Savings rates are great. How much money do you need to live vs. how much money do you make? Are you kidding me? That’s a perfect measure of how efficient you are behaving! I am a fan of savings rates.
What I’m NOT a fan of is calculating savings rates. What do you include as an expense and what don’t you include? Do you include 401(k) contributions as income? Is the whole debt payment an expense or just the interest part? Is home maintenance an expense or an asset?
Everyone seems to have their own method of calculating their savings rate, and just to muddy the waters, I’m going to introduce my own!
Unrelated picture of Cornelius & Klaus
Expenses: Here’s our 2015 expense report. For this report, I will exclude the principal payments on debt and include only the interest portion as an expense.
Income: Here’s where it gets complicated. This will be all of our take-home income, after everything gets taken out, with our 457 and 401(k) plan contributions added back in… but at 60%.
I know, I know, it sounds crazy. But hear me out. We can safely assume that if we had been paid those contribution amounts as income instead of putting them in tax deferred accounts, they would have been taxed at a 25% federal rate, plus state taxes and various payroll taxes. So let’s estimate that 40% would disappear before it hit our bank account. By adding back the contributions as income at 60%, we are mocking up what our take-home pay would have been if we took our entire paychecks home.
But what about our rental property? I am excluding all of our rental property income and expenses because I like to treat that as its own self-supporting business, separate from our personal spending. And the way I see it, the rental is an investment, so all of the start-up costs we endured this year (down payment, closing costs) are by default included as savings, same as if we had invested it in the stock market.
Caution – I will be showing you our after-tax income! Since it’s inherent in any savings rate calculation, I know you’d just be doing it in your head anyway, so why not just include it.
I can never think of any good pictures for these number-based posts…
So here’s a picture of a goat calendar.
From our annual expense report, we know that…
Expenses Excluding All Debt Payments = $35,373.10. Now add…
Interest Paid On Debt
| Mortgage Interest | $2,413.02 |
| Student Loan Interest | $172,18 |
| Car Loan Interest | $85.52 |
| Total | $2,670.72 |
So for our purposes, Total Expenses, Less Principal Payments = $38,043.82
We put almost $20,000 into tax deferred accounts (would’ve been more if it weren’t for Marge’s terrible 401(k) choices!), so our mocked up After Tax Income is $89,354.48. The difference is our savings at $51, 310.62.
Savings Rate = Savings / Income = $51,310/$89,354 = .574
So our Savings Rate is 57.4%! I was hoping to hit 50%, so I’m happy.
Another utterly irrelevant picture
Hey kids! Here’s a lesson I wish someone had taught me years ago. Through determining your savings rate, we can discover how many years it will take until your investments will cover those expenses, and you can retire! Incredibly, there is a formula for that and it works.
Mr. Money Mustache teaches us that a 57% savings rate means you only have to work about 14 years until your assets support your lifestyle.
Here’s a fun chart
What does the average Joe save?
The Federal Reserve keeps stats on this. Ever since the early 1990s, the average individual’s savings rate has hovered around 5%. During one month (December 2012) it peaked at 11%, and the highest the savings rate has been in the observable past is 17% in May 1975. I got you beat, Average Joe! I beat your ass two time! Three time!
At a 17% savings rate, you’ll still have to work for 40 years like a sucker before you can be financially independent. And at 5%? Well, I don’t even want to think about it! If you save 5% of your income, you’ll hopefully be relying on a pension or Social Security, or else be enjoying a restful retirement from the grave.