Author Topic: Calculating savings rate  (Read 18739 times)

Slow time fun

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Calculating savings rate
« on: March 22, 2017, 03:54:50 PM »
Hi All,

I'm wondering how you compute a savings rate. It seems like it should be incredibly simple, but for some reason I'm having trouble figuring it out! One could compute it on savings or one could compute it on spending (assuming one knows one's income). And, do I count employer matching toward the savings? Do I base it off gross or net income? And, do I deferentially weight pretax savings with after-tax savings (i.e., it takes more to save 18 k in ROTH 401k than regular 401k)? Perhaps I'm making this more difficult than it needs to be...

Here's what I know:

--- Gross Income: $150k

--- Money my wife and I saved:
- ROTH 401k: 18,000
- 401k: 18,000
- ROTH IRA (2): 11,000
- HSA: 5,750
- Funds into a brokerage account: 5,000

--- Contributed by employers:
- 6,000 in 401k
- 1,000 HSA

--- Spending: no clue.
--- Fed and state taxes: I'm not sure, but around 21,000. Still other taxes I don't know such as FICA, county, etc.

So.... Is there any way to compute the savings rate? And, am I the only one who is confused by this? I'm probably making this more complicated than it needs to be....





Spork

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Re: Calculating savings rate
« Reply #1 on: March 22, 2017, 04:16:05 PM »
Every single person is going to answer this differently.  I only know because it comes up a lot.

My answer:  Use standard accounting! 

(income - expense) / income

It's that easy!  If you want percent, multiply by 100.

Now: You need to identify what is income and expense.  I *always* used gross.  If my employer put 3% into my 401k.. that's income.  If money came out of my check for FICA or federal taxes, that's an expense.

Your problem is going to be the "spending: no clue".  If you don't know your expenses, you don't know your savings rate, IMO.  There are other really good reasons for tracking expenses.  You can see things like "wow, my car is really expensive" or "you know, over the last 5 years, our grocery bill has increased a lot faster than the rate of inflation... what are we doing?"

Also: computers are handy.  If you get 4 "good, but different answers" on how to compute savings rates... it's very simple to have the same sets of numbers spit out all 4 rates.  Use something automated (or minimally a spreadsheet) and keep track of it over time.


Edit to add:
If I am to assume "money my wife and I saved" and "contributed by employers" is for the last year.  And this is the sum total of what you have saved...  That would put your expenses at: 150000-64750=85250

By my formula, that's 43% savings.

Now... you may have more or less expenses if you start really categorizing.  For example, some portion of a house payment is expense (interest, insurance, taxes) and some part of a house payment is a reduction in liability (principle).  If you put $700 into principle this month, sell your house next month, the check coming to you is presumably $700 bigger than if you sold it this month (all other things being equal).   Probably overly semantics here but: It's not so much that the "principle is savings"... it's that the principle is an asset transfer from one asset (your checking account) to another (your home equity).  But, in essence, you did retain that much of your assets, i.e. "saved" it.

I'll go the other way: You also might have expenses you are not counting.  You may have a car you bought last year for $30,000.  If you were to sell it this year, it might only sell for $25,000.  That $5000 is a real expense.  (You could take a $30k expense every 10 years... but that does not make your expenses very predictable and it is hard to really see over time the annual cost of the car.)  Personally, I ding myself once a year for the depreciation expense... This gives me a better idea how expensive my car ownership is.
« Last Edit: March 22, 2017, 04:29:07 PM by Spork »

MDM

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Re: Calculating savings rate
« Reply #2 on: March 22, 2017, 05:27:59 PM »
Every single person is going to answer this differently.  I only know because it comes up a lot.
+1

Another defensible answer: don't bother!

In other words, presumably one calculates a saving rate as a means to calculate something else.  It's likely the "something else" may be calculated without needing to calculate a saving rate....

Slow time fun

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Re: Calculating savings rate
« Reply #3 on: March 23, 2017, 05:59:39 AM »
Very helpful! Thanks!

andy85

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Re: Calculating savings rate
« Reply #4 on: March 23, 2017, 06:08:21 AM »
My method, which i stole from arebelspy:

A = net income + pre-tax contributions + any employer matches/contributions
B = spending*

(A-B)/A

It is simple and works good enough as any other method for my tastes...

*mortgage: Personally, I only count the interest, taxes, and insurance as spending...not the principal (since that increases net worth).

marty998

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Re: Calculating savings rate
« Reply #5 on: March 23, 2017, 06:13:19 AM »
I'm wondering how you compute a savings rate.

What is left of my head is getting very familiar with a certain brick wall.


