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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: daveydinner on July 17, 2014, 04:17:15 PM

Title: Calculating My Savings Percentage
Post by: daveydinner on July 17, 2014, 04:17:15 PM
Do you calculate your savings percentage before taxes or as a percentage of take-home-pay?

Here are my numbers:

My salary is $44,000 per year
I put 15% into my 401K ($6600/yr)
Max my HSA ($3300/yr)
Company provides 4% 401k match ($1760/yr)

Total saving is $11,660

So that's about 26% of my income BEFORE taxes. Since about 15% of my paychecks go to taxes, if I reduced my salary 15% to $37400 I'd be saving about 31%. Make sense? Which number is the one to go by on this site where so much revolves around saving 50%.

Of course I want to make my way to 50% (lowish salary in the Bay Area, so it'll be tough), just a little discouraged if i'm only at about 25%  so that extra 6% would be a glimmer of hope!
Title: Re: Calculating My Savings Percentage
Post by: gimp on July 17, 2014, 04:36:11 PM
Ah, that lovely question of pre- or post-tax being your denominator. Truth is, some people do one, some do the other. What're you more comfortable with? Would you like to feel more accomplished with a bigger number, pushing you to do even better, or would you be more motivated by a lower number?

By the way, in the bay area, you're doing quite well. (Of course we can all do better.) It's hard to make it on 44k here where the rent is so expensive. I know people making 3x as much saving nothing. So it goes.
Title: Re: Calculating My Savings Percentage
Post by: vespito on July 17, 2014, 04:37:41 PM
I calculate this on a post-tax basis.  While I subtract taxes out, I do leave in any healthcare premiums, my FSA (since it needs to be used up) or any other deductions.
I do add in any employer contribution to my 401k.

And yes, saving 50% in the Bay Area with a lowish salary is difficult.  At 44k, you are doing really well.
Title: Re: Calculating My Savings Percentage
Post by: robotclown on July 17, 2014, 04:39:35 PM
I don't count the tax money as income.  It's phantom money; never mine to begin with.
Title: Re: Calculating My Savings Percentage
Post by: ender on July 17, 2014, 04:43:10 PM
Pretax.

way easier for me, makes my savings rate look "worse" which probably makes it better?
Title: Re: Calculating My Savings Percentage
Post by: KayakMom on July 17, 2014, 04:46:21 PM
I always count pre-tax as well.
Always knowing what I pay in tax is a good motivator to arrange my life so I need less income. 
Title: Re: Calculating My Savings Percentage
Post by: RapmasterD on July 17, 2014, 04:46:35 PM
Take home pay, which is what MMM does.
Title: Re: Calculating My Savings Percentage
Post by: solon on July 17, 2014, 04:49:55 PM
All of your deductions (fed tax, state tax, fica, etc) are based on your gross pay. So, when the government wants a percentage, they look at gross, why wouldn't you?
Title: Re: Calculating My Savings Percentage
Post by: Fatmouse on July 17, 2014, 04:56:45 PM
I prefer take home pay, and I think this aligns better with some MMM posts, such as this classic: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/)

I like the concrete idea that a 50% savings rate (of take home pay) directly correlates with one year of financial freedom (not accounting for the magic of compounding.)
Title: Re: Calculating My Savings Percentage
Post by: FrugalSpendthrift on July 17, 2014, 05:30:34 PM
If you want to get technical,  the 4% match should also be considered as income.
Title: Re: Calculating My Savings Percentage
Post by: Numbers Man on July 17, 2014, 05:51:37 PM
I use gross rather than net because tax deferred vehicles impact your tax rate and tax home pay. Calculating off of gross pay will tell you how efficiently you are saving.
Title: Re: Calculating My Savings Percentage
Post by: JoyBlogette on July 18, 2014, 09:06:01 AM
I prefer take home pay, and I think this aligns better with some MMM posts, such as this classic: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/)

I like the concrete idea that a 50% savings rate (of take home pay) directly correlates with one year of financial freedom (not accounting for the magic of compounding.)
+1
Title: Re: Calculating My Savings Percentage
Post by: neo von retorch on July 18, 2014, 09:17:59 AM
So do you count take home pay and pre-tax 401(k) contributions?

Example:
Gross: $5000/month
401(k): $1450/month
Net / Take Home: $2520/month
Taxable Savings: $550/month

Total Income: $3970 / month
Savings: $2000/month (401k + additional savings)

Percentage: 50.4%

And then, when aiming for your target total investable assets, so you apply some kind of deduction on pre-tax retirement funds? Or do you basically ignore tax because MMM folk will likely make withdrawals in the $25-40k range, annually, and be taxed relatively little?

Example:
401k: $300,000
Investments: $200,000

Target: $591,000
FIRE Fund: $440,000 (assuming 20% tax on withdrawals)
Title: Re: Calculating My Savings Percentage
Post by: Middlesbrough on July 18, 2014, 09:21:07 AM
I have a spreadsheet with about three different savings vs. pre-tax, post tax, spending, etc. i calculated them once and just keep dragging the different formulas through to give me different perspectives on my situation. The more you know the better!
Title: Re: Calculating My Savings Percentage
Post by: Cromacster on July 18, 2014, 09:28:56 AM
You can take out payroll taxes, but it doesn't make sense to take your 401(k) and HSA savings from your take home pay.

