### Author Topic: Shockingly Simple Math question  (Read 27739 times)

#### themush

• 5 O'Clock Shadow
• Posts: 7
##### Shockingly Simple Math question
« on: July 18, 2013, 10:06:57 PM »
Hi,

We're currently saving 47% of our take home pay. I'm also contributing to my 401k - 5% from me, 4% employer match.  My wife contributes 13% to 401k.

Does this mean 47 + 9 + 13 = 69% savings rate? And I'm currently ~8.5 years from retirement?

#### napalminator

• 5 O'Clock Shadow
• Posts: 71
• Age: 39
• Location: Denver
##### Re: Shockingly Simple Math question
« Reply #1 on: July 18, 2013, 10:23:29 PM »
are the 401k savings amounts based on your gross pre-tax pay, or your after-tax/"take-home" pay?  that's the key point.

if you want to figure it out, put everything in dollar amounts, not percentages, and work with that.

#### Lans Holman

• Bristles
• Posts: 276
• Location: North by Northwest
##### Re: Shockingly Simple Math question
« Reply #2 on: July 18, 2013, 10:34:33 PM »
Also, you can't take a percentage based on both of your pay (the 47) and add it to a percentage of your pay and then a percentage of hers.  They need to be percentages of the same thing.  The dollar amount approach sounds good.

#### pom

• Bristles
• Posts: 288
• Location: Paris, France
##### Re: Shockingly Simple Math question
« Reply #3 on: July 19, 2013, 04:41:17 AM »
It's probably more like 47 + 9 x (your pay/total pay) + 13 x (her pay/total pay) so probably something in the order of 57%-59% depending on your respective pay.

Anyway 8.5 is a guideline only, the calculation has a few underlying assumptions that may or may not pan out. Take it as a good ballpark estimate.

#### matchewed

• Magnum Stache
• Posts: 4319
• Location: CT
##### Re: Shockingly Simple Math question
« Reply #4 on: July 19, 2013, 04:46:40 AM »
I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

#### ToeInTheWater

• Stubble
• Posts: 137
• Location: Central Indiana
##### Re: Shockingly Simple Math question
« Reply #5 on: July 19, 2013, 05:12:07 AM »
from the article:

Quote
** definition of take-home pay: gross income minus all taxes. Remember to add back in any 401k or other savings deductions to the paycheck you see, since these are really part of what you are “taking home” – you just happen to be saving it automatically.

when applying the "simple math" you need to use this definition of "take home pay"

so for matchewed's example:

gross:        100K
less taxes:  (15K) (guess)
take home:  85K

savings:  50K + 10K (in 401k) + 4K match (assuming it's vested) = 64K.
believe you can also count mtg principal payments as well.

simple math savings rate:  64K / 85K = 75%

-------------

just re-did the calcs for ours.  using the same 100K for the gross using 2012 actuals.

gross:             100K
tax:                 ( 23K)
take home:        77K

savings:
401Ks            14.4K
mtg princ:      23.3K
savings:         37.7K

savings rate:  37.7 / 77K = 49%

projected '13: 61%

b

#### oldtoyota

• Magnum Stache
• Posts: 3123
##### Re: Shockingly Simple Math question
« Reply #6 on: July 19, 2013, 07:11:32 AM »
Is this what you need? I asked a similar question and got this handy formula in reply:

Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.
« Last Edit: July 19, 2013, 07:14:47 AM by oldtoyota »

#### MissStache

• Pencil Stache
• Posts: 710
• Age: 36
• Location: Washington, DC
##### Re: Shockingly Simple Math question
« Reply #7 on: July 19, 2013, 07:45:44 AM »
Is this what you need? I asked a similar question and got this handy formula in reply:

Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

HOLY CATS!  That's the best calculation I've seen.  Simple indeed.   Thank you!

#### velocistar237

• Handlebar Stache
• Posts: 1422
• Location: Metro Boston
##### Re: Shockingly Simple Math question
« Reply #8 on: July 19, 2013, 08:36:35 AM »
This is what goes into the model in the shockingly simple math post:

savings rate = (annual savings)/(annual savings + predicted annual retirement expenses)

(Annual savings excludes interest income.)

Current expenses are a good proxy for retirement expenses, and oldtoyota's formula is a good one for estimating savings rate from current numbers.