Linea_Norway

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Re: Calculating savings rate
« Reply #6 on: March 23, 2017, 07:45:29 AM »
We simple compared the same date in this year and last year. We checked what we had on all our bank accounts, in funds and in savings. And then we checked how much is in there in all accounts at current date. That is savings. Income is everything you have gotten paid by your employer, minus any income tax.

Income - savings = expenses. Savings/income = savings rate.

Re3iRtH

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Re: Calculating savings rate
« Reply #7 on: August 19, 2017, 09:35:03 PM »
Bumping this.

Does anyone have any tips if you have rental income (and expenses) added to the already someone complicated tracking mentioned above? You may have mortgage and maintenance fees from several properties, as well as rental income coming in, in various forms.

Morning Glory

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Re: Calculating savings rate
« Reply #8 on: August 19, 2017, 09:47:21 PM »
Since this is a case study, face punch for the Roth 401k at your income level. You will likely be in a lower bracket after retirement.

I use the formula from the original MMM post to calculate savings rate. {(income+match-taxes) - spending} /(income + match- taxes).

Spork

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Re: Calculating savings rate
« Reply #9 on: August 20, 2017, 06:18:08 AM »
Bumping this.

Does anyone have any tips if you have rental income (and expenses) added to the already someone complicated tracking mentioned above? You may have mortgage and maintenance fees from several properties, as well as rental income coming in, in various forms.

It's not complicated.  It's always: (income - expense) / income

You can add more income.  You can add more expenses.  It's still: (income - expense) / income


HildaCorners

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Re: Calculating savings rate
« Reply #10 on: August 20, 2017, 09:39:50 AM »
I don't bother with "savings rate."

For me, the important number is % annual increase in Net Worth.

And my spending $$, so I can figure out when I'll have the magical Net Worth = annual spending * 25.

Yes, I could make this a lot more complicated. [What about my passive income streams, how do I factor in real estate appreciation, employer matches, taxes ...] So many What-ifs! I find it easier to just forget about them, because, as long as my Net Worth = annual spending * 25, I'll have all the money I need. Any excess is gravy, and I don't live on gravy.

Spork

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Re: Calculating savings rate
« Reply #11 on: August 20, 2017, 11:06:02 AM »
I don't bother with "savings rate."

For me, the important number is % annual increase in Net Worth.

And my spending $$, so I can figure out when I'll have the magical Net Worth = annual spending * 25.

Yes, I could make this a lot more complicated. [What about my passive income streams, how do I factor in real estate appreciation, employer matches, taxes ...] So many What-ifs! I find it easier to just forget about them, because, as long as my Net Worth = annual spending * 25, I'll have all the money I need. Any excess is gravy, and I don't live on gravy.

I honestly think all metrics are good metrics.  The more metrics you have, the better picture you have.  But with that said: be careful of the percent annual increase in net worth.  For me, this number is better understood over long periods of time than short periods of time.  This is not meant as a doom and gloom.  I think of it as always going up.  I've just seen it zoom really fast, only to plateau and/or fall. 

Capt j-rod

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Re: Calculating savings rate
« Reply #12 on: August 20, 2017, 11:52:51 AM »
Until you record, analyze, prioritize and control your spending then a "savings rate" does you nothing. You can make all the money in the world and spend it. This lifestyle is about reduction. Use Mint to track your spending. Keep every receipt and count every dime. Look back as to what you purchased. Punch yourself in the face three times or have a loving trusted friend do it for you. Then repeat the tracking exercise for another month. I had to repeat this for 4 months to reach 50% savings. I still get a face punch at least 6 times a year to remind myself not to be a consumer moron.
I do include principle payments in my savings. Escrow and interest don't count as they are other people's money. To succeed at this game you need to reduce your spending, and use that capital to work with and for you. Every other jackass in America carries the burden of interest and stupidity on their back.
Finally it is very important to embrace the healthy lifestyle of better eating and exercise that is in this world. You feel better and are able to do more fun things when you are healthy.

Acastus

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Re: Calculating savings rate
« Reply #13 on: August 24, 2017, 02:12:53 PM »
As stated previously, the end calculation is (income - expenses)/income  x 100%  = savings/income x 100% = savings rate.

I like to use gross pay for income and add up known fund contributions and general accumulation to get the %. You don't need to hunt down as many numbers. MMM prefers net income + company matches for the income. This gives you around 2 times the % unless your taxes are high.

The value comes with some benchmarking. I consider the financial rule of 50% needs / 30% wants / 20% debt & savings as the starting point. If you do this, you will have enough nest egg to retire at 65 or so. Increasing savings allows earlier retirement. Categorizing your needs and wants gives you power. Realizing many of your expenses are wants, or luxuries, gives you a place to reduce spending to enable saving. Cable TV and smart phones are nice to have, but I lived until age 33 without cable, and no cell phone of any kind until age 45. They are merely common luxuries unless you are nomadic or a media critic.