So for starters look at

(401k + HSA + Cash)/(Gross - fed - state - fica - SS)
Title: Re: Calculating My Savings Percentage
Post by: Numbers Man on July 18, 2014, 01:07:19 PM
You can take out payroll taxes, but it doesn't make sense to take your 401(k) and HSA savings from your take home pay.

So for starters look at

(401k + HSA + Cash)/(Gross - fed - state - fica - SS)

Your Federal and State taxes change when the amount you devote to 401k, hsa, 403, etc change. So why go through the mental gymnastics to figure your savings on net and just use gross pay instead.
Title: Re: Calculating My Savings Percentage
Post by: okashira on July 18, 2014, 01:22:56 PM
Savings Ratio.

Savings (401k+HSA+Loan Principle+Other) / Spending (Loan interest+food+housing, etc.......)

Helps take the tax no tax thing out of the equation but still encourages being tax efficient.
Title: Re: Calculating My Savings Percentage
Post by: doublethinkmoney on July 19, 2014, 06:56:22 AM
I had wondered this myself, now looking at responses I see that I will calculate after my take home pay. Thanks for the math!

I save 25% in my 401k (pretax) then an additional 30%(post tax).


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Title: Re: Calculating My Savings Percentage
Post by: matchewed on July 19, 2014, 07:09:28 AM
It doesn't matter exactly how you calculate your savings rate. What matters is if it means something for your circumstances (as in takes into account as many variables as you can expect and track without going insane) and if it is consistent.
Title: Re: Calculating My Savings Percentage
Post by: Mazzinator on July 19, 2014, 01:29:32 PM
I use "savings rate" more to determine what your FI number is..so i'd say:

$11,660/$39,160= 30%

Or

39,160 - 11,660 = 27,500 (the amount you spend per year..in other words, the amount of passive income you need to make per year to be considered FI) (or a stash of ~$700k... 11,660 per yr at 5% interest compounds to ~$700k in 28 yrs)

At ~30% you'll be FI in 28 years...

*but i could be wrong because i don't know if you spend the hsa money or it stays in savings???
Title: Re: Calculating My Savings Percentage
Post by: vivian on July 19, 2014, 07:36:57 PM
Do you guys include employer matching for 401K as part of the savings in calculating savings rate? It is clearly contributing to my savings, but then savings+spending+taxes will be more than gross.

What I do is have the denominator be gross-taxes+employer matching.
Title: Re: Calculating My Savings Percentage
Post by: Cromacster on July 20, 2014, 08:58:19 AM
Your Federal and State taxes change when the amount you devote to 401k, hsa, 403, etc change. So why go through the mental gymnastics to figure your savings on net and just use gross pay instead.

With modern technology it's more mental gymboree than gymnastics.
Title: Re: Calculating My Savings Percentage
Post by: arebelspy on August 12, 2014, 05:36:37 PM
Agree with those who said post-tax, personally.

Also, if you're a savings rate nerd, we've had about a dozen discussions on savings rate, many with good conversations about why you might calculate it one way or the other.

Do you guys include employer matching for 401K as part of the savings in calculating savings rate? It is clearly contributing to my savings, but then savings+spending+taxes will be more than gross.

Your gross income is the total amount you're paid.  That includes any matching, bonuses, etc.

Savings + spending + matches + taxes + bonuses + etc. etc. (everything all added up) should always equal your gross.

What I do is have the denominator be gross-taxes+employer matching.

Yup.  Because really, that match is part of your gross compensation.
Title: Re: Calculating My Savings Percentage
Post by: Credaholic on August 12, 2014, 09:55:40 PM
I think in terms of post tax dollars since when you retire you won't be paying income tax. I don't include taxes in my budget, so why would I include them in my savings ratio? And it doesn't take that much mental gymnastics to figure it out. DH is salaried and I'm an independent contractor, so I have to set aside money for taxes independently. I don't count this as savings. Our savings vehicles are 401Ks (self employed 401K for me), Roths, and the profit sharing contribution to my self employed 401K. If hypothetically this equalled $50k annually and we had $75k of expenses, that means my savings rate is 40% of take home pay. I know that if I wasn't using tax advantaged accounts as savings vehicles that my take home pay would be different, but who cares? The point is that $75k is going out the door and $50k is remaining, so 40% is the number that affects how quickly we reach FI.
Title: Re: Calculating My Savings Percentage
Post by: arebelspy on August 12, 2014, 09:59:32 PM
I think in terms of post tax dollars since when you retire you won't be paying income tax.

I plan on paying lots of taxes when I retire.

/shrug

The key thing is to count all your expenses in FIRE, whether that includes taxes, travel, whatever.  Come up with a specific FIRE budget.