In your case, if you and your wife both earn the same amount, and you pay 10% taxes, then your actual savings rate by oldtoyota's formula is about

(0.5*(0.09+0.13)+0.9*(1-0.05-0.13)*0.47)/(0.9*(1-0.05-0.13)+0.5*(0.09+0.13)) = 54%

That's about 15 years to retirement starting from zero net worth, maybe a little less with a mortgage, but my guess is that your savings rate will go up to 60-75% in a few years. You could very well retire in less than 10 years if you keep at it.

Out of curiosity, will getting one number rather than another change what you actually do? Do you have a target retirement year?

#### KatieSSS

• Bristles
• Posts: 433
• Location: DC
• "Because of your badassity, babe!" - My GoudaMan
##### Re: Shockingly Simple Math question
« Reply #9 on: July 19, 2013, 08:52:55 AM »
Is this what you need? I asked a similar question and got this handy formula in reply:

Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

#### oldtoyota

• Magnum Stache
• Posts: 3123
##### Re: Shockingly Simple Math question
« Reply #10 on: July 19, 2013, 09:21:58 AM »
Is this what you need? I asked a similar question and got this handy formula in reply:

Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

Sounds great! When you are done with the loans, you can send that money to retirement! As you know. I just said it because it makes me happy. =-)

#### KatieSSS

• Bristles
• Posts: 433
• Location: DC
• "Because of your badassity, babe!" - My GoudaMan
##### Re: Shockingly Simple Math question
« Reply #11 on: July 19, 2013, 09:37:09 AM »
Is this what you need? I asked a similar question and got this handy formula in reply:

Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

Sounds great! When you are done with the loans, you can send that money to retirement! As you know. I just said it because it makes me happy. =-)

Yes, I almost wrote something like, "And when I'm done paying those loans off then that money can go towards retirement!"

#### themush

• 5 O'Clock Shadow
• Posts: 7
##### Re: Shockingly Simple Math question
« Reply #12 on: July 19, 2013, 09:51:45 AM »

Out of curiosity, will getting one number rather than another change what you actually do? Do you have a target retirement year?

It shouldn't change anything too much - I'd just been working with the cash savings alone. We're just now getting out of credit card and car debt. We have some student loan debt that we'll be working on, but I'd like to start investing alongside that as to not miss roth contributions. But really, we both want to be done working as soon as possible and the idea of boosting our savings rate by 20% was really exciting.

#### backyardfeast

• Pencil Stache
• Posts: 899
• Location: Vancouver Island, BC
##### Re: Shockingly Simple Math question
« Reply #13 on: July 19, 2013, 11:52:44 AM »
Quick follow-up question, probably obvious, if you'll excuse the newbie. :)

Many of us are starting from negative net worth and our "savings" \$\$s are actually paying off debt.  Do the "years to retirement" numbers apply right away?  Or do we wait until we are at zero net worth to start counting?  Confusing, because mortgage principle is considered savings, but I'm not sure that student loan pmts, etc (although generating a return in the short term, and technically moving us closer to our goals) are actually accumulating the wealth and compounding benefits that the simple formula assumes?

Thanks!

#### velocistar237

• Handlebar Stache
• Posts: 1422
• Location: Metro Boston
##### Re: Shockingly Simple Math question
« Reply #14 on: July 19, 2013, 11:58:56 AM »
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

#### steveo

• Handlebar Stache
• Posts: 1944
##### Re: Shockingly Simple Math question
« Reply #15 on: July 19, 2013, 03:25:15 PM »
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

This makes sense to a point for me. I think I have to start from the point of paying off the mortgage in full because I need to live in a house. So for me mortgage paid off then save for retirement.

I might be being a little conservative here but I think it is the safer approach.

#### themush

• 5 O'Clock Shadow
• Posts: 7
##### Re: Shockingly Simple Math question
« Reply #16 on: July 19, 2013, 03:53:47 PM »
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

Would this mean that early retirement is more easily achieved by buying a house? I'm a renter at the moment.

#### matchewed

• Magnum Stache
• Posts: 4319
• Location: CT
##### Re: Shockingly Simple Math question
« Reply #17 on: July 19, 2013, 04:12:08 PM »
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

Would this mean that early retirement is more easily achieved by buying a house? I'm a renter at the moment.

