Calculating Your Savings Rate

[Nutria]

Dave Ramsey. (Yes, I understand his system is not about what makes the most sense {}.)

Why am I not shocked that a fundamentalist doesn't make the most sense when thinking about the future?

[disneysteve]

Why am I not shocked that a fundamentalist doesn't make the most sense when thinking about the future?

To be fair, Dave Ramsey focuses on BEHAVIOR. I think we can all agree that getting on a firm financial path requires changing one's behavior. He freely admits that his system isn't the one that saves you the most money but it gets people motivated and doing the right thing. I don't have a problem with that overall. There are just individual things he teaches that I disagree with.

[Nutria]

Dave Ramsey focuses on BEHAVIOR.

And what controls your concepts of proper behavior?

[Singuy]

Sure it is, for everyone else besides you and my father.



Only if you pick your own stocks and try to time the market.



Which is why day trading is so imprudent.

OTOH, picking broad market no-load mutual funds (S&P 500, Wiltshire 5000, All Market) and leaving it there is pretty darned safe.



There's no guarantee that I won't die of a heart attack this afternoon.



I dunno about that... Since June of 2006, the S&P 500 is up 64%. That's an... 8% APR (with dividend reinvestment).

Exactly what I said it would be.



From June 2008 to June 2015, the S&P 500 grew at... 8.7% APR (with dividend reinvestment).

Bottom line: your assertions have no basis in fact.

Okay now you are arguing over semantic. I was saying that the person who purchased(including a lot of my friends who were trying to get me into stocks in 2006), ended up losing 40% of their investments after the stock market crashed. Because they used their "savings"(not retirement) to do this, they got emotional about it and truely ended up losing 10-15k worth of money via stocks (cut your loses mentality). Sometimes speculation goes haywire when you have such a large movement in the global economy.

I agree with Disney Steve that the stock market generally goes up overtime(although we argued the same fact about housing but that turned out to be false)...and I agree that if you just want some money to sit somewhere for 30 years, the stock market is most likely better than your typical savings account.

But we talking about SAVINGS, not long term investments. You shouldn't have to worry about your savings disappearing one day, or accumulate a large amount of wealth on another. This is what you use for your a/c that broke down..that new you car you wanted, or that vacation you are going on. You can't just pull your money out of the stock market whenever you want(especially when it's less than what you bought it for).

[disneysteve]

And what controls your concepts of proper behavior?

I'm not sure what you're asking. Dave Ramsey focuses on building an emergency fund, paying off consumer debt, and saving for the future (retirement, college, etc.). I think everybody is on board with that stuff. We can discuss and debate the best way to approach it but that's really the basis of his program.

[Nutria]

[QUOTE=Singuy;411036]Okay now you are arguing over semantic.

Semantics can be very important.

I was saying that the person who purchased(including a lot of my friends who were trying to get me into stocks in 2006), ended up losing 40% of their investments after the stock market crashed.

Where did they get that money?

A transfer from other investments? That's *not* "saving". It's "moving your portfolio".

(No, that's *not* semantics.)

But we talking about SAVINGS, not long term investments.

But where does the money come from for long term investing?? Money that you put aside (aka save!!) each month.

Why do you conflate "the act of saving" with "the repository of those savings".

[Singuy]

[QUOTE=Nutria;411040]

Okay now you are arguing over semantic.

Semantics can be very important.



Where did they get that money?

A transfer from other investments? That's *not* "saving". It's "moving your portfolio".

(No, that's *not* semantics.)



But where does the money come from for long term investing?? Money that you put aside (aka save!!) each month.

Why do you conflate "the act of saving" with "the repository of those savings".

???
Savings come from their earned income. It's literally money you don't spend from what you earned. I don't know if you consider this a "transfer of profolio".

And semantics are impt but what you did was took what I met(stock market crash and rebound) to "on look it never happened because I can play around with specific dates he didn't specify".

Lastly, since no one here considers paying off a mortgage quicker as savings..which can be another repository btw(since you can take out home equity in a flash)..then I am assuming we are talking about full liquid savings. I don't see "savings" in the stock market as your typical liquid savings..it's an long term investment.

[disneysteve]

I was saying that the person who purchased(including a lot of my friends who were trying to get me into stocks in 2006), ended up losing 40% of their investments after the stock market crashed.

They only lost 40% if they panicked and sold at that point. If they held on and rode it out, they would have seen their investment recover and grow.

we talking about SAVINGS, not long term investments.

Where did we say that? The topic of the thread is "Calculating your savings rate". My savings rate includes both short term and long term savings. I have emergency savings but I also have college savings, retirement savings, vacation savings, etc. It is all part of savings.

