Author Topic: How do you calculate your savings rate?  (Read 7641 times)

Thoughtful Mule

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How do you calculate your savings rate?
« on: September 23, 2014, 01:35:52 PM »
I'd be interested to learn how you other mustachians calculate your savings rate? The internet seems to be inconclusive on this seemingly simple matter.

Here's how I've been doing it. I divide savings into four categories and use the sum.

  • First is before tax retirement savings (401K and HSA).  This gets divided by gross income
  • Next is after tax retirement savings (roth IRA).  This $ amount is divided by net (after tax) income.
  • Then comes after tax cash savings (savings account for real estate purchases).  Again divided by net income
  • Finally (and controversially) is principal paydown  (personal and rental property, student loans). $ amount knocked off principal divided by net income.



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skunkfunk

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Re: How do you calculate your savings rate?
« Reply #1 on: September 23, 2014, 01:51:25 PM »
I think we all have this issue. I like to think of your fourth one as "this will eventually be my savings rate at current pace."

I think I like your way of doing it, I'm going to do that for a few months and see what I find.

Edit: 60.8%. Now if I use this for retirement age will it be accurate? No. Tax rates, some of the interest will go to investments, return will vary based on asset and loan rate, blah blah blah.
« Last Edit: September 23, 2014, 01:57:08 PM by skunkfunk »

retired?

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Re: How do you calculate your savings rate?
« Reply #2 on: September 23, 2014, 02:00:58 PM »
I would do "post tax", so you are capturing the amount you save that is actually available for saving in the first place.  Granted 401k, etc. can alter your taxes.

But, does it really matter specifically how you do it as long as it is reasonable?  The goal of knowing this is so you can adjust if go below (or get ahead).  i.e. if you save 30% under one measure, but 20% under another measure, it is still the same amount of savings.

My suggestion is to choose a metric and stick with it.  And, if you are comparing your savings rate to "guidelines", then simply know how the guideline defines savings rate.

dragoncar

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Re: How do you calculate your savings rate?
« Reply #3 on: September 23, 2014, 02:22:00 PM »
At this point, I just pick a random number.

Zaga

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Re: How do you calculate your savings rate?
« Reply #4 on: September 23, 2014, 02:25:51 PM »
I agree, as long as you stick with one method then you are fine IMO.

Since you asked for people's calculations, here is the one I have in my spreadsheet:

Numerator, amount saved:
Debt principle reduction + total contributed to retirement accounts (including employee match)

Denominator, net income:
Paycheck amounts + tax refund (or - amount owed for federal taxes) + 401-K contributions

This is a yearly calculation for me, I don't worry about month to month since so many things vary throughout the year.

NumberCruncher

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Re: How do you calculate your savings rate?
« Reply #5 on: September 23, 2014, 02:30:04 PM »
At this point, I just pick a random number.

+1 

Savings rates are maybe useful initially, or to use for bragging rights, but after you have a plan and are on track with your favorite retirement calculators, it just becomes pointless.

Actual spending levels are more impressive to me. :)  Spending levels are also *somewhat* easier to compare and to use as learning experiences (varies depending on region, of course).

boarder42

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Re: How do you calculate your savings rate?
« Reply #6 on: September 23, 2014, 02:37:26 PM »
everytime i save a dollar i add 1 to my savings rate.  at the end of the year i count the hash marks on my wall and thats how many dollars i saved.  really gets time consuming with the penny wall though.

arebelspy

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Re: How do you calculate your savings rate?
« Reply #7 on: September 23, 2014, 02:46:39 PM »
At this point, I just pick a random number.

I recommend you pick a high one then.
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Cheddar Stacker

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Re: How do you calculate your savings rate?
« Reply #8 on: September 23, 2014, 02:51:52 PM »
At this point, I just pick a random number.

+1 

Savings rates are maybe useful initially, or to use for bragging rights, but after you have a plan and are on track with your favorite retirement calculators, it just becomes pointless.

Actual spending levels are more impressive to me. :)  Spending levels are also *somewhat* easier to compare and to use as learning experiences (varies depending on region, of course).

+ 2

My savings percent is > average and < mustachian. It's somewhere in the 45-55% range I think, but I really don't care much where it falls in that range since it results in a lot of savings. I would prefer it be 75% but there are circumstances outside of my control bringing it down. Meh.

For the record though, anyone not counting debt principle as savings is fooling themselves. If you use hard earned cash to increase your net worth, it's savings.

wtjbatman

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Re: How do you calculate your savings rate?
« Reply #9 on: September 23, 2014, 02:54:33 PM »
Once I save 100% I win, right?

