Author Topic: Shockingly Simple Math question  (Read 27763 times)

Eric

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Re: Shockingly Simple Math question
« Reply #50 on: August 16, 2013, 11:02:44 AM »
It tells you your *time* to retirement/FI.

I get that part.  In fact, if I'm trying to introduce friends or family to MMM, I'll often use the Savings Rate article because I think the concept is revolutionary and is incredibly eye opening.  But at the same time, it's still just a general guideline, and the closer you get to FI, the less relevant it becomes, as you'll use the size of your stash and your expenditures as related to that as your trigger mechanism and your savings rate will be irrelevant. 

Eric

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Re: Shockingly Simple Math question
« Reply #51 on: August 16, 2013, 11:06:57 AM »
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.

I am trying to maximize my savings rate, that's true.  However, I don't care what the actual number is, because that's the part I find irrelevant.  Maybe it's just my way of looking at it.  I do *love* the concept though.  It's truly eye opening if you've never thought about it before. 

matchewed

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Re: Shockingly Simple Math question
« Reply #52 on: August 16, 2013, 11:17:55 AM »
How can you maximize but at the same time not care what the number is? Maybe it's my decade in the corporate world speaking but if you are not measuring how do you know if you are improving let alone maximizing? Maybe you're using a different metric but you are still using a metric.

Eric

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Re: Shockingly Simple Math question
« Reply #53 on: August 16, 2013, 11:59:49 AM »
How can you maximize but at the same time not care what the number is? Maybe it's my decade in the corporate world speaking but if you are not measuring how do you know if you are improving let alone maximizing? Maybe you're using a different metric but you are still using a metric.

I think the number itself is irrelevant.  It's only indirectly tied to your FI stash amount, in that it's a baseline to help you see when you might be FI.  However, it has no direct bearing, as your stash size for FI is based on expenditures.

Personally, I try to optimize each of my expenditures.  In this way, I'm optimizing my savings rate too.  But at the same time, calculating whether my savings rate is 43% or 48% doesn't matter to me, because I know I'm already saving as much as I can, because of the optimized expenditures. 

Again, it may just be a perspective thing, and like I said, I really like the concept.

velocistar237

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Re: Shockingly Simple Math question
« Reply #54 on: August 16, 2013, 01:14:58 PM »
I think the number itself is irrelevant.  It's only indirectly tied to your FI stash amount, in that it's a baseline to help you see when you might be FI.  However, it has no direct bearing, as your stash size for FI is based on expenditures.

Savings rate is directly related to how long it takes to accumulate your FI stash amount. That's the brilliance of it: By increasing savings rate, you both reduce expenses, which lowers your required FI stash amount, and you increase your accumulation rate, which decreases the time it takes to get you to your stash amount. Double whammy. But, you know, you can ignore the second part if you prefer single whammies.

Personally, I try to optimize each of my expenditures.  In this way, I'm optimizing my savings rate too.  But at the same time, calculating whether my savings rate is 43% or 48% doesn't matter to me, because I know I'm already saving as much as I can, because of the optimized expenditures. 

You need to know the trade-off between material comfort and years of freedom to do a system-level optimization. That requires some knowledge of savings rate. For example, do you want to take on another roommate? How about two roommates? How about moving to a low COL area and starting a new, higher paying career? Dumpster diving? Living on the street? How would you know if it was worth it to you? You use savings rate to determine how much time it would add to your retirement, then decide between time and comfort level.

I think what you're actually saying is that you've reached an expense level that you're comfortable with, and you know generally that your savings rate is high enough to get you to financial independence in a reasonable time-frame. However, if your income dropped, or your career soured and drove you to a goal to quit in 3 years, a more precise savings rate would be pretty important for deciding your expense level.

Also, savings rate is a fun math problem. See attached.

oldtoyota

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Re: Shockingly Simple Math question
« Reply #55 on: August 16, 2013, 01:40:27 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 $$ making $$.

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?

Yes, I think you are missing something. I also used to question why the savings rate mattered, so I *think* I know where you are coming from with this question.

Yes, you will need to accumulate a large enough stash. If you increase your savings rate, you are living on less. When you live on less, you can retire sooner.

