Any holes or room for improvement in the way I calculate my savings and spending

[RUStash]

First a little about my wife and I's situation which should answer some questions about why I am calculating my % saved and % spent the way that I am.

I am a DOD civilian and obviously taxes and other pre tax deductions are taken out of my check.

My wife is a contractor working for a large newspaper accounting department and there are no taxes taken out of her check. Of course she pays her taxes quarterly.

I calculate our savings and spending rate based on our Gross checks every month (PRE Tax). I do this mainly because I like to see how much we are spending on a monthly basis and I am not exactly sure how much is going to come out of her checks for taxes. The months that she does pay taxes I do NOT count that as money spent, since I also do not count the money coming out of my paycheck for taxes as money spent.

Our income includes her paycheck, my paychecks, and a little dividend we receive from our money market account.

Here are our different vehicles for saving.
- TSP (401K) Maxed out at 17500 per year coming out of my checks at 674 per paycheck. (Paid every two weeks or 26 times a year)
- VA 529 Accounts for our two children contributing 125 to each child per month 250 Total.
- Vanguard Index fund at 125 per month
- Principle on Mortgage averaging around 365 per month. (That's just the principle, not interest)
- Money Market account - we put in a couple hundred a month. This money then goes to pay down the principle on our mortgage after we save up 1000.00 increments. This is also our emergency money. I plan to have our mortgage paid off prior to my oldest child going off to college. To do this we have to pay an additional 7,000 per year on top of our regular mortgage payments. Our oldest child is now 5.
- My wife's IRA maxed out at 5500 a year.

I do NOT count the money the government puts in my TSP as saved money or income (Matching the first 4%). To me its just gravy. Basically for calculating the savings rate I ignore it. (I do not ignore it when calculating retirement income once that day hits)

I have been doing this calculation for all of 2014 and through 8 months we are saving 31.90% of our income and spending an average of 42.91%.

I know there are many different ways to calculate your savings rate and this way may not be ideal or perfect but so far its working for us. But I am always looking for ways to improve or tweak my approach so that's why I am posting it here. What say the Mustache community? Other than stop spending so damn much! I know I know, got to keep the wife out of Target!

Oh and I may have left something out so please don't hesitate to ask questions.

Thanks!

[Aphalite]

- I personally calculate debt service as part of my savings rate too, as if I wasn't paying that money to debt it would be going towards my savings, so any interest on your mortgage or student loans if you have them is included.

- Also, your 31.9% is gross instead of net, most people take taxes out when calculating savings rate, you're probably closer to 50% (32+interest/75 total that you listed below)

- The 529 accounts is part of savings but would not count towards your retirement

- You can also contribute to an IRA yourself, character of the IRA (Traditional or Roth) would depend on your total income - I would try to max that next

- As far as money market account - I'm a fan of using a HELOC as my emergency fund, but if you are putting it into mortgage everytime you get to $1,000, I don't see a problem with that

Looks good though, doing a great job!

[slugsworth]

I think roughly you calculate the same way I do. . . but I wasn't clear about the denominator (income) are you counting after tax income or pre-tax income? You say you are counting your income as 'pre-tax' but then you say you don't count your tax payments as money spent.

I think if you add % saved + % spent they should equal 100%. I'm thinking that maybe what you are doing is not including taxes which is roughly 25%.

What I do, and I think this is pretty common, is to take my net income add back in any retirement payments as well as any auto deducted medical payments and count that as my 'income' as far as my savings, I basically count the same things you do - actual savings + mortgage principle payment.

There is a lot of debate about the mortgage principle payment and whether that should be counted or not. . . but it is really semantics.  Part of the decision is about whether you are going to sell your home when you quit your work, or not. As long as the metric works for you - it's great.

[FrugalSpendthrift]

I know there are many different ways to calculate your savings rate and this way may not be ideal or perfect but so far its working for us. But I am always looking for ways to improve or tweak my approach so that's why I am posting it here. What say the Mustache community? Other than stop spending so damn much! I know I know, got to keep the wife out of Target!

One thing I just started doing is compiling a cash flow statement.  It shows all income, all of the taxes withheld, all expenses and all of my invesment contributions.  You can use it to calculate your savings rate any way you want, but I also find it helpful for tax planning.

I got the idea from http://radicalpersonalfinance.com/26/

[RUStash]

- I personally calculate debt service as part of my savings rate too, as if I wasn't paying that money to debt it would be going towards my savings, so any interest on your mortgage or student loans if you have them is included.

