The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: patrickza on August 27, 2015, 06:15:00 AM
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Do you include or exclude dividends etc?
If I earn $5000 in salary, and $1000 in dividends per month, but only spend $1000 a month, is my savings rate 100% of my salary, or is it 83.3% of my income?
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You're not calculating your rate to compare to others - just to see your own progress and if you want to figure out when you're financially independent. So what matters is how fast your savings grow in comparison to your expenses. In your example, if you start with $100,000 getting 12% dividend returns ($1000 per month) and $5000 in salary... and you only spend $1000.
Year 0 $100,000 spending $12,000
Year 1 $160,000 spending $12,000
Year 2 $227,200 spending $12,000
Year 3 $302,464 spending $12,000 - You're FI!
Now you probably still want to figure out a percentage. I would say it's 83.3% because salary is just one source of income. Investment returns, freelance and any other way you earn money increases your financial engine.
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I don't include dividends, I ignore it, it would boost my numbers if I calculated with my savings rate.
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Amount of money put into savings accounts (including retirement and investment accounts) divided by gross salary.
We don't include dividends or company matches. Only money I transfer there from my paycheck.
I don't use net salary, because I consider taxes as an expense. They are without a doubt my greatest expense category.
I use the value of my house minus the remaining mortgage to calculate my net wealth, but I do not consider principal payments to the house to be "savings". Until I sell the house and add that money to accounts, it is not money I have.
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A few other (kind of) related questions...
(1) Is "income" net income (after taxes) or gross income?
(2) If it is net income, do you just add 401k on top of your net income?
(3) Do you include paying off debt in your savings rate?
I guess I'm looking for a bit of a more detailed formula than "money put into savings/investment accounts divided by income" so I can really see where I'm at with my current savings rate.
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http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/
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401k's, IRA's, HSA, + savings account (down payment fund, etc) / Gross Salary. If we had debt payments like a mortgage I'd probably count that too, but we don't currently.
Yeah before tax / after tax shenanigans might sway it one way or the other but the most important thing is that YOU calculate it the same way every time.
You should be comparing against yourself for the most part, not others, so the goal is consistency and continuous improvement.
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I don't calculate the gross part because the taxes you pay is not something you have any control over.
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I don't calculate the gross part because the taxes you pay is not something you have any control over.
Sure it is.
There are lots of things you can do to reduce your tax liability.
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401k + Roth IRAs + HSA contributions/ gross incomes + tax refunds. The tax refunds are refundable credits, not return of withholdings, so are definitely on top of earned income.
Taxes paid/refunded can definitely be influenced - our refunds are carefully maximized by contributions to the HSA and tax deferred accounts. Contributions to the HSA have a nearly 50% return for us, tax wise, between FICA + state + fed taxes avoided and EITC and state matched EITC phaseouts avoided. 401k contributions don't avoid FICA, but otherwise are similar, until we reach fed taxable income = 0, but EITC are the lion's share of credits, anyways.
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The problem with using gross income is that the inverse of your savings is not indicative of your expenses in retirement. MMM's handy table (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) doesn't work with gross income.
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Amount of money put into savings accounts (including retirement and investment accounts) divided by gross salary.
We don't include dividends or company matches. Only money I transfer there from my paycheck.
I don't use net salary, because I consider taxes as an expense. They are without a doubt my greatest expense category.
I use the value of my house minus the remaining mortgage to calculate my net wealth, but I do not consider principal payments to the house to be "savings". Until I sell the house and add that money to accounts, it is not money I have.
I'd argue that it's savings. You are increasing your assets. You can always open up a heloc to get that equity. Just because you're not planning on using it any time soon (identical to your 401ks) doesn't mean it's not savings. It's just in a super non-liquid form. Regardless, the point of any of this is to really compare to yourself and whether or not you're improving.
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The problem with using gross income is that the inverse of your savings is not indicative of your expenses in retirement. MMM's handy table (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) doesn't work with gross income.
MMM's handy chart is just a simplification, it doesn't handle lots of unique situations. It doesn't account for having a partial stache already started. It doesn't adjust for changes in income along the way, or conversely changes in expenses. It is just an example to get the uninitiated fired up about the possibilities. Once you are on the path, you develop a more nuanced approach to when you achieve FIRE.
My expenses in fire will be very different from now: healthcare costs, empty nest, may relocate, etc.
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I wouldn't include dividends or any other investment returns in calculating "savings rate." I can see payroll taxes either way, but lean towards excluding them (but not excluding medical plan and retirement contributions that are also deducted from most people's checks.
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I'd argue that it's savings. You are increasing your assets. You can always open up a heloc to get that equity. Just because you're not planning on using it any time soon (identical to your 401ks) doesn't mean it's not savings. It's just in a super non-liquid form. Regardless, the point of any of this is to really compare to yourself and whether or not you're improving.
By that logic, everything I own can be considered savings. I could sell off ANY of my belongs. Most of the stuff I own wouldn't be super liquid, but I probably could sell it.
To me, my house is a good I purchased. It's spending, not savings.
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The problem with using gross income is that the inverse of your savings is not indicative of your expenses in retirement. MMM's handy table (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) doesn't work with gross income.
MMM's handy chart is just a simplification, it doesn't handle lots of unique situations. It doesn't account for having a partial stache already started. It doesn't adjust for changes in income along the way, or conversely changes in expenses. It is just an example to get the uninitiated fired up about the possibilities. Once you are on the path, you develop a more nuanced approach to when you achieve FIRE.
My expenses in fire will be very different from now: healthcare costs, empty nest, may relocate, etc.
I agree. A formula that would work for everyone would be too complicated.
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I'd argue that it's savings. You are increasing your assets. You can always open up a heloc to get that equity. Just because you're not planning on using it any time soon (identical to your 401ks) doesn't mean it's not savings. It's just in a super non-liquid form. Regardless, the point of any of this is to really compare to yourself and whether or not you're improving.
By that logic, everything I own can be considered savings. I could sell off ANY of my belongs. Most of the stuff I own wouldn't be super liquid, but I probably could sell it.
To me, my house is a good I purchased. It's spending, not savings.
I think your're nitpicking. It may be arbitrary but I don't include my cars in my NW. I think you can say something that you can "reasonably" convert into cash in ~1 month. Getting a HELOC isn't that big of a deal.
Maybe you could argue it's something that you can borrow against? I don't know. I just know that when I'm "spending" money by putting principal payments, it's not disappearing like when I purchase something from the store. Completely different.
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Do you carry a mortgage? I mostly include the purchase price of my apartment in my net worth calculations to balance out the mortgage.
As I said previously, I consider my home value in my net worth; because it is a significant asset. But I don't consider payments towards it as any part of my savings rate.
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Do you include or exclude dividends etc?
If I earn $5000 in salary, and $1000 in dividends per month, but only spend $1000 a month, is my savings rate 100% of my salary, or is it 83.3% of my income?
I think we all do this in slightly different ways, but the "simple maths" surely assumes that the rate of investment return includes re-investment of dividends, otherwise the prediction of a long-term 7% investment return average would need to be reduced.