What counts as saving when determining %

[GettingSomewhere]

Hello!

Long time lurker (probably 2 years), first time poster (nervous).  Summary of myself:
30 years old, married with young kids.
Primary career that I went to college for earns me about $135k a year pre tax.  I have had a side business for a few years and it has taken off.  It makes about $135k a year pre tax as well.  Wife is SAH mom and helps with the side business. So my total yearly salary is about $270k.

My net worth in Nov 2014 was $33,000 (House - school loans - mortgage).  In the past year I paid off my school loans and paid off my mortgage (completely debt free as of last month!!!!!!! high five), fully funded my 2014 IRA, and fully funded mine and my wife's 2015 IRAs.  My net worth today is $188,000 (House + our IRAs + $15k in savings).  I am pretty happy about the $155k increase in net worth in one year. Maybe around $5k was due to property value increasing, so let's say I put in around $150k out of my salary.  I'm not good with taxes, but I assume I will pay somewhere around $70k in income tax this year.  So rough estimate I'd guess we live on $50k a year ($270income - $70taxes - $150invested/saved =$50).

So my question is about determining savings rate.  How do you guys figure it out?  Is there a standard?  If I do this math, $200k post tax income and $150k invested/saved, that means I have a 75% savings rate.  Is that right, or am I missing something?   My wife and I are trying to figure out how to budget better, and I mentioned pulling 75% (post tax) out of every payment we get and putting it in savings/investments, and whatever is left is what we live on (aka spend).  She's not sure, and neither am I, so I am on a fact finding mission.  What about when repairs are needed on the house?  Does that come from investing/saving money or spending money?  My next goal is to have a rental house.  If repairs are needed on the rental house, is that investing or spending? 

I hang out with a bunch of young professionals who live in REALLY nice houses and drive REALLY nice cars.  I am pretty sure I make more money than most of them, but my house is the smallest and my truck is the oldest.  My friends think I don't make much money.  My parents know how much I make and think it's great, but they think I should work until I'm 70.  My wife doesn't know why I want to retire early so bad, but she loves me so she puts up with me.  I come here to feel normal. :) 

Thanks for hearing me out, and thanks in advance for any help.
GettingSomewhere

[MDM]

GettingSomewhere, welcome to the forum.

See http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-savings-rate-and-other-questions/msg836617/#msg836617 - does that discussion answer your questions?  If so, great - if not, let us know what questions remain.  Good luck!

[marty998]

Welcome... glad to see new people contributing! If you hide and lurk we can't say hi.

My view is that savings rates don't really matter... to me the $ amount matters more. Circumstances change and your spending in FIRE is going to be different to your spending now, so it doesn't make sense to look at savings rates as a guide to time to FI etc.

Once you add in tax concessions and investment gains etc it starts getting horrendous to calculate anyway. You're better off putting the brainpower into your business and making more $$$.

just my ramblings =)

[Asdfg]

I'm in a VERY similar situation as you OP (except my company doesn't make that much). And I actually had the same question, thanks for the reply MDM.

Because Mint is not available here, our family has one bank account where all our incoming money goes into and where all the bills are paid from. So I just check the balance difference from Jan 1st to Dec 31st and compare this to my post tax income.

For example, after 2014 the account had 55k more money than in the beginning of the year. So we had saved 55k in that year. Our total income during that year post tax was 75k so our SR was 55/75= 73%.

This seems like a solid way to calculate SR because it includes EVERYTHING. House repairs, mortgage payments, rental incomes, insurances, everything.

[Expatriate]

I divide all payments into pension, saving and investments by the total after-tax income plus pension (because it's deducted by the employer).

However, it means relatively little, as I'll likely move from HCOL to LCOL in (max) 10 years. So the amount is more relevant.

[Gin1984]

Since your side business is bringing in so much money, have you considered a i401k?

[GoldenStache]

Care to share your side gig?

[GettingSomewhere]

Unfortunately I can't share my side gig. It would be pretty easy to figure out who I was if I told you what I do.  Funny you mention 401k, because I've been wondering about that. I do have an LLC for my side business, can I set up a 401k for myself???

[zephyr911]

Eeek. Get thee to a tax shelter, stat. Anything and everything to hold onto more of that income.

Unfortunately I can't share my side gig. It would be pretty easy to figure out who I was if I told you what I do.  Funny you mention 401k, because I've been wondering about that. I do have an LLC for my side business, can I set up a 401k for myself???

So, either you're famous, you serve famous customers, or you designed an app we all know by name. Interesting.

[GettingSomewhere]

Eeek. Get thee to a tax shelter, stat. Anything and everything to hold onto more of that income.

Unfortunately I can't share my side gig. It would be pretty easy to figure out who I was if I told you what I do.  Funny you mention 401k, because I've been wondering about that. I do have an LLC for my side business, can I set up a 401k for myself???

So, either you're famous, you serve famous customers, or you designed an app we all know by name. Interesting.

Not famous on a large scale, but famous in a certain group of people.  Kinda like MMM is famous among you guys, but no one else in the world would care if they ran into him.  I have a similar kind of thing with my group.

So I know you guys said % doesn't really matter, and I understand that, but I have more questions about it if you don't mind.  I paid off my mortgage but I plan on acquiring another house in the upcoming year or 2.  Would you count paying your mortgage as investing or spending?  Or would you break it apart and count principle as investing and interest/tax/ins as spending?  Does it matter if the mortgage is on the house you live in or if it's a property you rent out?  I know this is all semantics, I am just curious.

[Spork]

Don't think of it as "investing" and "spending". 

Think of it as Assets / Liabilities / Income / Expenses.

If you're paying off a mortgage (either a little every month or in one big chunk), you're paying some principle and some interest.
The principle is a reduction in Liability.
The interest is an expense.
The tax you pay at the end of the year is an expense.

