Correct way to calculate savings rate

[moof]

I'd like to have a good estimate of my savings rate.  Savings divided by take-home, right?

But it isn't that simple.  Do I count my employer 401k match as income?  Some savings is pre-tax, some is post-tax.  If I stay where I am at in Oregon I estimate I'll have a net ~20-25% tax hit when I start drawing on my pre-tax 401k, so the Roth stuff should be more valuable by at least 25%, right?

My rough numbers:
401k+match:  $18k plus $6k matching (pre-tax)
Roth savings: $11k (post-tax)
College savings for kid: $2.4k (should I count this at all? post-tax)

Take Home: $96k (include all that post-tax)

Call me a pedantic engineer (my wife does), but I don't like summing up pre-tax with post-tax savings and dividing by a post-tax plus pre-tax denominator.  So I get something like 37.4k/102k, or a 31% savings rate.

I could easily argue the 401k money is worth only 75 cents on the dollar compared to post-tax money in a Roth, ignore the college fund and get 29%.  Does the principle portion of my mortgage count as savings?  I count the principle as part of my net worth after all.  So what is the correct pedantic way to look at a savings rate when there is a mess of pre-tax and post-tax money floating around?

[MDM]

So what is the correct pedantic way to look at a savings rate when there is a mess of pre-tax and post-tax money floating around?

However you want to look at it. 

The critical question is "why do you want to calculate it?"  If the answer is "to determine time to FI," consider using
    Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i).

Details can be found in http://forum.mrmoneymustache.com/ask-a-mustachian/fire-in-8-years/

[sisto]

This has come up before.

http://www.google.com/search?hl=en&source=hp&q=site%3Amrmoneymustache.com%2Fforum+calculate+savings+rate
http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-savings-rate/
http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-my-savings-percentage/

[Shor]

Question to the pedantic engineer:
Why would the price that you purchased your house matter in Any way shape or form to the 3rd party trying to buy the house? Why should principal count at all during the accumulation phase if you're not looking to sell the house?

When you are looking to sell, you would then look at the general sellable price of the region, again not the principal you paid 15-30 years ago.

The answer is of course, if you're looking to FIRE right now, you have 2 possible equations to run:
- Sell house and move. Add cost of new house / rent added to expenses
- Stay in house, maybe P+I is eliminated or X years left. Only maintenance + land tax left to include in expenses.

Neither of these use or utilize your Principal. People just use that as an estimate for what they think their house should be worth.

[Playing with Fire UK]

I separate out my work related costs (that will cease on FIRE) so that I'm not trying to replicate these in FIRE (these are around 30% of my total expenses). If I had a mortgage that I was planning to pay off I'd do the same thing.

Consistency is more important than accuracy. Measuring the same thing every time so you can see trends. If you want bragging rights then (savings including pre-tax plus principal)/take home pay is the way to go.

If you were overpaying the mortgage into an account that you can take cash out of (dunno if they are common where you are, sort of like a HELOC), I would count that as savings, as it's money I have not spent and can access.

If you are 'saving' for a replacement car/holiday whatever, I don't count this as saving - it is smoothing spending over a couple of accounting periods.

[Monkey Uncle]

29% vs. 31%.  What difference does it make?  Sounds like you're chasing significant digits for no good reason.

[andy85]

per MMM's blog post formula, i calculate it like this:

Gross pay + 401(k) match - Taxes - Medical/Vision/Dental(or other deductions) = take home pay

(take home pay - spending) / take home pay = savings rate

sure, its not perfect...some savings is post-tax, some is pre-tax and some is just a buffer left in my checking account that i didn't spend that month. but over the course of the year it's close enough for me

[Playing with Fire UK]

As a pedantic engineer you may like TFS's post: http://thefirestarter.co.uk/calculating-savings-rate/ [warning, this led to me spending hours on an already complex spreadsheet].

If I was expecting to have a high tax burden once I was accessing my pension I'd probably put a factor in there as well.

[andy85]

As a pedantic engineer you may like TFS's post: http://thefirestarter.co.uk/calculating-savings-rate/ [warning, this led to me spending hours on an already complex spreadsheet].

If I was expecting to have a high tax burden once I was accessing my pension I'd probably put a factor in there as well.

that was an interesting read.
...back to my spreadsheets i go....

[Playing with Fire UK]

@andy85, glad you found it interesting - hope you didn't have anything planned for today!

[TheAnonOne]

TECHNICALLY, you would count debt payments (the principal part) as savings and deduct the balance from your stash.

So if you...
Have 100k in your stash
Make 10k a month (After taxes)
Spend 5k a month BUT 3k of it is mortgage(all principal for whatever reason) on a mortgage balance of 100k

The following situations arise.

1. You are saving 50% because you count your spending as a whole, payments included. Your stash is 100k
2. You are saving 80% because you count principal payments as savings. Your stash is 0 because you are counting principal as savings.

I would argue that the 2nd method is actually more accurate, because it will give you the time-to-fire more accurately without doing some odd calculations for increasing savings rate once the mortgage is paid off. Also, people make extra payments on debt here, is that not saving?

[BoonDogle]

This is really a preference item.  I do not compare my savings rate with others so I don't feel like we have to be on the same method.  My preference is gross salary less payroll taxes = earnings.  Expenses include health insurance (my portion) but exclude mortgage principal.  I pay extra on the mortgage.  My expenses now should be the same ones as when I retire (mortgage will be paid off), so I can get a better estimate of what my retirement expenses will be.  Savings rate is (earnings - expenses) / earnings.

[Anon in Alaska]

Why would you take out taxes before calculating your savings rate?

Taxes are voluntary (if you're willing to go to jail for not paying them and can hide your assets where they can't be confiscated to pay your taxes)[1]. That makes them voluntary consumption.

Calculate savings as a percentage of gross.

[1] But that would be wrong....