The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: TheSonganator on February 28, 2015, 11:42:35 PM
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For a long time I was patting myself on the back for saving between 42-48% of my income each month. These savings include investments (401K and IRA), a mortgage down payment, an emergency fund, higher education, a Swiss watch, a used car, and a vacation.
As a recent MMM reader it occurred to me that while my investments are going towards retirement, nearly all my other perceived “savings” are actually going to be spent -- but in the near future (mortgage, watch, car, vacation, higher education, etc.). So are these true savings? They are not bringing me closer to retirement, but rather are ways to maturely purchase things/experiences to avoid unnecessary debt.
Now, it appears I am only saving 23% of my income towards retirement with the other money going towards different purchasing goals.
So what constitutes savings (ie when MMM advocates saving 50% of your income)? Do only retirement savings count? And how do these saving/purchasing goals play a role? Thanks.
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Imo most of your delayed savings items are not actual savings.
Vacation. Watch. Car. Student loans.... nah.
these are just plain expenses, especially the amounts meant for the vacation, car, and watch.
House downpay... kinda, because that down pay will at least offset the loan and technically provide potentially equity in the property.
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You're talking long-term vs. short-term savings.
Short-term savings probably doesn't jive with MMM since it doesn't directly contribute to your financial independence. (you could argue in a way it does since you're not going into debt to do those things but...) In any case you shouldn't be disappointed with a 20%+ long-term savings rate. Although it may be less than some people here it's much higher than your average Joe.
Retirement savings are definitely considered long-term. Those could be specific retirement investment like 401k's, IRA's, etc. or other investments like stocks that you plan on holding on to until retirement. Long-term and short-term goals are both equally important in my mind. We're all different so while one person may be able to strictly put 50% into long-term savings and go without for an extended time others find more sense in splitting it up, which is still good and certainly much better than using debt for those short-range goals.
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I love your question because you are pondering the impact of such varied forms of saving!
I think it's good to separate saving that increases your future ability to live off of investments (401k, for example) vs forms of saving that are about consumption (vacation, Swiss watch); the consumption ones do not contribute to a future income stream that could allow you to live on just the investments.
Even there, your list includes special cases in the form of education and the down payment on a home. Obviously, education is an investment if there is a realistic expectation of increasing future earning ability, and you expect to apply that earning ability. But it's not a direct contribution to the type of financial wealth where the investor can live off the investment income, so I think this blog counts it separately from savings that directly produce passive income (income from investments). Simillarly, a home can be a great base for a secure life, but strictly speaking is also an expense, not an income producing investment.
My understanding is that Mr. MM's default recommendation is to establish financial freedom by paying off an efficient home, measuring the cost of living you incur living there, and accumulating investments equal to 25 times that cost of living. For example, own a $100K home, find that your cost of living is $20,000 per year, add $500,000 of investments. Then you can live off the investment income forever, to the extent your lifespan permits. Paying off the home mortgage and making 401k contributions add to this scenario (real savings!) where the Swiss watch does not. I suppose the education would be a preparation for making these investments, but not in itself be one of the investments.
FWIW, here is a recent post by MMM himself:
http://www.mrmoneymustache.com/?s=saving
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Savings that are earmarked to be spent soon don't count in the same way as savings that are earmarked for retirement from a MMM perspective.
I do the same thing too. I pat myself on the back for saving 50%+ each month, knowing full well that we are planning a bunch of travel later in the year that will eat into that savings rate.
I think it depends what your personal goals and priorities are as well. I really enjoy travel so don't mind the trade off of having to work longer/harder in order to do a bit while I'm young. To me short term savings are still a big positive, you are still focusing your earnings towards a small number things that will add positively to your life rather than spending frivolously on many impulses.
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Gail Vaz Oxlade separates the two into savings and "planned spending." It's only really considered savings if you are saving long term, I.e. For retirement. Otherwise if you're putting aside money to spend for a short term purpose like a vacation, house downpayment, or wedding, it's really planned spending, not savings.
I use YNAB -- in that system there's a "Rainy Day" fund for planned spending. It's a great habit to get into -- putting aside money for large occasional expenses -- but it's not really "saving."
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I don't know about the rest of you, but I do plan to eventually spend all the money I end up saving. Does that mean I have a 0% savings rate because all that money {hopefully} won't be in my account when I die?
Personally, I count any money that I move into a savings vehicle as savings, no matter what it's earmarked for. In the future, if I actually do spend it (and there's always the chance that I change my mind and don't spend it), it gets accounted for as an expense and will reduce my savings rate for that year.