The savings rate--as detailed by MMM and Nords--shows you that you can retire sooner if you save more. If you save 80%, you can retire a lot sooner than someone who only saves 10%.

It sounds to me like you are saying something similar when you say, "it's your expenditures" that determine FI. Yep. If you save more, you will have fewer expenditures.


oldtoyota

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Re: Shockingly Simple Math question
« Reply #56 on: August 16, 2013, 01:41:58 PM »
I think the number itself is irrelevant.  It's only indirectly tied to your FI stash amount, in that it's a baseline to help you see when you might be FI.  However, it has no direct bearing, as your stash size for FI is based on expenditures.

Savings rate is directly related to how long it takes to accumulate your FI stash amount. That's the brilliance of it: By increasing savings rate, you both reduce expenses, which lowers your required FI stash amount, and you increase your accumulation rate, which decreases the time it takes to get you to your stash amount. Double whammy. But, you know, you can ignore the second part if you prefer single whammies.


That is pretty much what I said up above. I think it's a confusing concept at first. 

Eric

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Re: Shockingly Simple Math question
« Reply #57 on: August 16, 2013, 02:13:57 PM »
I get it.  I understand that your savings rate directly affects how long it takes to reach FI.  I also get that cutting your expenses or increasing your savings is a double whammy, as your stash grows faster AND you need a smaller stash to live off of because your expenses are lower.

My question is why the specific number matters.  Maybe an example will help.

Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?  To me, there is no difference between those numbers, so I'm viewing the specific number as irrelevant, while at the same time, the concept or the act of increasing savings and lowering expenses is extremely important.

It's probably just semantics.  I promise not to disrupt any other savings rate threads with this.  I personally feel that figuring out whether my number is 50% or 58% is irrelevant.  But if it helps you all challenge yourselves and stay motivated to save, I'm glad it helps.

tomsang

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Re: Shockingly Simple Math question
« Reply #58 on: August 16, 2013, 02:25:43 PM »
Eric - Don't get all logical on us.:)  To me, I know down to the nearest 100th of a percentage, but I would be comfortable knowing to the nearest 10%.  To me, I see it as a light at the end of the tunnel marker.  If you calculate that you can retire in 5 years on day one it gives you more clarity when you are going to be FI than the alternative of I am going to save until I am FI.  Every year and up to five year, your estimates and timeline can be solidified.  So, yes knowing whether it is 50% or 58% probably doesn't matter.  Knowing whether it is 10%, when you think you are saving like 70% is probably something that you should know.

velocistar237

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Re: Shockingly Simple Math question
« Reply #59 on: August 16, 2013, 03:52:04 PM »
Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?

You're considering a knowledge error rather than a truth error.

In navigation, if you have a course error and no estimation error, then you can use your knowledge to correct your course. This is like having a 30% savings rate, deciding that's too low, learning how to be more frugal, and ending up at 50%.

If you have an estimation error and no course error, then you might end up doing the wrong thing. You might have a 45% savings rate, but think you have a 55% savings rate, resulting in a difference of more than 5 years. If you knew your savings rate was only 45% instead of 55%, then you might learn how to be more frugal, but since you don't, you might not have enough motivation to keep reducing expenses. Everyone has their equilibrium point.

Or suppose it goes the other way. You want to retire before you have kids, but you're really feeling the pinch when you try to cut expenses. You think your savings rate is 55%, which won't get you to retirement until your late 30s, so you decide to work extra hours in your contracting business. In reality, your savings rate is 65%, so you didn't need to take on those miserable extra hours.

Mazzinator

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Re: Shockingly Simple Math question
« Reply #60 on: August 16, 2013, 05:37:13 PM »
I'm still a noob here, been a member ~6months or so..so keep that in mind. But my understanding was using a % (rather than an actual number) takes into account the 'variables' like income, COL, double income, single income, kids, no kids, etc.

It's better to say "save 15% of your take home pay and your average..but save 50% or even 70% and that's badass" than to say "you should live on $7k/yr or $27k/yr" or whatever (you get the point) because people (in say NYC) would think no way and give up.