Not necessarily. It all depends on the math behind it. There are areas in the country where renting will be more cost effective even over the long term. There are areas where buying a house will be more effective. This depends on many factors such as your time frame of where you want to buy/rent and what the market for renters and buyers is like.

#### Eric

• Magnum Stache
• Posts: 4061
• Location: On my bike
##### Re: Shockingly Simple Math question
« Reply #18 on: July 19, 2013, 04:18:09 PM »
The numbers apply starting from zero net worth. The principal payments are moving you toward retirement, though, so they should still be considered part of your savings.

Would this mean that early retirement is more easily achieved by buying a house? I'm a renter at the moment.

Not necessarily. It all depends on the math behind it. There are areas in the country where renting will be more cost effective even over the long term. There are areas where buying a house will be more effective. This depends on many factors such as your time frame of where you want to buy/rent and what the market for renters and buyers is like.

Right.  If you live somewhere where rent prices are much cheaper than mortgage payments, in NYC or SF for example, it's probably more advantageous to rent.  If you live somewhere where rent prices are similar to mortgage prices, then it's generally more advantageous to buy.

#### velocistar237

• Handlebar Stache
• Posts: 1422
• Location: Metro Boston
##### Re: Shockingly Simple Math question
« Reply #19 on: July 19, 2013, 05:06:36 PM »
By the way, you can still use the equation here with negative net worth, just set AoE negative. To account for interest rate differences, it's probably better to just use a spreadsheet.

#### CorpRaider

• Bristles
• Posts: 415
##### Re: Shockingly Simple Math question
« Reply #20 on: July 19, 2013, 07:37:24 PM »
Can I just use the reciprocal or invert the spending rate over the take-home and just include debts as negative net worth to get there?  Seems simpler to to me.  Controlling the spending is the real point of emphasis here, right?

#### velocistar237

• Handlebar Stache
• Posts: 1422
• Location: Metro Boston
##### Re: Shockingly Simple Math question
« Reply #21 on: July 19, 2013, 08:09:06 PM »
Can I just use the reciprocal or invert the spending rate over the take-home and just include debts as negative net worth to get there?  Seems simpler to to me.  Controlling the spending is the real point of emphasis here, right?

Sure, if the time horizon is short, or for a conservative answer, you can ignore ROI.

T = (1-SR)/SR*(1/SWR-AoE)

For zero AoE and SR of 50%, it overestimates by 8 years for a 4% real return.

#### dragoncar

• Walrus Stache
• Posts: 8516
• Registered member
##### Re: Shockingly Simple Math question
« Reply #22 on: July 19, 2013, 11:38:23 PM »
All this math it too complicated.  I prefer the following method:

1) "Just one more year"
2) Goto 1

#### velocistar237

• Handlebar Stache
• Posts: 1422
• Location: Metro Boston
##### Re: Shockingly Simple Math question
« Reply #23 on: July 20, 2013, 06:02:38 AM »
All this math it too complicated.  I prefer the following method:

1) "Just one more year"
2) Goto 1

while AoE < 1/SWR
save
endwhile

#### ender

• Magnum Stache
• Posts: 4734
##### Re: Shockingly Simple Math question
« Reply #24 on: July 20, 2013, 06:11:47 AM »
I am very content with my savings rate - I currently save between 401k (including company match), HSA, Roth IRA, and cash savings about 60% of my pretax salary.

Calculations in this thread put that closer to 75% (!).

Only going to go up for the time being as any raises I get are going to go directly into the 401k until that is maxed.

#### oldtoyota

• Magnum Stache
• Posts: 3123
##### Re: Shockingly Simple Math question
« Reply #25 on: July 20, 2013, 07:58:59 AM »
I think the post by MMM is amazing, helpful and possibly revolutionary. I've done a LOT of reading over the years starting with fool.com many moons ago when the RE guy (john??) was using the boards heavily.

What I never heard about and never learned was how important savings rate as a percentage of take-home pay was to an early retirement date. What I mostly heard was that stocks were important and keeping costs low was important.

I will always be grateful to MMM for this post. That said, it seems people have a lot of questions about it and I think including the formula above would really help people out. If any of you talk to MMM, please consider suggesting that. I mention this because I think this is a VERY important topic and people need to understand it 100%.