Thoughtful Mule

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Re: How do you calculate your savings rate?
« Reply #10 on: September 23, 2014, 02:55:50 PM »
At this point, I just pick a random number.

+1 

Savings rates are maybe useful initially, or to use for bragging rights, but after you have a plan and are on track with your favorite retirement calculators, it just becomes pointless.

Actual spending levels are more impressive to me. :)  Spending levels are also *somewhat* easier to compare and to use as learning experiences (varies depending on region, of course).

I think you guys are hitting the nail on the head.  By itself the number is only a tool for whatever purpose you choose.  I personally like it as a metric because it includes both income and expenses.

I made a small tweak and it kinda threw off my tracking, which is what spurred my original post. The important thing is to clearly understand what the number represents.

dragoncar

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Re: How do you calculate your savings rate?
« Reply #11 on: September 23, 2014, 03:11:16 PM »

For the record though, anyone not counting debt principle as savings is fooling themselves. If you use hard earned cash to increase your net worth, it's savings.

On the downside, I have to consider my home purchase a giant expense.  I guess my savings rate was very negative this year.

pichirino

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Re: How do you calculate your savings rate?
« Reply #12 on: September 23, 2014, 07:33:22 PM »
How do bonus' work into this?

Do ya consider bonus' part of the income or leave this out of the calculation?
I ask this because considering I use my bonus' for my living costs my savings rate when considered by salary would be extremely high,even by Jacob's (ERE) standards.

dude

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Re: How do you calculate your savings rate?
« Reply #13 on: September 24, 2014, 06:40:49 AM »
I think savings rate matters psychologically when you consider MMM's classic "The Simple Math Behind Early Retirement."  Obviously, there's more to planning successful FIRE, but knowing what percentage of your money is going toward that goal can be pretty satisfying in itself.

Dezrah

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Re: How do you calculate your savings rate?
« Reply #14 on: September 24, 2014, 09:18:53 AM »
I look at it this way, everything that comes in is allocated into one of four categories:
1) Paying for the past
   -Debt minimums
   -Accelerated debt payments
2) Paying for the present
        -discretionary expenses
        -non-discretionary expenses
3) Paying for the future
   -retirement deposits
   -earmarked short-term savings
   -HSA transfers
   -includes employer matching
   -anything left over
4) Taxes
   -Hybrid of all three previous categories

I guess you could say I look at everything in terms of gross and pre-tax amounts.  I try to maintain a balance the best I can for all these categories according to our specific situation.  Eventually the debt will go away and we’ll have the option of splitting that amount between the present and future. 

The only item I find a little tricky to allocate is home mortgage payments; it’s simultaneously a non-discretionary bill, debt in the form of a loan, and future savings since the paid down principal is theoretically available immediately in the form of a HELOC.  We only rent now, so it will be a while until I have to figure this out.

Here’s my current breakdown.  Note that this is for a pair of married, professional DINKS.
Past: 21%
Present: 34%
Future: 27%
Taxes: 18%

deborah

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Re: How do you calculate your savings rate?
« Reply #15 on: September 24, 2014, 11:15:29 PM »
Before I was RE -

(my bank balance now - my previous bank balance + what my pay slip said I had put into funds) / (my after tax pay from my pay slip + what my payslip said I had put into funds)

This obviously didn't include any matching, or how much my savings were earning, so it was a bit wrong.

sobezen

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Re: How do you calculate your savings rate?
« Reply #16 on: September 25, 2014, 05:43:48 PM »
Stupid question: Does anyone know of any online calculators that help accurately calculate your savings rate? Thanks.

boarder42

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Re: How do you calculate your savings rate?
« Reply #17 on: September 25, 2014, 06:12:50 PM »
just use excel.  seriously.  its simple math.  add up what you saved and divide that buy what you earned.  here is the formula

 Total savings / total after tax earnings = savings rate. 

its a tough one. 

Total savings = total retirement saving + house principal


Caoineag

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Re: How do you calculate your savings rate?
« Reply #18 on: September 25, 2014, 07:46:42 PM »
Since I treat taxes as an expense that can be reduced (which it can to a certain point), everything is calculated off of gross.

Makes comparing my number to others less impressive but I am perfectly comfortable with that (~45%).

