Author Topic: Take Home Pay - Please help.  (Read 1242 times)

Nicholas88

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Take Home Pay - Please help.
« on: December 01, 2018, 02:27:47 PM »
Fellow Mustachians

I would really appreciate your input on how to calculate take home pay (to then calculate the savings rate).

General definition according to MMM's famous "simple math" article: ** 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.

My question:
1. Would you consider mandatory contributions you make to social security a tax?
2. What about mandatory insurances (unemployment insurance for example, where I come from that's mandatory)?
3. What about health insurance (which is also mandatory in my country)?

Thank you so much for the clarification.

Btw. you guys are awesome. I find this forum so inspiring! :)

Kind regards,
Nick

tyler2016

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Re: Take Home Pay - Please help.
« Reply #1 on: December 01, 2018, 02:54:41 PM »
I'm assuming you are in the US since you are using US tax terms.

There is a problem with adding back 401k contributions. When you do that you ignore the tax benefit. To get an accurate number in this case, you have to subtract the taxes you would have paid. If you have an HSA sponsored by an employer, you also have to add FICA taxes, because HSA contributions are often taken out before FICA. You can't ignore health insurance premiums either, because then when you calculate your FIRE number you are ignoring a HUGE expense.

I don't bother with take home pay. I create monthly cash flow and income statements. I create quarterly balance sheets. It is a bit more work, but it gives me a much better picture of my finances.

So when you are calculating your FIRE target, you need to include health insurance and taxes. Your post FIRE taxes are  going to be a lot different due to the different level and source of income.

Nicholas88

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Re: Take Home Pay - Please help.
« Reply #2 on: December 01, 2018, 03:05:43 PM »
Thank you for your response. I'm actually located in Europe.

But we have the equivalent to your SS, 401k, etc. and it's treated similarly from a tax perspective.
We don't have any HSA. I never heard of subtracting fiction 401k taxes. That's new to me.
I guess if one plans to retire abroad (e.g. for me the United States), different considerations should be made entirely.

Seems kinda complicated. I'd just like to be able to accurately calculate my savings rate.

BicycleB

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Re: Take Home Pay - Please help.
« Reply #3 on: December 01, 2018, 07:51:35 PM »
I agree with MMM's way of calculating savings rate, because it provides the savings % that allows the saver to most accurately calculate years to FIRE, using the table in the same Simple Math article. Using MMM's way, as I understand it:

1. Yes, Social Security contributions are a tax. They should be excluded from the after tax income. For MMM purposes, the income consists of two components: discretionary income used for living expenses, and discretionary income used for investing. Social Security contribution is not discretionary, it is mandatory, so subtract it from income in order to prepare for the savings rate calculation.

2. Yes, mandatory insurances are a tax for this calculation. Reasoning similar to Social Security.

3.  Yes, health insurance the same, because mandatory.

« Last Edit: December 01, 2018, 07:54:24 PM by BicycleB »

MDM

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Re: Take Home Pay - Please help.
« Reply #4 on: December 01, 2018, 10:23:45 PM »
Define take home pay and savings rate however you want.

What do you want to do with those numbers?

AccidentialMustache

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Re: Take Home Pay - Please help.
« Reply #5 on: December 01, 2018, 10:34:00 PM »
Budget and stash size accuracy matters far more than take home pay / savings rate calculations. Budget and size say when you've hit FIRE -- savings rate helps you project "when" FIRE happens, but its just a projection. Savings rate may motivate you, but you're competing against yourself, so as long as your definition is consistent, it doesn't matter how you define it.

Dicey

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Re: Take Home Pay - Please help.
« Reply #6 on: December 02, 2018, 12:49:59 AM »
Yup. The value of calculating a savings rate is highly overblown on this site, IMO. It's the amount you save and how efficiently you invest it that matters most. Savings Rate in the MMM context seems more about bragging rights, and I don't cotton much to that.
Now, that MMM talk about Investment Order is incredibly sexy...

tyler2016

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Re: Take Home Pay - Please help.
« Reply #7 on: December 02, 2018, 12:42:04 PM »
Here is how I calculate FI date:

annual FIRE expenses x 30 (inflated stock market) - current investment assets = T

T / Mean monthly net income = months to FI

To get your monthly average net income, take your gross income and subtract ALL expenses, including taxes. Add any retirement contribution matching and dividends to your income. Do this every month for a year. Add up all 12 months. Add any tax refunds to your net income, and subtract any additional payments. Divide this by 12.

My method is a bit complicated, but very accurate.

I don't base my FI expenses on current expenses because they will be a lot different. For example, health care and taxes, which tend to be a large part of  my expenses will be a lot different.

