Author Topic: Savings Based on Gross or Net?  (Read 3389 times)

NWOutlier

  • 5 O'Clock Shadow
  • *
  • Posts: 91
  • Age: 50
  • Location: Seattle Area
Savings Based on Gross or Net?
« on: September 20, 2014, 12:39:15 PM »
Hi Everyone,

I'm confident this question has been asked before, but I must know for myself. (and I can't find it yet in the forum).  when I calculate my savings rate:  I add the total deposited into all accounts, 401k, IRA, taxable, and 401k matching...  to simplify the problem, let's use round numbers.

Gross Pay 100,000
Savings 45,000
-----------------------
Savings Rate = 45%

is the right way to calculate savings rate at gross or net income?  if I based it on net income, clearly I would have a higher savings rate, but what's considered the "right way" - this will give me a clearer picture of when I can retire...

thanks in advance,

Steve

dividendman

  • Handlebar Stache
  • *****
  • Posts: 1127
  • Age: 36

ender

  • Magnum Stache
  • ******
  • Posts: 4734
Re: Savings Based on Gross or Net?
« Reply #2 on: September 20, 2014, 01:23:00 PM »
It doesn't really matter, as long as you understand the metric.


If you are using MMM's shockingly simple calculating you want based on takehome-income (plus 401k/etc added in).

I don't even bother calculating a savings rate, though I have a ballpark one. In the end what really matters is how much I spend vs what my total assets are.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 35
  • Location: Missouri
Re: Savings Based on Gross or Net?
« Reply #3 on: September 20, 2014, 03:08:04 PM »
If you can max a 401k, IRA, and put money into taxable accounts... you're saving more than enough. Keep it up, retire when your stash gets large enough to support whatever SWR you feel comfortable retiring on/supports your spending. Who gives a shit what your savings rate is?

shuffler

  • Bristles
  • ***
  • Posts: 315
Re: Savings Based on Gross or Net?
« Reply #4 on: September 20, 2014, 03:41:10 PM »
is the right way to calculate savings rate at gross or net income?
People do it both ways.  The right way is whatever works for you.

Like enderland, I don't personally think about savings rate too often.  But when I do, I like to compute it using gross-income like you've done in your example.  My primary reason for doing it that way is because if I didn't include taxes (etc.) in that equation then I would have less incentive to look for ways to lower my taxes.  Taxes are an expense, just like anything else.  If you keep them in your measurements, then you're more likely to improve (i.e. lower) them.  My secondary reason for using gross-income is simply that it'll show a lower savings rate, giving me a small mental kick-in-the-pants to save more.

clarkfan1979

  • Handlebar Stache
  • *****
  • Posts: 1850
  • Age: 40
  • Location: Kauai & Denver
Re: Savings Based on Gross or Net?
« Reply #5 on: September 20, 2014, 05:40:27 PM »
I believe in basing your savings rate based on gross and would consider it to be consistent with this blog. A big part of achieving a high savings rate is avoiding taxes legally. Some people earn a very high gross, pay a shitload of taxes and inhibits their savings rate. Those who max out their tax deferred accounts can achieve a higher gross savings rate.

NWOutlier

  • 5 O'Clock Shadow
  • *
  • Posts: 91
  • Age: 50
  • Location: Seattle Area
Re: Savings Based on Gross or Net?
« Reply #6 on: September 22, 2014, 09:10:37 PM »
Thanks everyone,

I wish there were 'like' buttons for each of the responses I've read.  I'll go back and review MMM's article, and calculate the rate @ both gross and net and see how it plays out.

I've always just wanted to know the % so I can get an idea of how many years it may take to save.

Regards,

Steve