If you were to pay cash for the house outright, you would just be trading one asset (cash) for another asset (house).  Presumably they are of equal value.   

[Davids]

When determining your savings rate as to what are expenses when it comes to mortgage payments, the principal portion of your mortgage is not an expense, it is part of savings, the interest is just the expense portion so if your mortgage is $1,000 and $750 that month is prinicipal and $250 that month was interest just include the $250 in your expense column.

[Brilliantine]

I think you need a budget. (That's a referral link. ;])

Savings rate is fine but it's oversimplifying things in your case. You have a great income and you want to save most of it. Great. Now you need to give every dollar a task. Most of those dollars will be tasked with making you more dollars. You can't just have a 10,000 feet level of budgeting (because budgeting is what you are doing when you say "let's save 70% of each income check"). You need finer granularity than that.

Just make a budget, get to know every dollar that you have and will make. Things will get much clearer.

[StockBeard]

Since nobody seems to want to give you a straight answer:

If I do this math, $200k post tax income and $150k invested/saved, that means I have a 75% savings rate.  Is that right, or am I missing something?

This is also how I count my savings rate.

But as others have mentioned, it doesn't mean that much. I think MMM calculates it this way, and says at this rate it would take you 7 years or so to reach FI. But the truth is, you won't spend "only" 50k in retirement. You'll spend 50k + whatever taxes on your income + healthcare, etc...
MMM has worked a lifestyle where has close to no tax by getting very minimal income (can't remember the specific blog post). I don't think this applies to many of us who retire early.
In other words, it is true, your savings rate does not matter that much, what matters is to understand how much you'll need once your RE, and from there, understand how big your stach needs to be.

Note: from a personal point of view, Taxes + healthcare + compulsory national pension schemes will definitely not be negligible in any of the countries I plan to go for my RE. They are a significant part of my expenses in the future, unfortunately. So you need to be careful. Just because you save 75% of your post-tax income does not mean you'll be FI in 7 years. This would only be true if you'll have no change in your expenses during RE. Taxes tend to change your number.

[Spork]

My super simple straight answer (which depends on properly identifying Income/expense/Asset/liability)

(income - expense) / income * 100

It really is that simple.  If you are making it harder than that, then you are not properly identifying what categories your money falls into.

[DMoney]

Hi, GettingSomewhere,

I was literally logging on here to ask the same question.  "How exactly do you figure out your savings rate?"  Thanks for beating me to it!  And bravo to you on your high income and low yearly costs!  very impressive. 

I know it doesn't technically matter, rather its 25x what you'll need in retirement in your nest egg,  but I think it's a good benchmark to figure out how ridiculous our spending is and if we should tighten up a bit.

Also, I appreciate the comments wololo. 

Because our lifestyle is face-punch worthy, we are likely going to be paying plenty of taxes in retirement.  This doesn't get mentioned a lot in the surprisingly simple math.  But in my rough calculations, it increases the needed size of our nest egg quite a bit, anticipating those taxes later in life.

[zephyr911]

Since nobody seems to want to give you a straight answer:

If I do this math, $200k post tax income and $150k invested/saved, that means I have a 75% savings rate.  Is that right, or am I missing something?

This is also how I count my savings rate.

But as others have mentioned, it doesn't mean that much. I think MMM calculates it this way, and says at this rate it would take you 7 years or so to reach FI. But the truth is, you won't spend "only" 50k in retirement. You'll spend 50k + whatever taxes on your income + healthcare, etc...
MMM has worked a lifestyle where has close to no tax by getting very minimal income (can't remember the specific blog post). I don't think this applies to many of us who retire early.
In other words, it is true, your savings rate does not matter that much, what matters is to understand how much you'll need once your RE, and from there, understand how big your stach needs to be.

Note: from a personal point of view, Taxes + healthcare + compulsory national pension schemes will definitely not be negligible in any of the countries I plan to go for my RE. They are a significant part of my expenses in the future, unfortunately. So you need to be careful. Just because you save 75% of your post-tax income does not mean you'll be FI in 7 years. This would only be true if you'll have no change in your expenses during RE. Taxes tend to change your number.

Assuming the taxes+etc on 50K in net income will be negligible is unwise, but assuming the difference in taxes on 200K gross vs. (whatever it takes to net 50K) is negligible is even more unwise.

Work it out to whatever level of detail makes you comfortable.

[Brilliantine]

But as others have mentioned, it doesn't mean that much. I think MMM calculates it this way, and says at this rate it would take you 7 years or so to reach FI. But the truth is, you won't spend "only" 50k in retirement. You'll spend 50k + whatever taxes on your income + healthcare, etc...
MMM has worked a lifestyle where has close to no tax by getting very minimal income (can't remember the specific blog post). I don't think this applies to many of us who retire early.
In other words, it is true, your savings rate does not matter that much, what matters is to understand how much you'll need once your RE, and from there, understand how big your stach needs to be.

Note: from a personal point of view, Taxes + healthcare + compulsory national pension schemes will definitely not be negligible in any of the countries I plan to go for my RE. They are a significant part of my expenses in the future, unfortunately. So you need to be careful. Just because you save 75% of your post-tax income does not mean you'll be FI in 7 years. This would only be true if you'll have no change in your expenses during RE. Taxes tend to change your number.

Actually, MMM's income and tax liability went up post-retirement because of the blog related income, etc.

In early retirement, in the US, if your ordinary income is in the 15% bracket, and if all (or nearly all) of your income is from qualified dividends and long-term capital gains, then it is possible to pay near-zero federal income tax; take a look at the GoCurryCracker example. You may argue that some people can live on $35k/year, and some people can't. That's valid, I suppose. My point is, it takes some tax planning but it is possible to limit the tax implications in retirement.