Penn42

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Re: Take Home Pay - Please help.
« Reply #8 on: December 02, 2018, 02:37:05 PM »
There is a problem with adding back 401k contributions. When you do that you ignore the tax benefit. To get an accurate number in this case, you have to subtract the taxes you would have paid. If you have an HSA sponsored by an employer, you also have to add FICA taxes, because HSA contributions are often taken out before FICA. You can't ignore health insurance premiums either, because then when you calculate your FIRE number you are ignoring a HUGE expense.

I don't bother with take home pay. I create monthly cash flow and income statements. I create quarterly balance sheets. It is a bit more work, but it gives me a much better picture of my finances.

Subtract the taxes you would have paid from what?  Not trying to be snarky, I just don't know.  Say all my 401(k) contributions would be in the 22% bracket.  That's $4070 of tax I didn't pay if I maxed out my contrbutions.  I'm not sure where I would need to take that savings into account.   

Also, out of curiosity, how does a cash flow or income statement vary from figuring out your take home pay.  Looking for ideas with my own tracking.

tyler2016

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Re: Take Home Pay - Please help.
« Reply #9 on: December 02, 2018, 05:10:27 PM »
There is a problem with adding back 401k contributions. When you do that you ignore the tax benefit. To get an accurate number in this case, you have to subtract the taxes you would have paid. If you have an HSA sponsored by an employer, you also have to add FICA taxes, because HSA contributions are often taken out before FICA. You can't ignore health insurance premiums either, because then when you calculate your FIRE number you are ignoring a HUGE expense.

I don't bother with take home pay. I create monthly cash flow and income statements. I create quarterly balance sheets. It is a bit more work, but it gives me a much better picture of my finances.

Subtract the taxes you would have paid from what?  Not trying to be snarky, I just don't know.  Say all my 401(k) contributions would be in the 22% bracket.  That's $4070 of tax I didn't pay if I maxed out my contrbutions.  I'm not sure where I would need to take that savings into account.   

Also, out of curiosity, how does a cash flow or income statement vary from figuring out your take home pay.  Looking for ideas with my own tracking.

I was a bit sleep deprived when I made that post. Now that I read it again, I am confused myself.

I guess it depends on what you consider "take home" and what you are trying to do. Most consider it what is deposited after all deductions. Pete's formula works for what your net pay is.

An income statement lists all of your income for a period, all of your expenses, and how much money you gained or lost in the period. Cash flow will tell you how much cash you bring in and how much goes out. You can be cash negative and still have a positive income statement.

 If you started a month with 5000 in your checking account, got paid 2000, you now have 7000. Suppose you paid all of your normal expenses of 1000 dollars and deposit 1000 in a T IRA. You decided to put an extra 1000 towards your mortgage and ended up with 4000 cash. You would have negative cash flow and a positive income statement. Your income statement bottom line would be 1000 and cash flow -1000.

Your income statement would look something like this

Income:
Gross pay 1000
401k match: 100
Dividends 500
Total income: 1600
Expenses:
Groceries: 200
Mortgage interest: 300
Taxes: 100
Total Expenses: 600
Net income: 1000

Cash flow would like like this

Gross income: 1600
Expenses: 600
Dept payment 1000
Investments: 1000
Net cash: -1000

My wife and I split each months positive cash flow for our discretionary spending. Income statement keeps expenses in line. Balance sheets show how close we are to FI.

BicycleB

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Re: Take Home Pay - Please help.
« Reply #10 on: December 03, 2018, 08:20:12 AM »
An income statement lists all of your income for a period, all of your expenses, and how much money you gained or lost in the period. Cash flow will tell you how much cash you bring in and how much goes out. You can be cash negative and still have a positive income statement.

 If you started a month with 5000 in your checking account, got paid 2000, you now have 7000. Suppose you paid all of your normal expenses of 1000 dollars and deposit 1000 in a T IRA. You decided to put an extra 1000 towards your mortgage and ended up with 4000 cash. You would have negative cash flow and a positive income statement. Your income statement bottom line would be 1000 and cash flow -1000.

Your income statement would look something like this

Income:
Gross pay 1000
401k match: 100
Dividends 500
Total income: 1600
Expenses:
Groceries: 200
Mortgage interest: 300
Taxes: 100
Total Expenses: 600
Net income: 1000

Cash flow would like like this

Gross income: 1600
Expenses: 600
Dept payment 1000
Investments: 1000
Net cash: -1000

My wife and I split each months positive cash flow for our discretionary spending. Income statement keeps expenses in line. Balance sheets show how close we are to FI.

Just curious. If you got paid $2000, why is the "gross income" in your income statement $1000?