« Last Edit: July 20, 2013, 09:03:22 AM by oldtoyota »

#### oldtoyota

• Magnum Stache
• Posts: 3123
##### Re: Shockingly Simple Math question
« Reply #26 on: July 20, 2013, 08:02:30 AM »
All this math it too complicated.  I prefer the following method:

1) "Just one more year"
2) Goto 1

This reminds me of BASIC. Anyone else a former or current computer nerd?

10: LET retirement equal one year
20: IF retirement equals 500,000 THEN GOTO 10

Or something like that. It's been a long time.

#### arebelspy

• Senior Mustachian
• Posts: 27766
• Age: -999
• Location: Traveling the World
##### Re: Shockingly Simple Math question
« Reply #27 on: July 20, 2013, 08:54:42 AM »
Yup, I thought of the same thing, but unfortunately it had us working until we die.  Poor programming instilled by society.

Velocistar got us out of that loop though with a fancy while statement!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

#### notquitefrugal

• Stubble
• Posts: 193
##### Re: Shockingly Simple Math question
« Reply #28 on: August 14, 2013, 08:56:31 PM »
This appears to be the most recent topic about savings rates. Not to be overly pedantic, or to beat a dead horse, but:
1. I pay self-employment tax (and pay my own quarterly estimated taxes) on 100% of my earnings. I know the average of what my quarterly taxes are, and can just deduct that every month when calculating my "savings" rate, even though it doesn't correspond to my cash flow. (Not really a question, just an observation/explanation. If I'm cheating or looking at this the wrong way, please let me know.)
2. If I sell an asset, such as a vehicle, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?
3. If I receive a cash gift, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?

#### steveo

• Handlebar Stache
• Posts: 1944
##### Re: Shockingly Simple Math question
« Reply #29 on: August 14, 2013, 09:25:18 PM »
Quick follow-up question, probably obvious, if you'll excuse the newbie. :)

Many of us are starting from negative net worth and our "savings" \$\$s are actually paying off debt.  Do the "years to retirement" numbers apply right away?  Or do we wait until we are at zero net worth to start counting?  Confusing, because mortgage principle is considered savings, but I'm not sure that student loan pmts, etc (although generating a return in the short term, and technically moving us closer to our goals) are actually accumulating the wealth and compounding benefits that the simple formula assumes?

Thanks!

I am paying off in my opinion a massive mortgage. I compute my savings rate as total savings and mortgage payments (including interest) / after tax income. This comes out at 67% for me. In saying that I think that I can really only start to compute how long to FI I have to go when the mortgage is completely paid off (hopefully 3 years time).

My goal is to increase that savings rate and as it increases and the debt gets paid off soon enough I will be FI. I don't really care how long it takes. The point to me is to increase my savings rate as much as possible. I also have 3 young kids who are really expensive. Over time I think the costs will decrease with regards to the kids so the savings rate should increase over time naturally.

I also have monetary goals that I am aiming for that consist of paying off the mortgage, get say \$800k retirement funds and \$200k of spend whenever I want money. Once I meet these goals I'm completely FI. Then I decide if I want to retire or work less or take more holidays or whatever.

#### dragoncar

• Walrus Stache
• Posts: 8516
• Registered member
##### Re: Shockingly Simple Math question
« Reply #30 on: August 14, 2013, 10:21:50 PM »
This appears to be the most recent topic about savings rates. Not to be overly pedantic, or to beat a dead horse, but:
1. I pay self-employment tax (and pay my own quarterly estimated taxes) on 100% of my earnings. I know the average of what my quarterly taxes are, and can just deduct that every month when calculating my "savings" rate, even though it doesn't correspond to my cash flow. (Not really a question, just an observation/explanation. If I'm cheating or looking at this the wrong way, please let me know.)

It's not cheating.  I don't do this kind of manipulation because I only really care about rolling 12 month averages anyways (it's not like any particular month is indicative of my actual savings or expenditures).  But if it works for you, go for it.

Quote

2. If I sell an asset, such as a vehicle, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?

I'd count it as a negative expense, although again... it probably doesn't make much difference.

Quote
3. If I receive a cash gift, is that included as part of my take-home pay and savings (if I save the proceeds) for purposes of calculating my savings rate?