- Also, your 31.9% is gross instead of net, most people take taxes out when calculating savings rate, you're probably closer to 50% (32+interest/75 total that you listed below)

- The 529 accounts is part of savings but would not count towards your retirement

- You can also contribute to an IRA yourself, character of the IRA (Traditional or Roth) would depend on your total income - I would try to max that next

- As far as money market account - I'm a fan of using a HELOC as my emergency fund, but if you are putting it into mortgage everytime you get to $1,000, I don't see a problem with that

Looks good though, doing a great job!

You include the interest you spend on your mortgage as money saved because if you weren't spending it on interest you would be saving it? That's one way of looking at it I guess. Never thought of that and I am not sure I am comfortable doing that. The reason I count the money going towards principle as money saved is because the house is an appreciating asset in my portfolio that will be sold one day (Most Likely will be sold, who knows what the next 25 years will bring).

I know my 529 accounts are not going toward retirement but its still money saved and if I didn't have the kids I would like to believe I would be saving the money anyway. Similar to your point on the interest payments.

Thanks for the replies! I will look into that site for tax planning recommended by FrugalSpendthrift

[RUStash]

I think roughly you calculate the same way I do. . . but I wasn't clear about the denominator (income) are you counting after tax income or pre-tax income? You say you are counting your income as 'pre-tax' but then you say you don't count your tax payments as money spent.

I think if you add % saved + % spent they should equal 100%. I'm thinking that maybe what you are doing is not including taxes which is roughly 25%.

What I do, and I think this is pretty common, is to take my net income add back in any retirement payments as well as any auto deducted medical payments and count that as my 'income' as far as my savings, I basically count the same things you do - actual savings + mortgage principle payment.

There is a lot of debate about the mortgage principle payment and whether that should be counted or not. . . but it is really semantics.  Part of the decision is about whether you are going to sell your home when you quit your work, or not. As long as the metric works for you - it's great.

I am using pre tax gross income numbers from my check and my wife's check to calculate our savings and spending rates. The reason I said I did not count my wife's federal and state taxes as money spent is because we have to pay that with a check direct to the IRS or to the state after the funds have been put in our account. So I take our spending numbers I get from MINT.com (Mint sees the tax expense and adds it to our spending bottom line) and subtract what we sent to the IRS or state to get our true spending for that month. Mint.com does NOT see the taxes and pretax deductions from my paycheck so that's why I subtract my wife's.

The reason my % numbers do not add up to 100% is because the remaining portion goes to taxes, health insurance, life insurance, SS, and any other pretax deductions that are strictly in my check. Nothing is withheld from my wife's check because she is considered an independent contractor.

Hope this makes sense

[FrugalSpendthrift]

I am using pre tax gross income numbers from my check and my wife's check to calculate our savings and spending rates. The reason I said I did not count my wife's federal and state taxes as money spent is because we have to pay that with a check direct to the IRS or to the state after the funds have been put in our account. So I take our spending numbers I get from MINT.com (Mint sees the tax expense and adds it to our spending bottom line) and subtract what we sent to the IRS or state to get our true spending for that month. Mint.com does NOT see the taxes and pretax deductions from my paycheck so that's why I subtract my wife's.

I think putting together your own cash flow statement will help you keep that all clear.  I would rather look at the larger picture which includes how much tax you are paying, because some of your investment decisions will affect your tax bill (i.e. roth vs. traditional).

From my cash flow statement, I can see that over the past 8 months, I have spent 24% on income taxes, 16% on housing, 35% has been invested and 25% on everything else.

My savings rate could be 35% of gross, 46% of net, or 53% of net if I included mortgage principal.  The method you use should depend on how you are using that number.  If your spending is really low and you don't expect any tax burden in retirement and plan to sell your house, then you may want to ignore taxes, include the mortgage principal and calculate from your net pay.  I like to look at the gross %, because I don't yet know what my spending or taxes will be in retirement.

[Retired To Win]

In my view, you have a worrisome hole in your financial approach, and that has to do with your emergency reserves (or actually lack thereof).

The way I read your original post, your "emergency fund" builds up to $1000 and then gets knocked back down to ZERO when that $1000 gets applied to mortgage principal.  Not good, my friend.  As far as I am concerned, you have no emergency fund.  And you need one.  Make it six months' worth of living expenses, make it 12 months' worth of living expenses, whatever feels safe to you.  Then keep your hands off it (please).

Good luck.

[RUStash]

Thanks for the concern but I just didn't explain myself correctly. Yes when the mortgage portion (based off excel files) of my money market acct reaches 1000.00 I send it off to the mortgage principle. But the other portion just sits there earning a pathetic interest rate. That other portion is more than enough to cover 16 to 18 months of expenses.

FYI since Navy federal just announced 5% 12 month cd's I just opened four of them fully funded at 5,000 each. One for each family member. So my emergency fund is now at 14 months worth of expenses.

I can also tap into my vanguard funds at any time.