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    % to savings, from gross or net ?

    Hi guys. I don't post alot but am a faithful reader. When you are talking % of income to savings ( usual advice is 20%), are you talking gross or net? Does this figure include sinking funds? DH and I manage our incomes seperately since he is self employeed and his income varies greatly and my job is really extra after being home with our 4 kids on and off.I am currently saving 40% of my net pay to both general savings and sinking funds ( 13% to sinking, 27% to reg savings).My 6 month EF is now fully funded. What is your advice as to further savings? The only debt I have is a car loan (14k at 4%) I have about $1400 each month after bills are paid. I need to re open my Roth. DH is self employeed and I don't get any retirement benefits at work. So, I guess this is a two part question. Is the 20% from gross or net and what should be my focus this year, car pay off or Roth ? Thanks in advance.BTW, we do have decent real estate holdings and some cash in savings for retirement, but being in our mid 40's, we have some catching up to do.

    #2
    Quick answer now - more to come when I have time.

    The figures we give are based on gross income.

    What do you mean by "sinking funds?"
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


      #3
      Thanks DS. Sinking funds ( maybe I have the terminology wrong), to me are savings accounts set apart from regular savings for anticipated spending throughout the year. I have Christmas, birthday, vacation and car expenses accounts. These account for 13% of my net pay currently.

      Comment


        #4
        if sinking funds do not increase net worth (at end of year), I would NOT include them in savings rate- it is creating "fools gold" for you.


        Using the sinking funds to fund the expenses (like xmas gifts and car repairs) is an EXCELLENT idea.
        adding that money to savings rate should NOT be done, because if you set aside $2000 for the year, and then at year's end you spent all $2000, you did not actually save anything.


        Calculate savings based on GROSS PAY because money can be put in accounts like 401k and IRAs pre-tax.

        If DH pay is not steady, I would try to do any of a number of things

        1) try to pay for all expenses from your income, meaning 100% of DH income can be saved or spent on luxuries.

        2) Have DH "pay household" a fixed amount each month. Leave the balance in business account, and use a portion of this money as sinking fund.

        3) Make sure budget (total expenses) is less than minimum income from you and husband, and save a large percentage of anything over the normal budget.

        example (for #3) calculate a budget with a small (5% of gross) savings rate. Both you and DH contribute to this as you see fit- all required expenses are in this budget with a specific income need to cover the budget. If you spend $4000/mo, then make sure you save $200/mo (5%), if the variable income adds another $1000, pledge to save 33% or 50% of the higher income (so $333 or $500 of the $1000 is added to savings for long term expenses like retirement).

        You would generally do #3 if #1 does not work. Meaning if you earn $2500/mo and DH earns around $1000-$5000/mo with expenses of $4000/mo, neither income can cover all expenses, so splitting up or combining is the way to make it work.

        Comment


          #5
          Originally posted by jIM_Ohio View Post
          if sinking funds do not increase net worth (at end of year), I would NOT include them in savings rate- it is creating "fools gold" for you.

          Using the sinking funds to fund the expenses (like xmas gifts and car repairs) is an EXCELLENT idea.
          adding that money to savings rate should NOT be done, because if you set aside $2000 for the year, and then at year's end you spent all $2000, you did not actually save anything.
          Jim, I don't necessarily disagree but I wonder where you draw the line. Ultimately, all money being saved will be spent (unless it is left to heirs upon your death). If money that I'm setting aside for vacation doesn't count as savings, what about money I'm setting aside for my next car? How about money being saved for college, home repairs, upcoming insurance bill, etc?

          I could easily classify almost everything but retirement as "sinking funds" in that case as it is all being saved for some future need, whether shorter term or longer term.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

          Comment


            #6
            Originally posted by disneysteve View Post
            Jim, I don't necessarily disagree but I wonder where you draw the line. Ultimately, all money being saved will be spent (unless it is left to heirs upon your death). If money that I'm setting aside for vacation doesn't count as savings, what about money I'm setting aside for my next car? How about money being saved for college, home repairs, upcoming insurance bill, etc?

            I could easily classify almost everything but retirement as "sinking funds" in that case as it is all being saved for some future need, whether shorter term or longer term.
            Draw the line at net worth

            a vacation does not improve your net worth over long term (say 7-12 years).
            purchasing a car does not improve your net worth
            home repairs might, but its not dollar for dollar (home improvements and home repairs, semantics...)
            college does not improve YOUR net worth (it will improve your child's though).


