Am I Figuring Savings Rate Correctly?

[Bartstache]

Hi all,

I've been sitting quietly soaking in MMM for a few months trying to get things figured out but I have some questions on my savings rate.  I figured now would be a good time to get it ironed out as the 2013 numbers are right at my fingertips.   

My wife and my gross income was 169k.  Less 36k for taxes and insurance leaving a net of 133k.

Our savings looked like:

24k for 401k contributions (upped contribution % during the year to get closer to max for 2014)
11k for Roth IRAs
20k to index fund
26k mortgage (12 x $1300 payments + 10k additional principal payment.)*
= 81k towards savings

so 81k/133k = 61% savings rate

* Figuring how the mortgage counts is where I think I may be getting confused.  The $1300 monthly mortgage payment is just P&I, no taxes or insurance.  The actual due is $700 a month and we always pay an extra $600.  We don't escrow the insurance or taxes.

Am I calculating this correctly?

Thanks,
Bart

[Thegoblinchief]

You shouldn't count the interest paid.

[SwordGuy]

and you should count employer contributions to the 401k.

[grantmeaname]

It depends what you want to calculate it for. If you want it as a percentage of take home pay you're on the right track, but if you want it as a percentage of net pay I wouldn't take insurance out of the denominator - it's an expense, after all.

[Bartstache]

Thanks for the replies.  I'll take off the interest and include employer contributions to the 401k.

My purpose is just to get a rough guesstimate on how far out we are from FI based on the MMM blog about the simple math behind early retirement.  I'm working on the home budget now to get the savings rate up for this year.  I'm almost afraid to post it -- my delicate ego might not be able to stand the face punches!

[NumberCruncher]

If the purpose of figuring on a savings rate is to figure out a goal for FI, why not just use a calculator for that?  -- savings vs. what you need to live on. Only slightly more complicated, but I think a little more useful.

http://mustachecalc.com/  one of the readers came up with this, for example. It's also easy to adjust for "what if" scenarios.

[Bartstache]

I didn't know that http://mustachecalc.com/ existed.  That is way cool!

[desrever]

When computing my savings rate, I don't like to just add pre tax and post tax investments, since the former is subject to taxation on withdrawal. I prefer a metric that regards pre and post tax saving at some exchange rate, cognizant of the fact that a saved post tax dollar is worth more than a saved pre tax dollar.

In my own computation, I fix this by computing a tax liability on the 401k savings, and subtracting it from both the numerator (amount saved) and the denominator (amount earned after cost of income).

[dragoncar]

When computing my savings rate, I don't like to just add pre tax and post tax investments, since the former is subject to taxation on withdrawal. I prefer a metric that regards pre and post tax saving at some exchange rate, cognizant of the fact that a saved post tax dollar is worth more than a saved pre tax dollar.

In my own computation, I fix this by computing a tax liability on the 401k savings, and subtracting it from both the numerator (amount saved) and the denominator (amount earned after cost of income).

This makes sense... if you are REALLY close to pulling the trigger.  At that point, you can just calculate your ACTUAL effective tax rate for the next year and decide if you need more.  5 years out... it's not worth the hassle IMO.

[desrever]

This makes sense... if you are REALLY close to pulling the trigger.  At that point, you can just calculate your ACTUAL effective tax rate for the next year and decide if you need more.  5 years out... it's not worth the hassle IMO.

OP saved $24000 in a 401(k) while deferring a tax liability of $7920. Both the tax liability and the saved money will both be subject to exponential growth. Accounting for the difference the way I suggested drops the computed savings rate by over 2%. (81000 - 7920) / (133000 - 7920) = 58.4%.

I think accuracy within a percentage point or so matters if you're tracking savings rate year-over-year, especially if you might transition between pre-tax and post-tax saving.