Author Topic: Calculating savings rate  (Read 2085 times)

JTD1968

  • 5 O'Clock Shadow
  • *
  • Posts: 9
  • Age: 56
  • Location: Lancaster, PA
Calculating savings rate
« on: February 04, 2016, 05:57:26 PM »
     I have seen many different methods of calculating ones savings rate on this forum (all with their merits). Some use gross, some use net, and many include 401K and other factors in their formulas. I try to keep it very simple and just use my take home pay (plus any side income) minus spending. I don't include my 401K  and any match. By this method I averaged 41% for 2015 (hope to do better this year). I don't include my 401K as it comes off the top before I ever see it. Maybe I am all wrong , but the way I look at it, if I were to include this then why not include my FICA tax  because it comes out of my gross pay also and goes toward future retirement (social security).  The point I am trying to get at is that I think the method of calculation used is less important than having a consistent way in which you can measure your progress and keep yourself accountable. I think that sometimes we get so caught up in the details and methodology and forget that it is all in service of a greater goal (financial independence). Just curious is anyone feels the same as I do on this.

lauraah

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Calculating savings rate
« Reply #1 on: February 04, 2016, 06:05:59 PM »
I contribute the max to my 401K ($18K) which is a massive portion of my savings.  If you contribute any significant amount to the 401K, I think that would be important to count in any calculation.  I agree though that it's all in service of an end goal and I guess whatever calculations help motive a given person the most make sense.

redcedar

  • Bristles
  • ***
  • Posts: 282
Re: Calculating savings rate
« Reply #2 on: February 04, 2016, 06:31:30 PM »
Here is a great article on various savings rate calculations - http://thefirestarter.co.uk/calculating-savings-rate/

I really don't think there is one perfect calculation but it is cool to have 2-3 that you like and work for your personal inputs.

nereo

  • Senior Mustachian
  • ********
  • Posts: 17499
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Calculating savings rate
« Reply #3 on: February 04, 2016, 06:39:15 PM »
Use whatever method works best for you, but don't loose sight of the forest for all the trees.  What ultimately matters is absolute dollars saved and annual expected expenses in retirement.

pdxmonkey

  • Bristles
  • ***
  • Posts: 364
Re: Calculating savings rate
« Reply #4 on: February 04, 2016, 07:23:04 PM »
I do calculations based on net. They seem easiest.

Net income = take home income + 401k contributions.
Net savings = Net income - spending.
%saved = Net savings/Net income.

networthify.com tells me how many years it will take to retire on x% savings based on net income.
That still leaves the problem of... when I can actually retire and on what saved money given that decent portions of it are tired up in retirement accounts and have rules for access, some of the money is Roth, some will be taxable on withdrawal, etc.

As a worst case scenario I just look at this:
When the line for savings outside of retirement accounts will go above the line for 25x spending. Given it doesn't account for 401k or IRA money at all it is very conservative and I am bound to beat it even in a terrible market.

I suspect as I get closer I'll start caring about using more complex and accurate methods that produce something better than I can retire 8-10 years from now.
« Last Edit: February 04, 2016, 08:14:33 PM by pdxmonkey »