I think yes.  I include gifts and other windfalls as "income"

#### Christof

• Pencil Stache
• Posts: 566
• Age: 43
• Location: Germany
##### Re: Shockingly Simple Math question
« Reply #31 on: August 14, 2013, 10:31:05 PM »
1. I pay self-employment tax (and pay my own quarterly estimated taxes) on 100% of my earnings. I know the average of what my quarterly taxes are, and can just deduct that every month when calculating my "savings" rate, even though it doesn't correspond to my cash flow.
I deduct any business expense and taxes from my income before calculating my saving rate. Since I'm a business owner, too, and my monthly income and fluctuates heavily, I use a rolling 12 month average to calculate the saving rate. In addition I'm tracking monthly expenses to notice signs of lifestyle inflation and to optimizing spending.

#### Dulcimina

• Stubble
• Posts: 182
• Location: Maryland
##### Re: Shockingly Simple Math question
« Reply #32 on: August 15, 2013, 07:26:52 AM »
I treat my 401k by adding it to both sides of the equation.

Simple example - I make 100k and save 50k after tax, 50% savings rate. I put in 10% into my 401k and my employer matches 4%.

50k+14K/114k would get my savings rate - a 56% savings rate.

I'm confused about why you are adding your 10% to both sides of the equation.  Shouldn't it be 50k+14K/104k  = 61%?

#### matchewed

• Magnum Stache
• Posts: 4319
• Location: CT
##### Re: Shockingly Simple Math question
« Reply #33 on: August 15, 2013, 07:28:26 AM »
You're correct I wasn't careful with my math.

#### Mr Mark

• Handlebar Stache
• Posts: 1173
• Location: Planet Earth
• Achieved Financial Independence summer 2014. RE'18
##### Re: Shockingly Simple Math question
« Reply #34 on: August 15, 2013, 09:43:12 AM »
The mmm calculation must start at zero net worth. Else, imagine you have massive debts and save 100% of income. You are clearly not FIRE ....

I think
- the employer match should count as both a savings \$ and and extra income \$
- in the end it's about saving like crazy to get a stash big enough to provide all your required income. The equation is just a rule of thumb. Getting worked up about exact saving rate when far from FIRE or even worse, hair on fire in debt, is a distraction.

#### arebelspy

• Senior Mustachian
• Posts: 27766
• Age: -999
• Location: Traveling the World
##### Re: Shockingly Simple Math question
« Reply #35 on: August 15, 2013, 12:36:35 PM »
The mmm calculation must start at zero net worth. Else, imagine you have massive debts and save 100% of income. You are clearly not FIRE ....

I disagree.

The only way to save 100% of income is if you have 0 spending, or some other source that covers all expenses.  There are scenarios of that where you are FI.

On to the debt part: if you have debt that requires payments, you can't have saved 100%, so that's a moot point.  And if you have debt that doesn't require repayments, why can't you be FIRE despite the debt?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

#### Mazzinator

• Pencil Stache
• Posts: 570
• Location: Pa, Ga, Fl, Pa, Az, Tn, Va, Hi, Va, Pa, NoVa
##### Re: Shockingly Simple Math question
« Reply #36 on: August 15, 2013, 02:29:32 PM »
Quote
Quote from: KatieSSS on July 19, 2013, 08:52:55 am
Quote from: oldtoyota on July 19, 2013, 07:11:32 am
Is this what you need? I asked a similar question and got this handy formula in reply:

Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib

Edited to add: And use dollar amounts not percentages.

Wow, thank you! If I did this right, I have a savings rate of 38%, which is actually better than I thought! I figured I was somewhere in the 20% range or even below. I did replace "principal repayment on mortgage" with "principal repayment on student loans." I don't have a mortgage, but do contribute lots to my student loans.

I'm with you!! Debt up to my eyeballs..

Sweet!!! Looks like we are around 48% although i feel like we are cheating with our super duper low taxes (dh is military)

Thank you MMM community!!!!

#### Mr Mark

• Handlebar Stache
• Posts: 1173
• Location: Planet Earth
• Achieved Financial Independence summer 2014. RE'18
##### Re: Shockingly Simple Math question
« Reply #37 on: August 15, 2013, 03:18:48 PM »
The mmm calculation must start at zero net worth. Else, imagine you have massive debts and save 100% of income. You are clearly not FIRE ....

I disagree.

