Calculating Your Savings Rate

[HouseHopeful]

I have seen a lot of different versions on how people like to calculate their savings rate. The one I have seen frequently - starts with Take home pay (Gross-taxes, but still includes 401k/savings contributions).

What do you prefer to utilize & why?

[phantom]

I don't calculate my savings rate because what percentage of what version of my income I'm setting aside for what purposes has little bearing on my ability to meet my financial goals. :-P

[creditcardfree]

The only savings rate I look at is % of gross for retirement. Currently we save over 17.5% of gross for retirement. Obviously, after taxes the percentage is larger. We have been slowing increasing it, usually when there are pay raises. I only calculate the percentage to make sure we are increasing it over time.

[disneysteve]

I have always based it off of gross. Any guidelines and recommendations you commonly see use gross also. The reason for this is that there are far too many things that influence net. It's just cleaner and simpler to use gross.

We currently save 23% of gross.

[snafu]

I've likely done it wrong all these years but I've always taken 10% off [net] any and all money, no matter the source, right off the top to savings. I consider deductions for CPP [Cnd equivalent SS] as part of saving tally. DH and I also have a former employer's pension plan which accrues annual value but we do not control.

I've always treated income based retirement savings as a bill similar to utilities, and automatically DCA to allowable limit. At month's end as I tally the monthly spending and confirm pay has deposited, I sweep sums left to savings, less the $ 1K 'float' the bank requires for their long list of free services. Other than EF or planned special expense, most of that money is used for planned stock purchases in a regular discount brokerage account as soon as sufficient sums have accrued.

I find it easiest to start with savings categories and then assign sums for all the other needs and want categories. Nearly everyone I know spends according to what they want. Hardly anyone looks at interest rates on CCs or cash advances.

[Singuy]

Is savings rate = net worth accumulation? Is paying more toward your house considered as "savings"?

[kork13]

I have always based it off of gross. Any guidelines and recommendations you commonly see use gross also. The reason for this is that there are far too many things that influence net. It's just cleaner and simpler to use gross.

We currently save 23% of gross.

I agree entirely. I use gross simply because it's EASIER! Taxes, deductions, and all the rest vary too much. So I just work off of gross. Currently we're able to save about 40% of our gross, but our stated goal really is 30%.

Is savings rate = net worth accumulation? Is paying more toward your house considered as "savings"?

Good question. Many people consider this (and other accelerated debt reduction) as savings. I personally do not, but I do recognize it as available funds for saving later once the debt is paid off.

[Nutria]

I have seen a lot of different versions on how people like to calculate their savings rate. The one I have seen frequently - starts with Take home pay (Gross-taxes, but still includes 401k/savings contributions).

What do you prefer to utilize & why?

Since I'm salaried, net of taxes and all deductions except 401(k) is how I do it.

Note, though, that before you can calculate "savings rate", you must define what the word "savings" means.

Some people think that it only refers to retirement savings. But you can save for a new car, save for a 20% house deposit, save for unexpected medical bills, save for job loss, and -- last but not least -- save for the the oxymoronic "bog standard" unexpected.

Thus, I think that you should calculate not just one savings rate, but multiple:

• retirement
• future, kids
• fixed future spending: house, car
• job loss
• rainy day, aka unexpected stuff: medical, repair, etc

Some of these might have a 0% rate if, for example, you have already purchased your home, and/or already have a job loss cushion.

Many disagree with me for having separate "job loss" and "rainy day" savings, but I like the knowledge that our regular bills could still be paid if I lose my job soon after having to make a big home repair.

[Singuy]

Our household savings rate is more or less around 80% of post tax income.

[corn18]

Since I'm salaried, net of taxes and all deductions except 401(k) is how I do it.

Note, though, that before you can calculate "savings rate", you must define what the word "savings" means.

Some people think that it only refers to retirement savings. But you can save for a new car, save for a 20% house deposit, save for unexpected medical bills, save for job loss, and -- last but not least -- save for the the oxymoronic "bog standard" unexpected.

Thus, I think that you should calculate not just one savings rate, but multiple:

• retirement
• future, kids
• fixed future spending: house, car
• job loss
• rainy day, aka unexpected stuff: medical, repair, etc

Some of these might have a 0% rate if, for example, you have already purchased your home, and/or already have a job loss cushion.

Many disagree with me for having separate "job loss" and "rainy day" savings, but I like the knowledge that our regular bills could still be paid if I lose my job soon after having to make a big home repair.

I was debating this with myself just yesterday. This year I will "save" 30% of my gross income. I'm good to go, right? Not really. 25% of gross for non-retirement savings (college, EF, car, vacation, house) and 5% of gross is retirement. I have a spreadsheet that indicates I am woefully short on retirement savings, but I also have a kid in college and another getting ready to enter college next year. So I have a spreadsheet for college cash flow now, too.

The conclusion I have come to is that it doesn't matter what percentage of gross, net, or other income number you are saving. What matters is whether you are saving enough to meet your goals. If you rely on a rule of thumb, you will be surprised when you get to the end of the race (either pleasantly or not).

[feh]

Is savings rate = net worth accumulation? Is paying more toward your house considered as "savings"?

I think that's a matter of opinion. I never considered loan payments as savings. Others do.

[Nutria]

I never considered loan payments as savings. Others do.

Sounds like someone is confusing "savings" with "increasing net worth".

[feh]

Sounds like someone is confusing "savings" with "increasing net worth".

Yeah, I don't understand it either. However, there was a thread on bogleheads a few months ago that went on for pages and pages, with much fervor.

If anybody is interested, I can try to find a link to it.

[disneysteve]

I think that's a matter of opinion. I never considered loan payments as savings. Others do.

I think the confusion arises because prepaying a loan saves you money by reducing the amount of interest you have to pay. Ultimately, that does result in having more money in your pocket over time. So I can understand why some people count that as savings. For example, prepaying a 4% mortgage is essentially the same as putting money in an account that earns 4% interest. In fact, the prepayment is a little better because the bank account interest would be taxable.

[Nutria]

I think the confusion arises because prepaying a loan saves you money by reducing the amount of interest you have to pay. Ultimately, that does result in having more money in your pocket over time. So I can understand why some people count that as savings. For example, prepaying a 4% mortgage is essentially the same as putting money in an account that earns 4% interest. In fact, the prepayment is a little better because the bank account interest would be taxable.

That's the same bone-headed logic that women use when there's a "sale" at the Mall.