It mostly helped me because we move a lot and my dh income flucuates with each move. So in VA we were barely hitting 35%, but then we moved to a vhcola, so his pay went up but so did our expenses and rent (even though we downsized to about half the sq footage) BUT our savings rate went up. So it made it clear that we are in a better position now at 48%.

I'm not sure how we will figure out our future retirement expenses because we have no idea where we will live and how much they will be or exactly how mucch income we will be getting. So in this sense, using a % isn't necessarily accurate. But like i said, i'm still new here and maybe someone will shed sone light on this.

Mr Mark

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Re: Shockingly Simple Math question
« Reply #61 on: August 16, 2013, 08:38:42 PM »
Fair enough. It is a beacon. If your savings rate -  however calculated - is less than 20%, its a long road ahead by definition.

Saving rate is a very powerful metric, but I just want to stress the power is in the concept, not so much the details. And at the >> 85% savings rate the equation breaks down somewhat. (Because as you cross into FIRE you can now execute more opportunities to replace expenditure with self solutions, now that you have no job to go to. So the assumptions break down wrt expenditure and tax constancy across the boundary)

Calculating the data and your 'saving rate' consistently and looking at the trend is what counts. Saving rate going up - great. Building a growing stash of passive income? Excellent.

If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid house.

Great to see these sort of things being talked about. Happens it seems very rarely in typical day to day life....



jfer_rose

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Re: Shockingly Simple Math question
« Reply #62 on: August 17, 2013, 06:52:35 AM »


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

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%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement stache.

Am I missing something, or just misunderstanding the intent of these comments?
« Last Edit: August 17, 2013, 07:00:31 AM by jfer_rose »

Zaga

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Re: Shockingly Simple Math question
« Reply #63 on: August 17, 2013, 07:07:49 AM »


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

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%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement.

Am I missing something, or just misunderstanding the intent of these comments?
I count my contributions as take home pay and savings, and the employer's contribution only as savings.

They should be added to savings, because they are being saved, even if in the case of the employer contributions I am not putting them there.

The employer contribution should not be added to take home pay, because there is no way I could get that in my take home check. 

My contributions COULD be in my take home pay if I did not contribute them (minus a few taxes, which I'm ignoring for this calculation), therefore they should be on the income side of the equation.

At least, that's how I see it.  This gives me a 42% savings rate for 2012 and a projected 49% rate for 2013.

jfer_rose

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Re: Shockingly Simple Math question
« Reply #64 on: August 17, 2013, 10:04:53 AM »


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

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%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement.

Am I missing something, or just misunderstanding the intent of these comments?
I count my contributions as take home pay and savings, and the employer's contribution only as savings.

They should be added to savings, because they are being saved, even if in the case of the employer contributions I am not putting them there.

The employer contribution should not be added to take home pay, because there is no way I could get that in my take home check. 

My contributions COULD be in my take home pay if I did not contribute them (minus a few taxes, which I'm ignoring for this calculation), therefore they should be on the income side of the equation.

At least, that's how I see it.  This gives me a 42% savings rate for 2012 and a projected 49% rate for 2013.


That's exactly the way I do it too. But that's not what these other few comments were suggesting.

dragoncar

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Re: Shockingly Simple Math question
« Reply #65 on: August 17, 2013, 03:19:13 PM »
Employer contributions are income too.  Anything that increases your net worth -- 401k contributions, employer match, gifts, etc.

Inquizator

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Re: Shockingly Simple Math question
« Reply #66 on: August 18, 2013, 05:14:18 AM »
I count my contributions as take home pay and savings, and the employer's contribution only as savings.

They should be added to savings, because they are being saved, even if in the case of the employer contributions I am not putting them there.

The employer contribution should not be added to take home pay, because there is no way I could get that in my take home check. 

My contributions COULD be in my take home pay if I did not contribute them (minus a few taxes, which I'm ignoring for this calculation), therefore they should be on the income side of the equation.

At least, that's how I see it.  This gives me a 42% savings rate for 2012 and a projected 49% rate for 2013.

Employer contributions are income too.  Anything that increases your net worth -- 401k contributions, employer match, gifts, etc.

