How Do You Calculate Your Annual Spending/Saving Percentage?

[MercyMe]

I see a lot of people mention their annual savings rate as a percentage of total income. When calculating this, do you include spending on taxes in the divisor?

Here is a hypothetical simplified example...

Discretionary Spending (vacation, dining out) : $10,000
Required Spending (utilities, home/car insurance): $20,000
Taxes: $15,000
Savings Account Growth: $55,000
Total Annual Income: $100,000

In this scenario, which of these is the annual savings percent?
55% --> 55,000 divided by 100,000
65% --> 55,000 divided by (100,000 minus 15,000)

Follow up question: Do you count health insurance as require spending?

 

[finnski1]

I see a lot of people mention their annual savings rate as a percentage of total income. When calculating this, do you include spending on taxes in the divisor?

Here is a hypothetical simplified example...

Discretionary Spending (vacation, dining out) : $10,000
Required Spending (utilities, home/car insurance): $20,000
Taxes: $15,000
Savings Account Growth: $55,000
Total Annual Income: $100,000

In this scenario, which of these is the annual savings percent?
55% --> 55,000 divided by 100,000
65% --> 55,000 divided by (100,000 minus 15,000)

Follow up question: Do you count health insurance as require spending?

Gotta be 55% for me.

 

[SecondCor521]

My opinions:

Taxes are an expense, just like groceries or utilities or recreation.

Savings is income minus expenses. So in your example, $100K - $10K - $20K - $15K = $55K.

Required vs. discretionary is more of a spectrum than a binary categorization. The basics of life are more required than recreation. There is also the aspect of fixedness: Certain expenses, like eating out, can be changed more rapidly than others, like a housing payment. But all expenses can be changed over a long enough time frame.

There are several reasons you want to include taxes as an expense. Taxes are one of the biggest expenses for a typical person who is targeting FIRE. And over time and at the margins, there are actions you can take to minimize taxes. These actions are among the most powerful levers to reaching FIRE. Ignoring taxes / working on a after tax basis risks ignoring all of that and risks missing taking those actions.

As a side note, tax planning in FIRE is also very valuable. I think it's also more complex. So training on tax minimization while working is good preparation for tax minimization while FIRE.

I have health insurance, and it's a moderately high priority in my spending spectrum. But other things come above it (food, shelter, utilities), and other things fall below (travel, recreation).

 

[38Chevy454]

*IF* I were to make that calculation, I would include all expenses. However I do not make that calculation, since I don't have excess income. Spend all income, plus some savings withdrawal. *That* withdrawal number percentage is of concern to me.

 

[ShokWaveRider]

To answer the OP's question, I do not. It is what it is.

 

[Lewis Clark]

I would calculate savings rate as:

Spending rate = (total expenses / total income) = 45,000/100,000 = 0.45 = 45%
This would include health insurance and everything that causes me to spend money.

Savings rate = 100% - spending rate = 100% - 45% = 55%

If I were doing this calculation, this is what I would want to know.

 

[W2R]

My opinions:

Taxes are an expense, just like groceries or utilities or recreation.

Savings is income minus expenses. So in your example, $100K - $10K - $20K - $15K = $55K.

+1

So, in the example given, I'd say $55K (55% of income) was saved.

And to answer your other question, yes, health insurance is required spending. It's spending, and it's not discretionary (fun) spending.

 

[retire48in2018]

In my retirement - no pension, not at SS age - therefore no defined income.

On paper - income could be increase in investments, but that does not really make sense, especially with last year’s market drop.

From a budget perspective - we take out of the market only what we need to spend.


So - I would have to say that savings (or savings percentage) is meaningless.

When I worked, savings was sum of - money added into retirement, net increase into checking, brokerage, etc - divided by sum of gross income (before any pre-tax deletions). So, yes heath insurance premium is counted as expense

 

[scrabbler1]

Not as elegant as SecondCor521, but I agree that taxes are an expense when determining this percentage. 55%

 

[MarieIG]

When I was working I said:

Self - "what is your gross pay?"

Self - "how much are you saving?"

Savings/gross = percentage saved.

 

[HI Bill]

When I was working I said:

Self - "what is your gross pay?"

Self - "how much are you saving?"

Savings/gross = percentage saved.

+1. My game was to try to save the most I could out of my paycheck. Managed to get it up to 48% of my paycheck in the last couple of years before I RE.

 

[donheff]

When I was working I would count anything going out (e.g. not being saved) from gross income as an expense. Taxes, health insurance, everything that goes out. In the example case it appears the taxpayer has no income taxes or property taxes since $15K would amount to payroll tax. If he is ignoring some taxes or other deductions from pay (e.g. health insurance) he is creating a limited picture of his expenses. Better to have it all sorted well before ER so you can more accurately assess what will change when you retire (e.g. payroll tax will drop to $0 if you have no earned income; health insurance will change, etc).

 

[MarieIG]

+1. My game was to try to save the most I could out of my paycheck. Managed to get it up to 48% of my paycheck in the last couple of years before I RE.

Very impressive! IIRC I saved about 33-35%.

 

[NW-Bound]

When we were still working, after maxing out our 401k, out of the net income after taxes, FICA, and whatever withholdings we still had plenty of money leftover at the end of the month. I never tried to figure out the percentage. Our spending was enough for a comfortable living and it was what it was. We did not try to cut back to save more, nor look to spend more to use up the excess.

