Author Topic: Check my savings rate calc please...  (Read 2395 times)

mbjerry

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Check my savings rate calc please...
« on: January 30, 2018, 06:27:10 AM »
Here is the calculation I am using to calculate my Savings Rate. Am I calculating correctly? thanks

Savings Rate = ((Total After Tax Income + 401k Savings + HSA Savings) – (Total Expenses + HSA Expenses)) / (Total After Tax Income + 401k Savings + HSA Savings)

nereo

  • Senior Mustachian
  • ********
  • Posts: 17496
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Check my savings rate calc please...
« Reply #1 on: January 30, 2018, 12:25:50 PM »
You can calculate your savings rate however you like.

What's important is that you are honest with yourself (i.e. you are consistent one year to the next)

Blackeagle

  • Bristles
  • ***
  • Posts: 296
  • Location: Ivins, UT
Re: Check my savings rate calc please...
« Reply #2 on: January 30, 2018, 05:46:50 PM »
You don't explicitly say whether your 401k Savings includes employer match.  If not, it should be in both the numerator and the denominator.

mbjerry

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Re: Check my savings rate calc please...
« Reply #3 on: January 31, 2018, 05:29:29 AM »
Thank you both for responding. Yes, the 401k# includes my employer match.

formerlydivorcedmom

  • Pencil Stache
  • ****
  • Posts: 701
  • Location: Texas
Re: Check my savings rate calc please...
« Reply #4 on: January 31, 2018, 12:52:32 PM »
I also include dividends earned.  Mine are reinvested, but that's still more earnings and investments we forget about.

Some people also include principal paid on their mortgage.

boarder42

  • Walrus Stache
  • *******
  • Posts: 9332
Re: Check my savings rate calc please...
« Reply #5 on: February 01, 2018, 08:09:26 AM »
I also include dividends earned.  Mine are reinvested, but that's still more earnings and investments we forget about.

Some people also include principal paid on their mortgage.

do you count share appreciation?  b/c if you're not counting that then there is no reason to count dividends - thats just artificially inflating your savings rate based on how your already invested money is returning value to shareholders.

mortgage principal also doesnt make sense to add to the calc.

calculating savings rates is really worthless once you have started your path to FIRE - but throwing random things in to inflate it to feel better isnt really good practice IMO.

mbjerry

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Re: Check my savings rate calc please...
« Reply #6 on: February 01, 2018, 10:38:51 AM »
I also include dividends earned.  Mine are reinvested, but that's still more earnings and investments we forget about.

Some people also include principal paid on their mortgage.

do you count share appreciation?  b/c if you're not counting that then there is no reason to count dividends - thats just artificially inflating your savings rate based on how your already invested money is returning value to shareholders.

mortgage principal also doesnt make sense to add to the calc.

calculating savings rates is really worthless once you have started your path to FIRE - but throwing random things in to inflate it to feel better isnt really good practice IMO.

Calculating my savings rate has been a very valuable tool for me since I started this 4 months ago. For me, it is a direct indicator of my spending habits for the month. Every month I have a goal to beat the previous month. The goal makes me think about every expense. I guess I don't understand why knowing how much I am saving vs. how much I am earning is worthless. The more I save, and the lower my expenses go, the faster I reach FI... I do see your points on the dividends and the mortgage principal paid. Those numbers are tracked in my net worth. I just want to know how much I am saving vs. how much I earn on a monthly basis.

boarder42

  • Walrus Stache
  • *******
  • Posts: 9332
Re: Check my savings rate calc please...
« Reply #7 on: February 01, 2018, 12:23:45 PM »
I also include dividends earned.  Mine are reinvested, but that's still more earnings and investments we forget about.

Some people also include principal paid on their mortgage.

do you count share appreciation?  b/c if you're not counting that then there is no reason to count dividends - thats just artificially inflating your savings rate based on how your already invested money is returning value to shareholders.

mortgage principal also doesnt make sense to add to the calc.

calculating savings rates is really worthless once you have started your path to FIRE - but throwing random things in to inflate it to feel better isnt really good practice IMO.