For example, I kept a $10k 'dream vacation' account for several years. Last year, I liquidated that account when I was in the process of paying off my mortgage. My savings rate was reduced because I had spent my savings to do this.
The math makes sense to me.
Savings for smaller things (like the watch and vacation in the original example, or my insurance premiums or property tax) would never leave my checking account, and would no be included in my savings rate.
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For a long time I was patting myself on the back for saving between 42-48% of my income each month. These savings include investments (401K and IRA), a mortgage down payment, an emergency fund, higher education, a Swiss watch, a used car, and a vacation.
Now, it appears I am only saving 23% of my income towards retirement with the other money going towards different purchasing goals.
I would only count savings in your savings rate that are earmarked for long term investments with no plans to spend the $$ prior to FIRE.
-- Vik
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I have one account for short term savings: My kids' college (one is in college NOW, the other is about to graduate high school), vacations, home repairs, and so forth. You could say this is a delayed spending account. In reality, it's money saved for expenses that I haven't yet encountered: Next semester's tuition, the need for a new roof in 5 years or so.
I have other accounts that are for retirement. Yes, that money is eventually going to be spent, but I don't think of it in the same way as the short term savings.
One comment: Any watch for which you need to save -- well, it's a bad financial choice. Past a pretty low dollar figure, a watch is a status symbol.
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Savings rate, in the mustachian community, is a tool used to guide how soon you will be Financially Independent and able to Retire Early.
"Savings rate" in this context means money that is earmarked for retirement. This is mostly investment accounts but may include your mortgage principal (depending on your perspective regarding housing costs in retirement.)
Savings in a general sense includes the other items like education, car, vacations, and other short-term consumables. Differentiating the two will help you if you intend on using your savings rate to determine when you can FIRE or anything like that. But it is just a tool, so as long as you understand it, you are fine changing it to suit you.
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If short-term savings counts, then you could say you "saved" your entire paycheck to pay for next month's expenses.
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I think there are two distinct concepts here.
On one hand, purchases can save you money. A more fuel efficient car, insulation, some equipment to make your own favorite treat, etc.... They have some upfront cost and lower other costs as time goes by.
There are also purchases that don't save you money, but if you're saving your money for a time when those purchases cost less, then delayed spending does equal savings.
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Too much equivocating and dissembling here for my taste.
The OP is engaged in delayed spending, not saving.
Bottom line: Monies exposed to markets (stocks, bonds) or otherwise set aside for retirement are "savings" in the retirement/4% SWR-sense. An exception could be made for other sums (home equity, for example) that could be made liquid and (immediately thereafter) put into the markets. But the Trinity Study (and related analyses) are looking at monies in the markets (equities, bonds, commodities) or cash (money market funds, cash under your mattress) set aside for use in retirement.
Nothing else counts. Saving for a watch, vacation, new bathroom remodel or whatever is neat in that you aren't taking out loans for these delayed expenditures, but none of these items counts as savings.
In firecalc and cfiresim there are no inputs for "Monies I've set aside to blow on delayed expenditures in Year X." Actually and to be precise, there are, but they count as expenditures that degrade your probabilities of succeeding in retirement.
So kudos to you for not taking on debt but, unfortunately, you aren't saving either. You are debt-adverse, but not necessarily a saver.
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I don't know about the rest of you, but I do plan to eventually spend all the money I end up saving. Does that mean I have a 0% savings rate because all that money {hopefully} won't be in my account when I die?
Absolutely. When you FIRE and start spending money, you in effect have a negative savings rate. Most will count how much they 'earn' passively in the markets, and the hope is that their earnings continue to equal or exceed their expenditures.
But yes - in retirement you may have a 0% or even -% savings rate, most of the time. For many that's a big mental hurdle to get over after saving 20-50%+ of their income for years.
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There is definitely some re-evaluation and prioritization I need to do to bring me up to that 40-50% savings rate.
I do find some solace in the fact that I am comfortably living off of ~52-57% of my pre-tax income. So either eliminating some of those goals/purchases, or achieving them and reallocating those funds towards investments, will make a huge impact towards FIRE.
Thank you for all the straightforward comments!
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But could you not consider any money saved in an HSA deferred spending as well? I mean our OOP max is $9000 for a year so this year we would not even have that amount in our HSA. At anytime the money in your HSA might become spendable money.
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You're all wrong. Your savings rate is as simple as MMM put it in his blog post earlier this year:
The savings rate is simply the percentage of your take home pay that you’re not spending.