Just to throw my $0.02 in... Personally, I don't include employer 401k match in my savings rate calculation. I'd never thought about it too in depth, but to me it seemed more important to see what portion of 'my' money I save (as you say, my contribution COULD be take home pay, but employer match could not...).

But, if I were to include it, I'd definitely put it on both sides of the equation. As a Math nerd, it just doesn't seem right to me to use a process that could indicate you save > 100%. If a formula is wrong at the extreme ends, it's probably 'wrong' in the middle too. Just doesn't seem mathematically correct to me to include it on savings but not income. If you are considering it as something you saved, then it should be income.

Of course, how you calculate savings rate is a personal decision and it really only matters that you're happy with it and it serves whatever purpose you use it for.

oldtoyota

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Re: Shockingly Simple Math question
« Reply #67 on: August 18, 2013, 07:04:07 AM »


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

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%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement stache.

Am I missing something, or just misunderstanding the intent of these comments?

I had the same question at some point. I am considering the contribution as both savings and income. Otherwise--like you said--the savings rate becomes artificially high. I will re-post this equation for any folks just joining the conversation:


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

teen persuasion

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Re: Shockingly Simple Math question
« Reply #68 on: August 18, 2013, 11:16:11 AM »
I'm trying to figure out why you all seem to ignore taxes and use take-home pay.  Our taxes could vary quite a bit, depending on how we invest (pre tax, post tax, taxable, HSA). 

Taxes are actually a net positive for us, so I'd expect to include them in the income side of the equation as well as the saving side (I fund our Roths with our refunds).

oldtoyota

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Re: Shockingly Simple Math question
« Reply #69 on: August 18, 2013, 04:43:43 PM »
I'm trying to figure out why you all seem to ignore taxes and use take-home pay.  Our taxes could vary quite a bit, depending on how we invest (pre tax, post tax, taxable, HSA). 

Taxes are actually a net positive for us, so I'd expect to include them in the income side of the equation as well as the saving side (I fund our Roths with our refunds).

I think it's because the taxes are just gone and you are not using them to live. They are gone before you ever see them. So, the point is the money you need to live on now and how much you need now. Since the taxes are never really your money and for your personal use, they are not factored into the equation.


velocistar237

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Re: Shockingly Simple Math question
« Reply #70 on: August 19, 2013, 05:46:15 AM »
I'm trying to figure out why you all seem to ignore taxes and use take-home pay.

It's because only two things matter for savings rate: how much you save, and what your expenses are during retirement. You do not save your taxes, and you do not have the same taxes during retirement, so you exclude them. If you want to be more accurate, you can include an estimate of retirement taxes in your retirement expenses.

The during retirement part can make a huge difference. If you plan to have lower costs during retirement (moving, living in an RV, low-cost travel), then your savings rate is effectively higher right now, as far as determining time to retirement goes.

missj

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Re: Shockingly Simple Math question
« Reply #71 on: August 18, 2014, 11:45:44 PM »


If you want to take the main route, wrt calculation, I'd suggest
- consider 401 k match as both savings and as income
- payments that reduce the principal of loans that must eventually be repaid, count as savings (but unless the debt is at <4.5% or so, secured by real estate, debt emergency rules probably apply.)
-  include your passive income as income too, including imputed rent, if you live in a paid

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%?

Ok, these comments are bugging me. Others here have said this--I thought that the standard route was to consider your 401 contribution as both savings and as income. If my reading comprehension is on track, a few here seem to suggest to do this for the match, but not for your contribution. I don't think that is correct. I had done that in one of my journal entries and was corrected. If you don't count your 401 contribution on both sides of the equation, you get an artificially high savings rate. But thinking about it logically, it does belong on both sides of the equation. It is part of your income, just a part you volunteer to contribute to the 401. But it also goes on savings because it is part of your retirement stache.

Am I missing something, or just misunderstanding the intent of these comments?

I ageree with you.  I came to this thread cause I was thought my savings rate might be artificially high (60%) after reading the cool easy equation:

How to Calculate a Savings Rate: (use dollar amounts, not percentages)
Pre-tax contrib. + principal repayment on mortgage (not interest) + any other savings
____________________________________
Net home pay + pre-tax contrib


I thought "cool. I get it. that is logical" and I recalculated and got 51% (which seemed closer to my instincts).