[tripods68]

I think we need to hit the 'reset' button for the purpose of this discussion.



Both wife and I save a combined pretax towards retirement 25%.

We save an additional $3000 to $3500 extra a month funding various accounts. For instance next year's school year tuition, we also fund our EF/Savings includes property tax and insurance, ROTH contributions, and 529s for both our kids. In addition, we are paying extra towards our mortgage. This is possible because both of us have excellent employment and pensions. We follow Dave Ramsey's principle religiously.

Obviously the goal is to pay off the mortgage as soon as possible to further maximized our retirement contributions and pay less taxes. Achieve 3.5 mil in net worth by retirement age.

We don't live a "lavish" lifestyle just simply life living in Cali

[corn18]

I thought I had this all figured out, but now I am less confident in my understanding.

If I save $30,000 for college this year and spend $30,000 for college next year, is that really saving? I guess so in that I didn't spend that $30,000 this year. And if I can maintain my spending at a constant level, that $30,000 / year will be available after the college expense ends. But then I need to pay off the house, add to retirement, etc...

On a monthly basis, I "save" 100% of my net income because I have a one month reserve built up (outside of EF). On an annual basis, I "save" 70% of my gross income. On a 10 year basis, I "save" 25% of my gross income. On a lifetime basis, I don't "save" anything. Every dime I make gets earmarked for some future expense. I have a big chunk of money sitting in savings right now for college, new car, home repair, vet bills, car repair, future tax payments, vacation, home improvement, etc... This is not "saving" this is just cash flow management. Some do it with credit (a mortgage is cash flow management, credit cards can be but get you in trouble). Some do it with "savings" (the better way).

I'm going to stick with what makes sense to me. I will "save" enough to cover all present and future expenses, including retirement (which is really just an expense). Anything left over after that is "savings".

Tom

[disneysteve]

I thought I had this all figured out, but now I am less confident in my understanding.

If I save $30,000 for college this year and spend $30,000 for college next year, is that really saving? I guess so in that I didn't spend that $30,000 this year.

I think savings is anything set aside from current income to be used for future expenses.

If each month we spend $6,000 but earn $8,000, we are saving $2,000/month. That money might get spent later for college, car repairs, vacation, new furniture, whatever, but it is money that wasn't spent when it was earned. That qualifies as savings in my book.

[feh]

I thought I had this all figured out, but now I am less confident in my understanding.

Yes, there is a lot of grey area.

Personally, I only count money that will be used for expenses in retirement as savings. By my definition, money put in a 529 account would not qualify. Nor would money put aside for home remodeling or car purchases.

[disneysteve]

money put in a 529 account would not qualify. Nor would money put aside for home remodeling or car purchases.

Interesting.

So if you have a baby today and start putting $500/month into a 529 for the next 18 years, you wouldn't count that as savings? What would you call it?

How does that differ from a 47-year-old who is putting $500/month into a 401k for retirement in 18 years? Why is one "savings" and not the other? Not arguing. Just trying to understand how people define things in their heads.

[feh]

Interesting.

So if you have a baby today and start putting $500/month into a 529 for the next 18 years, you wouldn't count that as savings? What would you call it?

How does that differ from a 47-year-old who is putting $500/month into a 401k for retirement in 18 years? Why is one "savings" and not the other? Not arguing. Just trying to understand how people define things in their heads.

If the money is being put aside for living expenses in retirement, I consider that savings. Money in a 529 will be used for the benefit of another person (our son); once that money is put in the 529, I don't expect to benefit from it at any point in the future (at least not materially; it will be emotionally rewarding to be able to assist him).

Not saying that's the appropriate or "best" way to think about things; it's just my approach.

[Jluke]

Calculating an overall savings rate may not be easy and will vary by individual philosophies (as seen by numerous back and forths on here).

First, everyone earns money. the money is either spent or ends up in some type of account.

Keep it simple by putting the accounts in buckets; basically those accounts where your money is "working" for you and wasn't spent on consumer, household, etc (expenses).

401k Savings - my savings rate is 15% - simple enough.

Cash: I add up my money markets at the Credit Union and Capital One. Compare that to my balance at the end of December 2014. This year I will be negative or close to even, but only b/c I put a lot of extra $ on my mortgage.

Taxable Investments: TBD

529: none for me, but most will have this; some will treat it as savings, others won't.

Roth: maxed out

Other(s):

Maybe then you can determine it by adding up all of the dollar amounts and determining a percent if you feel that is necessary - ultimately it will come down to your perspective of savings and your final calculation. Numbers can always be manipulated to inflate/deflate the final value (conservative vs non-conservative estimates).