            If you told me you are saving 33% of income, and then said 3% of that is for vacations and 1% is for the next car, and .5% is for home repairs and home improvements... I would say the only part of that which is SAVINGS is the part for home repairs.


            Net worth is kind of arbitrary (there are probably other ways which I cannot think of right now), but it is a good measure.

            You do raise a good point

            all money being saved will be spent (unless it is left to heirs upon your death)
            and I usually bias my answers to retirement savings and financial independence. So if someone has a better measure, I would love to see it.

            Comment


              #7
              OP here. Thank you Jim and Steve. DH makes significantly more money than I do, even when business is at it's worst. I pay utilities, expenses for kids, etc. but we could easily cover this from his income alone. The only real issue would be health insurance, which is a major reason for my working outside the home at all. As it is now, I have that $1400 extra a month. Do I pay off the car ASAP? Fully fund a Roth? I could also fund a Roth for DH which means 10k per year. Or, should I put an additional amount into regular savings above the already saved 6 months EF? Which is really an extra in itself because, like I said, if something happened to my job, we can definitely live on his income. As far as my sinking funds. I don't consider them true savings because they are used at the end of the year, but those funds would be available in an emergency.

              Comment


                #8
                Originally posted by disneysteve View Post
                The figures we give are based on gross income.
                Wait, what? All this time I was under the impression the percentages were based on real income.

                So if needs/wants/savings is broken down into 50/30/20, would paying taxes be part of the "needs"?

                Comment


                  #9
                  Originally posted by eeyoresmom View Post
                  OP here. Thank you Jim and Steve. DH makes significantly more money than I do, even when business is at it's worst. I pay utilities, expenses for kids, etc. but we could easily cover this from his income alone. The only real issue would be health insurance, which is a major reason for my working outside the home at all. As it is now, I have that $1400 extra a month. Do I pay off the car ASAP? Fully fund a Roth? I could also fund a Roth for DH which means 10k per year. Or, should I put an additional amount into regular savings above the already saved 6 months EF? Which is really an extra in itself because, like I said, if something happened to my job, we can definitely live on his income. As far as my sinking funds. I don't consider them true savings because they are used at the end of the year, but those funds would be available in an emergency.

                  You have a good problem to have
                  some insight might be given if you post your budget. List expenses. List income (break it down so we see your and DH's range). List how you save money now (both for retirement and sinking funds).


                  Expect to see these comments from other posters once the budget is posted.


                  1) Know your gross income. Know your net income. Spend less than you net (spend less than you earn) and confirm what the difference is between expenses and net income.

                  2) Save 20% of gross income. I suggest 15% to retirement and 5% to short term needs as the basics. The 5% leaves room for much interpretation... Use the 15% to fund both Roth IRAs and 401ks and other options (like self employed retirement plans). DH has higher contribution limits than employer sponsored 401k and similar type plans.

                  **if your budget in #1 is before 20% savings, look at #2, change savings, change budget, then redo #1 and #2**

                  my top few suggestions (for the 5%):

                  2a) put 5% to savings until you have between 6-12 months expenses. Depending on DH income range, I would consider 24 months expenses in cash, but it just depends.
                  2b) put 5% to pay down debt (like car, mortgage or other debt)
                  2c) put 5% in savings to build a sinking fund for large expenses (new cars, vacations, college)
                  2d) use an HSA and set 5% of gross into HSA for long term health expenses (and short term health expenses too)


                  3) Look for creative ways to pay for things. I am thinking this is a situation where you are an excellent saver based on sinking fund comments earlier in thread. Meaning you might spend $2500/month on normal expenses, and also set aside another $500/mo into sinking fund... (this would be total expenses of $3000), if this is true, then that $500 is a huge buffer (you could cut expenses from $3000 to $2500 and immediate impact is not even noticed). This would be first item to "remove" if DH has a bad month or two, for example. If you can shift more to sinking fund and less to normal expenses (so $3000 of expenses split $1600 to normal and $1400 to sinking fund) that actually helps cash flow considerably. Especially for large purchases (like a new car).