Now people are saying to NOT put it on both sides....what? So confused again, but the logical part of me believes that it belongs on both sides of the equation.

here is my next question.  If you want to track employer match (which for some of us will change our savings rate and therefore FIRE date quite a bit) shouldn't that ALSO be added to both sides of the equation (in dollars of course, not in % form)?

And finally, is there any way to get "credit" for my employer sponsored pension in this equation?  It will form a large chunk of my retirement income (roughly 1/3) but currently I cannot figure out how to calculate it, so I'm just ommitting it.

missj

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Re: Shockingly Simple Math question
« Reply #72 on: August 19, 2014, 12:01:46 AM »
Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?

You're considering a knowledge error rather than a truth error.

In navigation, if you have a course error and no estimation error, then you can use your knowledge to correct your course. This is like having a 30% savings rate, deciding that's too low, learning how to be more frugal, and ending up at 50%.

If you have an estimation error and no course error, then you might end up doing the wrong thing. You might have a 45% savings rate, but think you have a 55% savings rate, resulting in a difference of more than 5 years. If you knew your savings rate was only 45% instead of 55%, then you might learn how to be more frugal, but since you don't, you might not have enough motivation to keep reducing expenses. Everyone has their equilibrium point.

Or suppose it goes the other way. You want to retire before you have kids, but you're really feeling the pinch when you try to cut expenses. You think your savings rate is 55%, which won't get you to retirement until your late 30s, so you decide to work extra hours in your contracting business. In reality, your savings rate is 65%, so you didn't need to take on those miserable extra hours.
I get it.  I understand that your savings rate directly affects how long it takes to reach FI.  I also get that cutting your expenses or increasing your savings is a double whammy, as your stash grows faster AND you need a smaller stash to live off of because your expenses are lower.

My question is why the specific number matters.  Maybe an example will help.

Your savings rate is 50% because you save 50% of your net pay
or
Your savings rate is 58% because you save 50% of your net pay + mortgage principle

Either way, your stash is growing at the same rate.  Either way, you'll be FI in the same amount of time.  So why does it matter if you classify your savings rate at 58% instead of 50%?  To me, there is no difference between those numbers, so I'm viewing the specific number as irrelevant, while at the same time, the concept or the act of increasing savings and lowering expenses is extremely important.

It's probably just semantics.  I promise not to disrupt any other savings rate threads with this.  I personally feel that figuring out whether my number is 50% or 58% is irrelevant.  But if it helps you all challenge yourselves and stay motivated to save, I'm glad it helps.

I think I  actually understand BOTH of you perfectly (wow! light bulb moment for me)

so basically, eric is suggesting that if the information you gain from the equation is not actionable, then what is the difference?  and on some level he is totally correct.

Velocistar is suggesting that the perception that the information is not actionable could prevent you from optimizing.

But I have to award the debate points to Velocistar because if any of us believed that we couldn't affect this equation in some way by our choices and actions, then we wouldn't be in this thread or possibly even on this forum to begin with. 

A couple of scenarios in which case I could imagine it truly doesn't matter: A) you're in prison but you are earning money in some way (maybe you have a business, an annuity, whatever). Your expenses are essentially zero and you save 100% of your wages.  Substitute prison for "you're on a crabbing boat"  "antarctic research trip" "space station" or basically any situation where you have no opportunity to change your spending habits, but you are earning an income.

The other scenario that I could imagine where it actually doesn't matter is that you have a big enough "cushion" between your savings rate and your minimum retirement age that a few % points won't make one lick of a difference.  For example, you cannot retire from your company before age 55 or you lose your entire pension.  You're on track to be ABLE to retire at 40 years old with a 50% savings rate, but even if you achieved it you wouldn't be able to do it.  So there is enough flexibility built in that exact numbers won't affect your retirement age.

But for the rest of us, I think calculating an accurate number (for our purposes) and repeating that calculation in a consistent matter will be able to show us over time how we're doing, if we're making improvements if we have certain strengths or weaknesses, if we should consider taking on a part time summer job etc...
« Last Edit: August 19, 2014, 12:05:22 AM by missj »