Author Topic: Why are 401k contributions not part of monthly savings rate?  (Read 1818 times)

ice_beard

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I'm really sorry I had to post this thread, I'm sure it's been discussed a bazillion times here.

I'm working on my spreadsheet and I cannot determine why 401k matches are included as part of your "take home pay" yet your actual 401k contributions aren't.   

I want to understand my household's savings rate, but don't think I understand exactly what that consists of.  401k contributions are pre-tax money I've earned and could be taking home, but have decided not to.  So why is that not part of my savings rate?? 
Not to muddy the waters too much, but HSA contributions also seem like a form of saving, are they also not included? 

These calculations are based upon this blog post...   http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

For clarification, this comes from this part of the blog post...

The MMM Take Home Pay calculation would thus be:
Gross Pay + Employer 401(k) match taxes and fees
= $8620 gross pay + $300 employer 401(k) match $1724 federal tax $689 state tax -$200 professional fees


My calculation for savings rate is currently:
(Net pay - spending) / Net pay

Thanks for helping me understand this. 
« Last Edit: July 02, 2017, 01:10:18 PM by ice_beard »

Paul der Krake

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Re: Why is 401k contributions not part of monthy savings rate?
« Reply #1 on: July 02, 2017, 01:10:13 PM »
There is no fixed definition of savings rate. You get to make up your own.

I use gross income instead of net because tax-advantaged accounts are tricky. But really, whatever works for you.

Joel

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Re: Why are 401k contributions not part of monthly savings rate?
« Reply #2 on: July 02, 2017, 01:10:22 PM »
Do you understand the difference between gross pay (before taxes and retirement contributions) and net pay (after taxes and retirement contributions)?

ice_beard

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Re: Why are 401k contributions not part of monthly savings rate?
« Reply #3 on: July 02, 2017, 01:13:58 PM »
I think I do understand gross vs net.  Gross = ~64 hours x pay rate.  Net is what is left after taxes, fees, dues, contributions, correct? 

tawyer

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Re: Why are 401k contributions not part of monthly savings rate?
« Reply #4 on: July 02, 2017, 01:41:50 PM »
Interesting you should post this because my project this weekend is to deduce as much from our various income sources. I have found this to be as complicated as I expected because neither my tax documents nor my tax return actually has the denominator laid out for me in full, because of the subtle differences between gross earnings, deferred income, wages, etc.

In the example you cite, the 401k contributions are included in the total take home pay as part of the gross pay, so it is part of the take home pay. As you say, you could have taken it home (less taxes), but in my view because it is now in an account that you have control over, similar to an HSA, it is part of your denominator of money you have brought home.
 

Al1961

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Re: Why are 401k contributions not part of monthly savings rate?
« Reply #5 on: July 02, 2017, 01:59:35 PM »
If you look at it again, you will see that the employee's 401k contribution is included in take home pay in the blog post you quoted. That is because the blog uses gross pay (which includes what you would contribute to the 401k) plus the employer match, which is not a component of gross salary/wage (because it is a benefit).

ice_beard

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Re: Why are 401k contributions not part of monthly savings rate?
« Reply #6 on: July 02, 2017, 02:01:16 PM »

In the example you cite, the 401k contributions are included in the total take home pay as part of the gross pay, so it is part of the take home pay. As you say, you could have taken it home (less taxes), but in my view because it is now in an account that you have control over, similar to an HSA, it is part of your denominator of money you have brought home.

Okay, this makes sense.  Thank you.  I need to be using gross pay. 
Now I need to find paystubs.  This is a bigger project than I anticipated.   

tawyer

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Re: Why are 401k contributions not part of monthly savings rate?
« Reply #7 on: July 02, 2017, 02:25:37 PM »

In the example you cite, the 401k contributions are included in the total take home pay as part of the gross pay, so it is part of the take home pay. As you say, you could have taken it home (less taxes), but in my view because it is now in an account that you have control over, similar to an HSA, it is part of your denominator of money you have brought home.

Okay, this makes sense.  Thank you.  I need to be using gross pay. 
Now I need to find paystubs.  This is a bigger project than I anticipated.   
Emphasis mine. FWIW, I got my free IRS transcripts online for this project and combined with an end of year paystub I have found it is much easier to figure out what is coming and going from where.