First Post-Be Gentle Please

[Sarnia Saver]

Hello Mustachians, this is my first post and I just had a few questions about some of the concepts of Mustachianism savings rate goals.  When figuring out your savings rate, does the principal portion of your mortgage count as saving (investing in not having to pay rent down the road) and does employer contributions to pension plans count towards savings rate, as I get 9% pension whether I contribute a dime or not.  Also, do you factor in the tax rate when determining your savings rate?

I am just trying to see how I am doing compared to the ideal.  Having gotten out of the retail job stage of my life and going back for a degree in chemical engineering, I am now in a position to save.  I have a long way to go before meeting the level of badassity as a lot of you folks I've been reading about, but I'm trying.

Currently out of 115k averaged per year for last 3 years(before taxes; approx. 30% tax rate before deductions in Ontario):

18k in Pension(personal)/RRSP contributions,
5k in RESP contributions,
10k in TFSA contributions,
6k in mortgage extra payments.

Debts include mortgage (2.79%) and car loan (0%).  I realize I will get blasted for purchasing a new vehicle, but I splurged when I got the new job before I came across this site and my wife required us to own an ultra safe AWD SUV, at least the interest rate is 0% and the car came with a free oil change!

Curious on people's opinions on the variable mentioned above, glad to be starting this journey to financial freedom.

[deborah]

A recent post by MMM deals with net worth and what is included/excluded - http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/

There are many other thoughts about this in the forum, but MMM is the official view.

I also am paying a ridiculous interest on a car loan - I put the entire cost into a bank account, and it just goes out each month, and I get more interest in the bank account than I pay for the loan. So I actually *have* the money - it is just an investment decision.

[11ducks]

Welcome! To get a good response and ideas of where you may want to tweak your budget, think about submitting a case study in the 'ask a mustachian' section. I think anyone that starts here not massively in the hole (I have a net worth of -$19k currently!) is doing okay, but the MMM forum is great and helpful regardless of where you start.

[larmando]

Welcome! Good news: yes extra mortgage payments count, especially if you have a sensible choice of housing.

Bad news: "ultra safe" means "we'll make you pay more banking on your irrational fears" and "0%" on new means "we've already charged such a ridiculous price that the interest is rolled into that", so both of those are just excuses. (Yes, the free oil change is also not free) :) You shouldn't feel bad about this: it's sunk cost, but you should realise it for the future.

[Retired To Win]

Hello Mustachians, this is my first post and I just had a few questions about some of the concepts of Mustachianism savings rate goals... I am just trying to see how I am doing compared to the ideal...

I am not sure there really is an ideal.  Even MMM, from time to time, face punches himself for some non-ideal component of his situation.

If I were in your starting shoes, the first thing I would do is to think hard about how long I would find it reasonable to be willing to wait to reach FIRE.  Then I would evaluate all my current spending, my earnings, and my living location based on that benchmark and on how my present savings rate compares to the savings rate necessary to reach that targeted FIRE date.  And then I would start changing and slashing accordingly.  It's either that, or go back to the original thinking and move further back the FIRE date.

Good luck.

[MDM]

Hello Mustachians, this is my first post and I just had a few questions about some of the concepts of Mustachianism savings rate goals.  When figuring out your savings rate, does the principal portion of your mortgage count as saving (investing in not having to pay rent down the road)...Also, do you factor in the tax rate when determining your savings rate?

Depends on what you want to do with the results of the calculation.  If you want to plot the number over time so you can see whether it goes up or down, do whatever feels good to you.

If you want to use it as input to a back-of-the-envelope "how long until am I FI?" calculation, you may want to ignore "savings ratio" and "mortgage payments" completely, and use

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Return on invested retirement funds.
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions.

and does employer contributions to pension plans count towards savings rate, as I get 9% pension whether I contribute a dime or not.

Not sure how your pension works, so adjust what follows as needed.

A non-inflation-adjusted annuity/pension doesn't quite fit into the framework assumed by the Trinity Study folks, due precisely to the lack of inflation adjustment.

Taking a deduction from annual spending and using 25-30 times (actual spending minus annuity) isn't exactly correct because the annuity becomes a smaller fraction over time.  Treating it as part of net worth isn't exactly correct because it won't appreciate in value as a stock & bond portfolio would.

One can always make some approximations, however.  E.g., use (expenses minus "annuity payment discounted by 10 years of inflation") or "use a lower assumption for total stash growth" in the above equation.

See http://forum.mrmoneymustache.com/ask-a-mustachian/do-you-count-the-principal-part-of-your-mortgage-payment-in-your-savings-calc/ for more discussion.

[Sarnia Saver]

Thanks for all the responses, quick and concise.

My pension is immediately vested and is a direct contribution style.  They give me 'x' amount of dollars to invest and it's up to me to provide income for life within their plans.  They have some nice Blackrock balanced funds with MERs of less than 0.3%, which is pretty amazing for Canada.

As for right now, I currently look at each and every dollar I spend, and attempt to avoid spending it.  Some monthlies I have set in place, and would love to eradicate them, and at least two will be gone forever in a year and a half.  Much more time has been spent in the community, looking for free fun activites for the family, and the expensive gym membership actually includes child care while either of us are there, plus lots of free activities for the kids (Kung Fu, Swimming, bouncy castle gymnasium, etc).  At a later date I will post my budget in the aforementioned forum to look for any tweaks, as I have just started using mint 6 months ago.  It truly is amazing how much frivolous spending goes away once you have to answer for it, if only to yourself.