(Take home pay – spending) / (take home pay) , then multiply by 100 to get a percentage
If you spent the money, you subtract it from your savings rate. Having said that, you DO have to subtract the cost of anything you bought from your future savings rate. For example, lets say you make $100k a year. You spend $50k on normal expenses (Food/mortgate/car/insurance/etc). You put $30k in your 401k/IRA/Brokerage. You put $20k a year into a bank account so that you can buy that Ferrari that you've always dreamed of having. Your savings rate is 50%. You do this for 10 years (I'm going to ignore inflation/interest). That 10th year, you've now got $200k in your Ferrari bank account. You decide that you're going to pull the trigger. You bike down to the local Ferrari shop and slap down a briefcase of cash on the counter. You throw your old bike in the dumpster behind the dealership, cause who needs a bike when you have a Ferrari, and drive home in the Ferrari. Your savings rate for that year is now going to be:
$100,000 - $50,000 (normal spending) - $200,0000 (Ferrari)) / $100,000 = -150%. You just saved negative 150%.
The reason it works like that is because until you spend the money, you can do whatever you want with it. Just because you've already given it a "job" in your head, that doesn't mean you can't change your mind. It's all relative. Realistically though, I wouldn't be patting myself on the back for "saving" money that I'm planning on sending in the shorter term.
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I don't know about the rest of you, but I do plan to eventually spend all the money I end up saving. Does that mean I have a 0% savings rate because all that money {hopefully} won't be in my account when I die?
Personally I hope to protect my principal capital and die with millions of $$ I can leave to a charity of my choice. I'll endeavour to always take out less on average than my investments grew over a given period. It's possible this may not happen, but I'll do what I can to make it so - part-time work, flexible FIRE spending and 1 yr plus liquid emergency fund.
-- Vik
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For a long time I was patting myself on the back for saving between 42-48% of my income each month. These savings include investments (401K and IRA), a mortgage down payment, an emergency fund, higher education, a Swiss watch, a used car, and a vacation.
How is buying a swiss watch considered saving? Or a vacation? Or a car?
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I personally don't count our sinking funds as savings - just smoothed out expenses. I even add a 10% pad to our expenses before projecting, to handle the occasional un-budgeted expense that comes up.
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How is buying a swiss watch considered saving? Or a vacation? Or a car?
I think that is the point of the thread. It looked like s/he was saving, because month to month the income wasn't spent, but it wasn't really savings- it was delayed spending.
So those months where there was 48% savings, was there really? If that money just got spent down the line on something completely unnecessary?
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I don't really see the issue. If you just regard all money not spent as saved, then in some months, you'll have a high savings rate (b/c of those targeted savings accounts), and then in other months, when you drain those targeted savings accounts, you'll have a lower or possibly negative savings rate.
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Savings rate, in the mustachian community, is a tool used to guide how soon you will be Financially Independent and able to Retire Early.
"Savings rate" in this context means money that is earmarked for retirement. This is mostly investment accounts but may include your mortgage principal (depending on your perspective regarding housing costs in retirement.)
Savings in a general sense includes the other items like education, car, vacations, and other short-term consumables. Differentiating the two will help you if you intend on using your savings rate to determine when you can FIRE or anything like that. But it is just a tool, so as long as you understand it, you are fine changing it to suit you.
That's the key thing. When people say 'you can retire in x years if you save y%' they're talking about long-term savings.
Saving up for things is certainly better than living paycheck-to-paycheck. Personally since I've been doing this for awhile, I'm happy to just look at my average savings rate for the year. For example it's high now but I know it will drop a bit when I spend on a vacation in the summer.
But if you want more immediate feedback month-to-month or you have savings goals that are +1 years, you could just treat money you're delayed spending as current spending. Technically the value of my health savings account is still an asset that I possess, but since it's there to be spent I list the paycheck deductions towards it as an expense (and then when I use it to pay for things, I don't include include those transactions at all).
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I don't know about the rest of you, but I do plan to eventually spend all the money I end up saving. Does that mean I have a 0% savings rate because all that money {hopefully} won't be in my account when I die?
Personally, I count any money that I move into a savings vehicle as savings, no matter what it's earmarked for. In the future, if I actually do spend it (and there's always the chance that I change my mind and don't spend it), it gets accounted for as an expense and will reduce my savings rate for that year.
For example, I kept a $10k 'dream vacation' account for several years. Last year, I liquidated that account when I was in the process of paying off my mortgage. My savings rate was reduced because I had spent my savings to do this.
The math makes sense to me.