The only way to save 100% of income is if you have 0 spending, or some other source that covers all expenses.  There are scenarios of that where you are FI.

On to the debt part: if you have debt that requires payments, you can't have saved 100%, so that's a moot point.  And if you have debt that doesn't require repayments, why can't you be FIRE despite the debt?

Yes. I was making a broader point. It's about net worth.

If you had a huge huge debt, say 10 million, interest free but requiring regular repayments, and you earn 100k but live on 5k, yes, you technically have a superhigh savings rate 95% all directed at principal reduction, but are not financially independent.

#### arebelspy

• Senior Mustachian
• Posts: 27766
• Age: -999
• Location: Traveling the World
##### Re: Shockingly Simple Math question
« Reply #38 on: August 15, 2013, 04:15:23 PM »
Yes. I was making a broader point. It's about net worth.

If you had a huge huge debt, say 10 million, interest free but requiring regular repayments, and you earn 100k but live on 5k, yes, you technically have a superhigh savings rate 95% all directed at principal reduction, but are not financially independent.

Gotcha.  Yes, the simple math starts with 0 net worth.  If you are in debt, first calculate how long until you're out of debt, then it applies.  If you have some stached already before coming across the simple math, you have to calculate from that point.

Given that expenses fluctuate, income fluctuates, and thus savings rates will fluctuate, it's clearly more illustrative than prescriptive.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

#### Mr Mark

• Handlebar Stache
• Posts: 1173
• Location: Planet Earth
• Achieved Financial Independence summer 2014. RE'18
##### Re: Shockingly Simple Math question
« Reply #39 on: August 15, 2013, 04:23:51 PM »
It just sometimes seems many of our members are deep in the hole, with debt, of sometimes many types. In this situation it's easy to fret about the details, rather than the real decisions you can make now to make things better, and the actual goal - significant net worth.

Savings rate is just a tool. A metric.

#### arebelspy

• Senior Mustachian
• Posts: 27766
• Age: -999
• Location: Traveling the World
##### Re: Shockingly Simple Math question
« Reply #40 on: August 15, 2013, 04:29:34 PM »
It just sometimes seems many of our members are deep in the hole, with debt, of sometimes many types. In this situation it's easy to fret about the details, rather than the real decisions you can make now to make things better, and the actual goal - significant net worth.

Savings rate is just a tool. A metric.

Maybe.  About 14% of forum members have a negative net worth: www.mrmoneymustache.com/forum/welcome-to-the-forum/mustachian-net-worth/

I don't know if that counts as "many" members or not.

I agree that savings rate is just a tool/metric (then again, so is net worth).  I would posit it's easier to focus on savings rate, since it's not as overwhelming.  Being at -60,000 in net worth could seem like a huge mountain to climb, and have someone quit.  But trying to raise a savings rate from 20 to 25% (and higher, in subsequent months) is a tangible and achievable goal.

On the other hand, I'd imagine some would agree with me, and some with you, as there's no "right" answer, but it depends on the person and personality type involved.  Whichever works better for you, go for it.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

#### Mazzinator

• Pencil Stache
• Posts: 570
• Location: Pa, Ga, Fl, Pa, Az, Tn, Va, Hi, Va, Pa, NoVa
##### Re: Shockingly Simple Math question
« Reply #41 on: August 15, 2013, 05:03:15 PM »
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

#### Zaga

• Handlebar Stache
• Posts: 2077
• Age: 39
• Location: North of Pittsburgh, PA
##### Re: Shockingly Simple Math question
« Reply #42 on: August 15, 2013, 05:07:53 PM »
This is a great discussion!  We were at approximately zero net worth in the beginning of 2012, so our savings rate from that point forward would be a good place to start estimating our time to FI, and maybe RE.  That, plus the calculation I recently added to my spreadsheet, are very helpful.

#### Eric

• Magnum Stache
• Posts: 4061
• Location: On my bike
##### Re: Shockingly Simple Math question
« Reply #43 on: August 15, 2013, 05:16:53 PM »
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]

#### arebelspy

• Senior Mustachian
• Posts: 27766
• Age: -999
• Location: Traveling the World
##### Re: Shockingly Simple Math question
« Reply #44 on: August 15, 2013, 06:13:14 PM »
Sure.  It's still not a perfect calculation (someone spending 20k making 40k with a 50% savings rate is way more badass than someone making 200k and spending 100k for the same 50% savings rate), but it's a decent starting point.

