't have to be comparable with other people, so long as you can compare your savings rate over time to see how well you're doing.

[Emilyngh]

Also, if you're using a tax-deferred savings account, you will still be paying income tax after FIRE. But probably at a lower rate. So maybe you should count part of the tax but not all of it?

Not necessarily, at least not in the US.   A married couple in the US only needing to withdraw the $20kish to live a Mustachian life would probably not pay any tax if using the Roth pipeline.   We currently have an exemption for a daughter we won't have when FIRE, but with a household income >$50k have a $0 federal tax liability.   Unless tax laws change significantly, I don't expect to pay any income taxes when ER (using the Roth pipeline and living on <$25k a yr).

[Mississippi Mudstache]

Outside the context of the Shockingly Simpl(ified) Math which includes instructions on how to calculate your savings rate not including tax (and it's not really worth going into this detail for anyway), I don't think there's anything wrong with a simple 1 - expenses/income, counting all expenses. It doesn't have to be comparable with other people, so long as you can compare your savings rate over time to see how well you're doing.

I'm with warfreak on this one. I can get a much better estimate of our FIRE date using spreadsheets and accounting for expenses that will change in retirement than I can using a manipulated savings rate and the Shockingly Simple Math. So my savings rate calculation is all expenses/all income. It's just an arbitrary number that really only has meaning to me.

[slugline]

If an American only counts "take-home pay" in savings calculations, not only are we ignoring taxes, but we're also ignoring other payroll deductions like flexible spending accounts and employee contributions to health insurance premiums. The results would not feel complete to me. I count taxes and the other stuff as real expenses.

[ch12]

How about the tried and true formula of:
(take home + pretax savings - expenses)/(take home + pretax savings) for savings rate

Is that suddenly not good enough anymore?

[arebelspy]

How about the tried and true formula of:
(take home + pretax savings - expenses)/(take home + pretax savings) for savings rate

Is that suddenly not good enough anymore?

It is.

Anything you find good enough is.  You don't need to worry if someone else does something more or less precisely or differently.  It's not wrong, just different. :)

[halfshellmeijin]

When I calculate mine, I only count money I receive in the denominator. This way it gives me an idea of how much of the money I recieve I spend. So although taxes are an expense, I have little control over it. This allows me to get a sense of how my actions are impacting my savings rate. That is the true goal I feel, how what I do affects my ability to reach financial independence.

So just for some clarification I do count employer matches to my 401k because I am the one adding money to the 401k and taking advantage of the match.

What counts as "money received" for your denominator?

It sounds like with your system you could save over 100%, which is weird...

All money I receive is a misleading way to state what I do. What I mean is all income after taxes along with tax return, cash gifts, finding money, company matches on retirement accounts, capital gains, or anything else you can think of. So if I am counting all sources of monetary gain I shouldn't ever reach over 100% savings rate.

Also by counting my tax return as monitary gain it allows for tax strategy to show up as a larger return.

The obvious downside to the system is if I had a negative tax return as it would have to count as an expenditure which would be misleading compared to previous years where taxes were never an expense. But maybe after this conversation I will change my spreadsheets. Since I already keep track of taxes for tax time it should be an easy fix.

[Jazzpolice]

Thanks to everyone who replied.  I think I prefer the simpler math of net amount on my paycheck minus expenses=savings but the pre-tax money that goes into a 403b (hoping to max for the 1st time) should technically count as my savings.  Mostly I was trying to see if FI can be reached in 9 years by saving/investing 50% of net pay (along with 25% from gross to tax advantaged account).  Guess I'll know better in a few years. 

[frugalnacho]

I don't think it makes much sense to include the taxes.  The only taxes relevant are what you'll pay after you FIRE.  What the difference between one person making 100k and paying 50k in tax, and another making 50k and paying 0 tax?  They both end up with 50k in their hands.

OK, but by the same logic you shouldn't include transport to the job you won't be doing after you FIRE, childcare for the kids who will be adults by the time you FIRE, interest payments on the mortgage which will be paid off by the time you FIRE...

Also, if you're using a tax-deferred savings account, you will may still be paying income tax after FIRE. But probably at a lower rate. So maybe you should count part of the tax but not all of it?

I don't think tax is a specially-ignorable expense just because it isn't optional (also, by contributing more of your pre-tax income to retirement accounts, you can choose to pay less tax). Outside the context of the Shockingly Simpl(ified) Math which includes instructions on how to calculate your savings rate not including tax (and it's not really worth going into this detail for anyway), I don't think there's anything wrong with a simple 1 - expenses/income, counting all expenses. It doesn't have to be comparable with other people, so long as you can compare your savings rate over time to see how well you're doing.

Well my logic is that you calculate some post FIRE expenses independent of pre FIRE expenses because they are different.   Then you have a post FIRE annual income goal, and you can calculate the total stash needed to supply that.  By using a roth pipeline (and since you'll be living on substantially less money) you end up paying significantly less income taxes post FIRE.   My fire date will be dependent on when I can hit that total stash, and it seems easier to calculate it with post tax money since that is the money that goes into and out of my accounts.   You could also calculate it counting taxes as an expense, but it seems  like an unnecessary step to me.   

Yes you do pay less when contributing pre tax money into an account, but that gain in income is still accounted for when it's included as income.

[rpr]

There are so many ways of doing this.

For income:

A. gross income + employer match
Or
B. gross income - taxes + employer match
Or
C. gross income - taxes


For savings:
1. 401k + IRA + taxable
Or
2. 401k + match + IRA + taxable
Or
3. 401k + match + IRA + taxable + principal portion of debt payments including mortgage

If you are really nit picky then income definition can be expanded to include employer paid benefits which appear on your paycheck. In my case that includes such things as employer FICA taxes, employer portion of health care premiums, life insurance premiums, disability premiums etc.

It is messy. My head hurts.