The intention was to transfer the excess every so often to the investment accounts, but I was so busy with work and was so careless about investing that for a while our checking account balance would get to six figures. And this was during the heyday of the bull market of the 80-90s. So dumb!

It was only later in life when I was thinking about ER that I realized that I needed to have a better handle on expenses, incomes, and investment returns.

 

[socca]

Discretionary Spending (vacation, dining out) : $10,000
Required Spending (utilities, home/car insurance): $20,000
Taxes: $15,000
Savings Account Growth: $55,000
Total Annual Income: $100,000

I would say:

Discretionary Spending (vacation, dining out) : $10,000
Required Spending (utilities, home/car insurance, taxes, medical/dental, etc.): $35,000
Savings: $55,000
Total Annual Income: $100,000

Savings rate = 55%

There are probably some online forums you can visit that claim that U.S. taxes are optional, but for most of us taxes are a necessary expense.
P.S. Taxes are far-and-away my largest annual expense. I'm sure that the gov't spends my money wisely.

 

[harley]

Just out of curiosity, did those of you who received matching funds from your company in your 401K count that as part of your savings rate? Say you make $100k, spend 55% for a 45% savings rate (including your maxed out your 401K savings), do you add in the $5K (or whatever) that the company kicks in to make your savings rate $50%? I always did, back in the day. No real reason, other than good feels.

 

[SecondCor521]

Just out of curiosity, did those of you who received matching funds from your company in your 401K count that as part of your savings rate? Say you make $100k, spend 55% for a 45% savings rate (including your maxed out your 401K savings), do you add in the $5K (or whatever) that the company kicks in to make your savings rate $50%? I always did, back in the day. No real reason, other than good feels.

I added the match as both income and savings. So if I had a base of $100K, 401(k) match of $5K, and spent $55K, then my savings rate would be ($45K savings + $5K match) / ($100K salary + $5K match) = 47.6%.

But anyone saving half of their income probably doesn't need to get into the finer points of ratios or accounting, especially if they can keep it up for several years.

 

[NW-Bound]

I would say:

Discretionary Spending (vacation, dining out) : $10,000
Required Spending (utilities, home/car insurance, taxes, medical/dental, etc.): $35,000
Savings: $55,000
Total Annual Income: $100,000

Savings rate = 55%

There are probably some online forums you can visit that claim that U.S. taxes are optional, but for most of us taxes are a necessary expense.
P.S. Taxes are far-and-away my largest annual expense. I'm sure that the gov't spends my money wisely.

Sorry for veering off topic, but the above made me look at my expenses last year. Taxes were 2x the housing cost for me, and I have 2 homes (no mortgage though). But that was because I did a big Roth conversion.

My income taxes can be very low if I want them to be. But I'd rather pay now than paying more later.

 

[Toast]

I agree with other who say 55%. It is how we would calculate our savings rate.

 

[Gumby]

There are many possible variations on a theme - Do you use gross income or income after taxes? Do you have a 401k match that should be counted in the income? If you do pretax savings (to IRA or 401k) do you subtract out the future tax obligation embedded in that money? Is prepaying principal on your mortgage (or any other debt) the same as saving?

In my case, I made none of those calculations, nor did I try to compare my rate to other people. I just saved as much as I could. I did notice that in the later years, my contributions to the portfolio were dwarfed by the internal returns.

 

[old medic]

In my case, I made none of those calculations, nor did I try to compare my rate to other people. I just saved as much as I could.

Both of us paid 6% into the state pension fund, and now I'm reaping the rewards. DW still paying in, along with 30% going into her 401K, and may increase that. My last few years of work, I figured my estimated retirement check and everything over that went into my 401K. When I actually retired, my take home pay increase nearly $200.

 

[COcheesehead]

When I was working, I calculated two ways:
Saving based on take home pay
Saving based on gross
Savings was defined as anything over and above all expenses.
Near the end I was at about 45% of gross income and about 60% of take home.

 

[GenXguy]

I've always calculated my savings rate based on net income, so income taxes and FICA taxes are not factored into that since they have already been taken out. However, I do add my employer's contribution to my 401 plan on both sides of the equation. This is the common way it was done on another retirement forum I used before this one. A few years back, before inflation skyrocketed, I had surpassed 80% savings rate.

For the OP, since the type of taxes wasn't indicated, I would include other taxes, such as property taxes, sales taxes, gas taxes, and such as expenses in determining your savings rate, but not income and payroll taxes.

 

[pjigar]

We have been tracking "Savings rate" for years and here is our formula:
Savings rate = (money "we" get in our accounts - many "we" spend)/money "we" get in our accounts
This formula *does* remove all pay slip deductions from the picture including but not limited to tax withholding, medical insurance, 401K, HSA, etc.

We settled on this formula so I can easily (relatively) calculate "on-the-fly" savings rate any time during the year without having to go through the pay slips. This is mainly because I use account aggregation and it can track all the deposits (which are after tax money). I do have to manually add back the "deposits" going directly into 401K, HSA, etc. on to of what is shown in the "account aggregation" view.

We don't necessarily care about the actual savings rate but rather it's trajectory so any formula works for use as long as we don't change it. We like to see upward trajectory!

 

[sengsational]

I can't remember who, but there were some that proclaimed the money you payed or will pay in taxes was never yours, so could be excluded from various calculations. Not the way I'd do it, but might be viewed as more applicable.