You're just competing against yourself though, so with that in mind, it's a great way to track month to month, because it takes into account both your badassity in cutting expenses as well as your badassity in earning extra income.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

#### oldtoyota

• Magnum Stache
• Posts: 3123
##### Re: Shockingly Simple Math question
« Reply #45 on: August 15, 2013, 07:57:14 PM »
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]

I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more \$\$ making \$\$.

#### steveo

• Handlebar Stache
• Posts: 1944
##### Re: Shockingly Simple Math question
« Reply #46 on: August 15, 2013, 08:54:06 PM »
I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more \$\$ making \$\$.

I agree with this completely. I don't think you can compare my savings rate when I have 3 kids to a single person or couple with no kids. It is though a way for me to gauge how much I need to live off compared to how much I am saving and therefore a guide to when I can retire.

#### Eric

• Magnum Stache
• Posts: 4061
• Location: On my bike
##### Re: Shockingly Simple Math question
« Reply #47 on: August 16, 2013, 10:14:55 AM »
The savings rate also helps me to see how we're tracking and gauge our badassity. With different incomes and costs of living it makes it easier to compare yourself with the badass guidelines.

And yes, it is soo easy to want to give up if you only look at debt vs net worth.

[light bulb]  Ahhh, this makes more sense now.  I could never really figure out why anyone was concerned with what their exact savings rate was, or how to calculate it, considering the math behind it was a generalization and you still need to accumulate your stash to get to FI anyway.  It's not like you can call yourself FI if your savings rate of X matches the number of years Y from the table if you don't have the money anyway. (market fluctuations, investment losses, etc.)  So I always looked at the savings rate to years to FI as a broad guideline.  Now that I see it's a competitive thing, I understand why you're all concerned about how to calculate it exactly.  [/light bulb]

I am puzzled by your comment about competition. I am not sure anyone is viewing it as a competition (I could be wrong). I am not. I am using the formula I mentioned above to calculate my savings rate, because my savings rate means I need to spend less to live. If I spend less to live, I can retire sooner. Also, I will have more saved and more \$\$ making \$\$.

I took the notion of competition from what I quoted, about gauging badassity and comparing yourself to badass guidelines.  I guess that doesn't have to be a comparison to others, but if it's not for competition, then I'm still really confused as to why anyone would spend time figuring the savings rate number out.

You don't need to calculate your savings rate to spend less or retire sooner.  If you increase your savings or to attempt to save as much as possible, you'll do the same thing.  The actual savings rate number or how you'd calculate it doesn't matter, since you still need to actually accumulate a large enough stash.  And your FI stash size is based on your expenditures, not your savings rate.  Because of that, I keep very close track of my expenditures, but I don't care at all what my savings rate number is, since I'm going to attempt to save as much as I can.

Therefore, I never really understood why people spend lots of time trying to figure out if they should add in mortgage principle or 401k, or what's the net and what's the gross or whatever.  There are tons of threads that talk about it, use formulas, debate what should be included, etc., but I don't see why it matters at all, since it's your expenditures that determine what your FI number is.

Am I missing something?  Other than motivation, what does calculating your savings rate do for you?

#### matchewed

• Magnum Stache
• Posts: 4319
• Location: CT
##### Re: Shockingly Simple Math question
« Reply #48 on: August 16, 2013, 10:42:03 AM »
Because the term competition requires more than the individual. With whom are you competing against? I certainly am not competing against you yet I still like the savings rate as a benchmark to see whether I am improving. That is not a competition it is just establishing a metric and determining if you are meeting your goals.

Also to your as you stated all that matters is your expenditures you are instantly discussing a savings rate just by mentioning expenditures, it is just not explicitly stated, it is derived from knowing your expenditures.

#### gecko10x

• Bristles
• Posts: 420
##### Re: Shockingly Simple Math question
« Reply #49 on: August 16, 2013, 10:44:48 AM »
It tells you your *time* to retirement/FI.

If your savings are going up, you may think you're doing well. But if your savings *rate* is going down at the same time, then your expenses are going up faster than your income, so your FI date is moving further away.

All else being equal, etc. I think I got that right ;-)