Calculating my savings rate has been a very valuable tool for me since I started this 4 months ago. For me, it is a direct indicator of my spending habits for the month. Every month I have a goal to beat the previous month. The goal makes me think about every expense. I guess I don't understand why knowing how much I am saving vs. how much I am earning is worthless. The more I save, and the lower my expenses go, the faster I reach FI... I do see your points on the dividends and the mortgage principal paid. Those numbers are tracked in my net worth. I just want to know how much I am saving vs. how much I earn on a monthly basis.

how much you spend is critical - your savings rate calculation can be fudged a million different ways- a focus on spending is more valuable than trying to do fancy math with a savings rate. 

tracking and decreasing your spending would be a better indicator of your spending habits - since its the same thing - savings rate is fun and a good way to get you in the door - but once you're in its about spending rate.

a savings rate can increase with extra income but thats not necessarily a good thing if your expenses rise with it.  So that is why focusing on spending is key - what ever you dont spend you're saving.

Dont start throwing crap in there like the poster i responded to - including dividends in savings rate is fools gold and doesnt help you achieve your goal any faster b/c they are assumed in the calculation - but again the calculation around savings rate from the shockingly simple math post is a mute point as soon as you have more than 1 dollar saved.

I would strongly suggest you switch your focus to cutting spending vs increasing savings rate - then use another spreadsheet to track and predict networth growth based on your expected savings plan - its much better b/c spending is simple there is no calculation to do its what you spent.
« Last Edit: February 01, 2018, 12:26:45 PM by boarder42 »

alanB

  • Stubble
  • **
  • Posts: 220
  • Age: 36
  • Location: PA, US
Re: Check my savings rate calc please...
« Reply #8 on: February 01, 2018, 01:33:50 PM »

how much you spend is critical - your savings rate calculation can be fudged a million different ways- a focus on spending is more valuable than trying to do fancy math with a savings rate. 

tracking and decreasing your spending would be a better indicator of your spending habits - since its the same thing - savings rate is fun and a good way to get you in the door - but once you're in its about spending rate.

Strongly agree, I tracked savings rate for years, but lately have found it less and less useful.  Now I track both absolute spending rate and pro forma spending rate (excluding non-recurring expenses).  For me non-recurring expenses include daycare and mortgage interest since I intend to pay off mortgage before retiring. 

Spending rate = (all money spent + pre-tax expenses) / (salary + bonus + 401k match + HSA match - all taxes)

Whether you include mortgage principal is up to you... that is not really an expense in my opinion. 

I guess I don't understand why knowing how much I am saving vs. how much I am earning is worthless. The more I save, and the lower my expenses go, the faster I reach FI...
 

If you maintained a 70% savings rate for 10 years in a row, yea everyone would agree it sounds great.  But if in the meantime your salary had doubled - uh oh, you have fallen victim to lifestyle inflation!! Maybe you calculated ~9 years to FI when you started saving, but now that you are spending twice as much the original estimate does not apply.  Your savings rate can easily give you false confidence if you compare year over year.

« Last Edit: February 01, 2018, 01:35:54 PM by alanB »

nereo

  • Senior Mustachian
  • ********
  • Posts: 17496
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Check my savings rate calc please...
« Reply #9 on: February 01, 2018, 02:50:07 PM »
I guess I don't understand why knowing how much I am saving vs. how much I am earning is worthless. The more I save, and the lower my expenses go, the faster I reach FI...
 

If you maintained a 70% savings rate for 10 years in a row, yea everyone would agree it sounds great.  But if in the meantime your salary had doubled - uh oh, you have fallen victim to lifestyle inflation!! Maybe you calculated ~9 years to FI when you started saving, but now that you are spending twice as much the original estimate does not apply.  Your savings rate can easily give you false confidence if you compare year over year.
^this.  Plus, what's ultimately important isn't how much you save relative to your earnings, but how much you will need in ER. For many their expenses in ER will differ significantly from their working years, as things like commuting, networking, daycare and business attire will drop out, while new expenses like travel and hobbies may increase.  Many find their post-working expenses drop substantially.  Others actually increase their spending.
Also, changes in your salary and large infrequent expenses can have an almost comical effect on your % saved. As alanB said if your salary increases 10% each year but your savings rate stays constant, that's bad.  OTOH if you take a pay cut or have an emergency expense your savings rate may plummet, but that doesn't automatically mean you have decades more work (particualrly if you already have substantial savings... at that point market forces often have a greater effect on your retirement date than any additional contributions).

I find total savings and the ratio of savings to expected earnings to be much more useful, and far less volatile. For example, assuming you are using a 4% WR you need 25x future expenses.  I can track how much I save relative to that amount (e.g. "this year I saved 1.2x future expenses") while also noting market gains/loses ("with market gains I am at 18x expenses).
YMMV- I've simply never found savings rates to be more than a broad-brush metric.