At DQYDJ, tax season has us recently rolling out our annual savings rate. The personal finance blogosphere constantly emphasizes its importance and demonstrates its impact on your ability to increase your net worth. It also helps show what you might reasonably expect to need to spend if you choose to retire.
What’s My Savings Rate?
My after-tax savings rate came in at 52% for 2017. This was a good year and we shall see if I can bring down some expenses and raise that income to get it higher next year. Overall, though, I don’t feel like I need to increase or significantly decrease it at all. Let chips fall where they may.
This year the savings felt a lot different than some of my previous years. A large portion of my savings is in my 401k, 401k match and ESPP and I don’t notice it every month. Thus, a large enough percentage is automatically saved without me ever realizing or seeing it. Following your checking account month-to-month makes it feel like you’re bringing in significantly less money since you have a large portion set aside.
Some Notes on Methodology
There are as many different ways to calculate savings rates as there are ways to define income or investments, which are inherently flexible. If you purchase a watch or a shirt, do you calculate it as a capital outlay and then depreciate it? For example, a $60 shirt may last 5 years so does it “cost me” $1 every month?
Generally, this level of detail would be insane.
The above example refers to the accrual-based form of accounting. The “purchase” of the asset isn’t an expense, but the ongoing usage or depreciation of it is what the actual expense is. This is in contrast to a cash-based form of accounting, which measures all the incomes and expenses as its impact on my cash accounts in the calendar year 2017. I will be using the accrual-based accounting, but will not track a ridiculous amount of assets.
Also, I will be including my employer match as part of both my savings and my income and won’t be counting any capital gains unless realized. I will be looking at everything after-tax, meaning my denominator income will be reduced by the amount of tax I pay. I do pay airline fees and sales tax and other fun fees associated with government but will not be taking these out of my income. Thus, my equation looks most closely like:
(Contributions to 401k+other investments accounts+cash/debt difference between 1/1/17 – 1/1/18) divided by (Total Income + Employer Match – SS/Medicare/Federal Income Tax + Taxable Dividends/Interest)
Enough With Boring Accounting!
This is my one of my higher savings rate years and is probably mostly driven by not moving and having a higher income than past years. My income and expense estimates fluctuate so I generally try to vaguely monitor where I’m spending money. If it is noticeably different than what I expect, then I would change my expectations or my behavior. I’m still far enough away from FI or ER that tracking savings and spending day-to-day (or more closely) doesn’t really help me do anything better.