                  Comment


                    #10
                    Originally posted by disneysteve View Post
                    Jim, I don't necessarily disagree but I wonder where you draw the line. Ultimately, all money being saved will be spent (unless it is left to heirs upon your death). If money that I'm setting aside for vacation doesn't count as savings, what about money I'm setting aside for my next car? How about money being saved for college, home repairs, upcoming insurance bill, etc?

                    I could easily classify almost everything but retirement as "sinking funds" in that case as it is all being saved for some future need, whether shorter term or longer term.
                    I agree with Jim here. I am using mint and if I was going to spend 10k towards car, I would add an artificial loan worth 10k to my account so when I see my net worth I wont see that 10k.

                    In near future, we are going to allocate some fund to vacation in our budgeting and we might keep adding artificial loan amount equal the amount that we keep aside every month for vacation. That way I wont see that being added to net worth and certainly wont think of that vacation money as savings.

                    Comment


                      #11
                      Thanks Jim. Here is my budget: monthly net pay ( after health insurance deducted), $ 2760
                      Cell phone plan for family-$150
                      Electric-$150 ( give
                      or take)
                      Car payment-$350
                      Orthodontist-$175 ( this will be paid off in July, no interest, so no advantage in paying off sooner)
                      Dues for timeshare- $90
                      Funding sinking funds-$360 (this actually covers a lot of spending)

                      Cash for gas and additional spending- $320
                      Last edited by eeyoresmom; 12-23-2010, 04:36 PM. Reason: Wrong info

                      Comment


                        #12
                        1. Determine if you are even eligible to contribute to a Roth:
                        Roth IRA Contribution Limits and Eligibility through 2010 and 2011

                        2. It looks like the 2 of you like to keep your finances somewhat separate. Therefore, if you are eligible to contribute to a Roth, contribute to your own Roth. Have your husband contribute to a retirement plan from his income. He has options other than a Roth which could allow him to contribute even more (for example a SEP-IRA). He'll want to study all his options before deciding.

                        3. EF: Does the 6-month EF only cover your share of the expenses? Does your husband also have an EF to cover his share of the expenses? If not, then the EF needs to be beefed up, preferably from his income. If your husband's income is uncertain, then you may want to have more than 6 months of expenses in your EF. (FYI - My situation is similar to yours. My husband is also self-employed. I work, but his income is substantially higher than mine. My income is pretty predictable but his income is uncertain and we are always aware of the fact that it could go to zero overnight. Therefore I sleep better at night with a minimum 1 year EF.)

                        3. If you have funded your Roth (if eligible) and you have a reasonable EF for your situation, then go ahead and pay down the car. I'd do that before I did any "extra" saving since it will save you the 4% in interest and you won't get anywhere near that on a savings account right now.

                        Comment


                          #13
                          I do qualify for a Roth and the 6 month EF is my current expenses only ( if I got laid off DH would cover the expenses I currently pay, I just want to have the extra security and maybe take a little more time finding another dream job). Out of his income, he has saved about 18 months EF. He is currently making extra mortgage payments. I will also help with this, hopefully sometime in 2012, I'm just thinking that this year should be car and Roth. DH's income also has paid for oldest DD to graduate from college loan free and second DD is half way through and will also graduate without debt. There is enough in our EF to continue to cover the education expenses.

                          Comment


                            #14
                            Originally posted by eeyoresmom View Post
                            I'm just thinking that this year should be car and Roth.
                            Given the additional details (ample EF, college taken care of) I think this sounds like an excellent idea. With the extra money you have each month, you will be able to fully fund your Roth and get the car almost paid off. And don't be surprised if, once you start paying it off, you gather some momentum and find some extra money, so that by this time next year the car will be 100% paid off. Good luck.

                            Comment


                              #15
                              I personally view the 20% figure as coming out of pre-tax salary. Ultimately, it's your goal to get savings directed for retirement up to 15-20%.

                              Things like the 'sinking' funds you mention, are definitely savings - just not retirement savings. Ideally, IMO you would like to have 20% to retirement + your sinking funds.

                              And I do not like attempting to manage finances separately from your spouse. If his income varies, you guys can learn to create a budget for a variable income. Best idea is to create a prioritized spending list: (something like this but better)

                              1)Food
                              2)Mortage
                              3)Utilities
                              4)Insurance
                              5)Debt elimination
                              ...
                              35) Soap
                              36) Movie nights
                              ...

                              And each month, you just go down the list as far as you can.

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