Zikoris

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Re: How do you calculate your savings rate?
« Reply #19 on: September 25, 2014, 11:17:22 PM »
On January 1st I open up Mint and pull up my total expenses and net income for the past year. I divide one by the other and get a number that makes me happy. So far anyways.

I don't do the monthly thing because my expenses and income fluctuate wildly, and I would get anything from 5% savings to 90% savings - pretty useless numbers in my mind. If you have a more stable life, a monthly calculation works fine.

DaKini

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Re: How do you calculate your savings rate?
« Reply #20 on: September 26, 2014, 01:20:28 AM »
I do it all post-tax with real available money to my household. I find this important since i cant know tax laws. If i manage to save taxes, this usually results in a tax refund or materializes as higher net income.

I made a report in my accounting software (btw opensource: kmymoney2) showing me sum of income, sum of expenses and the sum of both (equals net savings of the month; this/income=savings-rate). This generates a nice monthly graph revealing trends and correlations.
I find it way more usueful to see my fluctuations and "my" trends in relation, as i can see clearly wether spending had just a single peak or if it is trending upwards; or if i had a single bump in income or if it is declining constantly. This tells a way more complete story opposed to the savings-rate and allows for easy adjustment; especially as i see clear dollar (well, euro in my case) values.

For example, if my spending had a peak, i usually can see that the overall trend revolves around the long term average. This menas everything is fine (its just normal fluctuation). If the spending level would have slowly sneaking up i would see that there may a problem somewhere.

boarder42

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Re: How do you calculate your savings rate?
« Reply #21 on: September 26, 2014, 08:20:18 AM »
to the comment about doing it off of gross ... the only reason to calc a savings rate is to put it in the chart MMM has in shockingly simple math.... savings rate calc is completely useless otherwise.  and that chart assumes after tax so all these calcs should be after tax ...

what you really should concern your self with is..  HOW MUCH DO I SPEND?... OR  HOW MUCH WILL I SPEND IN RETIREMENT?

figure that out

then take your savings for every year and multiply it by 6% compounding then do what ever SWR you are comfortable with i use .035 so i have a buffer and that will tell you how many years you have to work.  or at least get you in the ball park.  when that number is larger than your spend you can retire

Proud Foot

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Re: How do you calculate your savings rate?
« Reply #22 on: September 26, 2014, 12:24:35 PM »
This is the first year I have found MMM and have thought about my savings rate but here is how I will calculate it.

Numerator = 403(b) contributions + HSA Contributions +Reduction in Debt Principal +/- In/decrease in bank savings accounts*

Denominator = Gross Wages + Side Income - Taxes Withheld +/- Tax Refund/Payment

* I use these for an emergency fund and sinking funds for large expenses I know I will have throughout the year (Insurance, Repairs & Maintenance)

I also don't calculate any matching on retirement contributions from my work as I want to calculate based upon money that could actually go into my pocket immediately if I were to chose so.

Unkempt Stash

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Re: How do you calculate your savings rate?
« Reply #23 on: September 26, 2014, 01:16:05 PM »
I am doing the same calculations as everyone else, mostly.

I like seeing my savings rate. It let's me know if I need to continue to tighten screws or if I am living the lifestyle I want while saving at a decent rate

My modifications to the formula everyone else is using:
1. I am not counting debt principle payments on things that are not sellable. House: yes. Credit card, student loans: no.
In my opinion, the principle on those debts is the same as the interest, just something to get out from under.

2. I am counting alimony and child support as 'taxes' and this not dividing by that portion of my income. Effectively it is a bill that I cannot reduce or avoid. it's easier to think of it as a reduction in income rather than an expense.

Handlebar Harry

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Re: How do you calculate your savings rate?
« Reply #24 on: October 16, 2014, 08:04:49 AM »
Numerator = 403(b) contributions + HSA Contributions +Reduction in Debt Principal +/- In/decrease in bank savings accounts*

Denominator = Gross Wages + Side Income - Taxes Withheld +/- Tax Refund/Payment

Proud Foot's calculation makes the most sense to me because I've been throwing 50% of my paycheck to extra debt reduction. This equations accounts for that.

Spork

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Re: How do you calculate your savings rate?
« Reply #25 on: October 16, 2014, 08:24:42 AM »
Short answer is: figure out something.  Be consistent.

My longer answer is: just use the normal accounting principles.

((income - expenses) / income) * 100

Anything else is (IMO) theoretically wrong... and just too complicated.

This does assume that you correctly identify what is "income", "expense", "asset" and "liability".  But: That isn't too hard.