Savings for smaller things (like the watch and vacation in the original example, or my insurance premiums or property tax) would never leave my checking account, and would no be included in my savings rate.
using this logic if i saved 50% of my income just to spend it later on hookers and blow... its still consider savings? yeah i dont think that is true to what 'savings' should be.
most here are talking about their savings rate as it offsets their need for income later.
so paying down mortgages is a savings since you will later not need to spend that money.
money into the 401k, roth, ira, etc is savings since this will later become the income you live off of.
saving up $60k to buy a porsche for cash, or $20k for a world wide cruise, so you dont put in on a CC... not REALLY savings since that money is then gone, never to work toward your FIRE again.
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i am not sure we can simply it this much but i generally think of it like this...
savings = anything you are putting aside that will later become your income. 401k, ira's, roths, brokerage accounts, cash, etc.
spending = everything else. deferred spending (buying a new car next year instead of this year), saved money for bulk cash purchases (vacations, tv's, watches), etc.
^^
this does put paying a mortgage into a gray area though. because the payments are spending, while the equity is kind of savings. however you need a place to live so i only thing that mortgage equity is savings if you are planning to downsize(or move to a lower cost area) in retirement. and then really the only savings there should be the offset between the new purchase and the old equity.
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I don't know about the rest of you, but I do plan to eventually spend all the money I end up saving. Does that mean I have a 0% savings rate because all that money {hopefully} won't be in my account when I die?
Absolutely. When you FIRE and start spending money, you in effect have a negative savings rate. Most will count how much they 'earn' passively in the markets, and the hope is that their earnings continue to equal or exceed their expenditures.
But yes - in retirement you may have a 0% or even -% savings rate, most of the time. For many that's a big mental hurdle to get over after saving 20-50%+ of their income for years.
That was my point (I guess I should have said "does that mean I currently have a 0% savings rate"). If you count savings as savings and spending as spending as it happens, the percentages work out. When you spend your savings, you have a negative savings rate, which is eventually the goal.
using this logic if i saved 50% of my income just to spend it later on hookers and blow... its still consider savings? yeah i dont think that is true to what 'savings' should be.
Yep, it's considered savings until the point in time that you actually buy hookers and blow - then it's an expense, and that month/year, you won't have a 50% savings rate. But up until then, you could change your mind and keep it in savings.
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using this logic if i saved 50% of my income just to spend it later on hookers and blow... its still consider savings? yeah i dont think that is true to what 'savings' should be.
Yep, it's considered savings until the point in time that you actually buy hookers and blow - then it's an expense, and that month/year, you won't have a 50% savings rate. But up until then, you could change your mind and keep it in savings.
the problem i have is calling money that you are specifically earmarking for spending really shouldnt be called savings.
lots of people are not going to earmark money for a purchase they want to make, just to save up for X duration and decide to drop it in the retirement account, when they are already dropping 20, 30, or 50% in retirement.
we can argue it either way because via a technicality, putting the money aside and not spending it is savings.
but if i am planning to spend that money, i wont consider it savings.
i mean if i dump $500/mo into savings but then plan to spend $400/mo on clothes... i am not REALLY saving $500/mo. its only $100/mo.
looking at localized savings rates makes some weeks/months seem more rosy than they are.
i think if you are going to perform delayed spending like this, than your savings rate really needs to include that delayed spending savings period, and the point in which you 100% decide NOT to make that purchase or you make that actual purchase.
so if you are trying to save $20k for that world wide cruise and its a 2 yr period... you add up you income for that period and savings as well. then work up your rate for spending and not spending that money.
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You can call it whatever you want. You can call the money for hookers and blow honkerdonk cash money if you'd like.
But what is your GOAL?
Goal A) Retire financially independent. Need to know Annual Expenses and Investable Assets. Assuming you blow all this "savings" before your retirement date, you know that this is not going to end up in your Investable Assets, but also that your Swiss Watch purchase will happen before then too and will not go into your Annual Expenses. Calculate accordingly. (If you decide later that retiring early by not spending your fun money is worthwhile, adjust calculations. But once you spend... you can't change your mind!)
Goal B) Some fun stuff. You are "saving" for this stuff. It is not being spent now because it will be spent later. Just like most savings. It's just not investable, at least - it won't be if you spend it within a time frame that is too short to reasonably/wisely invest it. Hopefully. it's not an annual expense. But sometimes vacations and cars and watches become things we want to buy again and again.
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You can call it whatever you want. You can call the money for hookers and blow honkerdonk cash money if you'd like.
But what is your GOAL?
Umm.... I think everyone knows what the "goal" is when spending money on a hooker - there's kind of an expected conclusion to that transaction ;-)