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Exchange Traded Fund Total Return Calculator: What Would You Have Today? (US)

Investing      by

On this page is an ETF return calculator which automatically computes total return including reinvested dividends. Enter a starting amount and time-frame to estimate the growth of an investment in an Exchange Traded Fund or use it as an index fund calculator. Additionally, simulate periodic investments into a fund by year, month, week, or day.

There are over 2,200 exchange traded funds in our database, accurate to within the last 7 trading days.

ETF Total Return Calculator with Dividend Reinvestment and Periodic Investments

How To Use the ETF Total Return Calculator

To begin, you need to enter at least an ETF’s ticker. As you type, it will auto-complete active exchange traded fund tickers.

Basic Exchange Traded Fund Details and Inputs

ETF return calculator basic input fields.
Basic options for ETF investment simulation modeling.
  • ETF Ticker: Enter a valid, active ETF ticker from IEX
  • Starting Amount ($): In dollars, an initial investment amount
  • Starting Date: Enter when an investment was first made °
  • Ending Date: Enter when an investment was sold °

° Depending on the ETF data (see more below), we might adjust the starting date and ending date. Check again after your calculation.

Advanced Dividend and Periodic Investment Options

Modeling options for periodic investments and dividend events.
Advanced options concentrating on dividend events and periodic investments

Click ‘Toggle Advanced’ to open the advanced ETF dividend and investment panel.

  • Show Events: Check the box and we’ll list all our dividend information for the ETF in your timeframe. We’ll also include (optionally) periodic investment information.
  • Periodic Investments: Select the box if you’d like to model periodic investments into an exchange traded fund.
  • “Monthly”: If you are simulating periodic investments, select the timeframe for the ETF investments.
  • Regular Amount: The amount invested every period in the simulation.

Interpreting ETF Model Results

ETF total return calculator showing graph of portfolio value.
Results of the total return calculator for DIA
  • Final Value ($): The value of the ETF investment on the ‘Ending Date’. Again, note we may change that date depending on the database refresh limit.
  • Annual Return: Our estimate of the annual percentage return by the investment, including and periodic investments. (See our compound annual growth calculator)
  • Graph: The value of the ETF investment over time. If you’re on desktop, hover over a point to see the investment value snapshot on any day in your scenario.

How do the periodic ETF investments work?

The tool is backed by a database with OHLC prices on exchange traded funds, and a separate entry for dividends. For your choice of dates, we invest at the open price – for the initial lump sum and any dividends – then calculate the portfolio value at daily close.

If you choose to model periodic investments, they are also added at daily open prices. To make the logic simple, we invest(the next legal market day) 1, 7, 30, or 365 days after the previous investment respective to your time frame choice. If dividends and periodic investments would have occurred on the same day, those calculations are independent.

Modeling Dollar Cost Averaging

Using the tool and periodic investments, you can also model dollar cost averaging. Dollar cost averaging is our preferred normal style of investing, where you invest on a regular basis.

For periodic windfalls you receive, we prefer investing the lump sum all at once.

Source and Methodology of the Exchange Traded Fund Total Return Calculator

The ETF return calculator is a derivative of the stock return calculator. Much of the features are the same, but (especially for smaller funds) the dividend data might be off.

The tool uses the IEX Cloud API for price and dividend data. IEX isn’t free, so we have some very modest limits in place:

  • ETF data may be up to 7 trading days old. Note: weekend refreshes and market holidays might mean this is over 7 ‘actual’ days’.
    • Always check the tool ending date after a scenario to see data recency of the ETF.
  • Splits are a manual process
    • I need to manually apply split factors. I might automate these eventually, but be patient for now.
  • Here are the rate limits in place:
    • Maximum 50 calculations per day
    • Maximum 10 calculations per minute

Limitations and Disclaimers

The exchange traded fund total return calculated contains idealized return data. It is based on closing and opening prices and would not match a real investor’s gains exactly.

The tool is for informational purposes only. We cannot warrant any results. ETF outputs are good for initial research, but please verify any information the tool outputs independently.

Note that there are other factors the tool is ignoring:

  • Taxes
  • Your portfolio management fees
  • Dividend timing
  • Slippage
  • Other things

It is very possible that the price or dividend datasets are wrong too (please report it if you find a bug).

Using the tool as an Index Fund return calculator

Many ETFs track published indexes, so the tool is very useful as a quick comparison on index funds. (Yes, we know – many more are in mutual fund form, we’re working on it.)

For the gold standard of index fund returns – perhaps with less resolution – see the prospectus of the fund. This calculator will give you a reasonable approximation of index fund returns, but your ETF provider probably calculated them exactly.

Bug Reports, Feature Requests, and Requests to Help with the ETF Total Return Calculator

Let us know if you find a bug. Include the fund with the issue so I can debug it.

Feel free to send enhancement requests, just know that the bar is very high. Outside of ads, I’m not paid to build or maintain this tool. For significant requests, please make a contracting inquiry.

Again, this information is for informational and research purposes only. We cannot and will not be able to help in a legal capacity. We can only help you with research inquiries. For legal inquiries, this data might be a useful starting point, but you probably need a professional known as a “forensic accountant”.

ETFs, Dividends, and Total Returns

We’ve maintained some version of a stock return calculator for some time now. After a mutual fund return calculator, an ETF return tool has been one of our most popular requests.

When we set out to redo the stock return calculator, ETFs were also in the back of our mind. We’re happy to finally bring it home!

As we like to stress on this site, dividend adjusted returns are the most important returns. Unless you are shoveling your dividend checks into your fireplace (or shredder), it’s real money which you can use to reinvest. Those additional shares also lead to real money. Dividends make up a huge amount of return when you trace them back over a long enough timeframe.

But, really, our aims are altruistic with this tool. For the last decade we’ve stressed that you need to produce fair, dividend reinvested return comparisons when discussing investments.

This tool, in many ways, is better than some of our popular index total return calculators. ETFs (and mutual funds) are the most common ways to track an index, and they include fees and slow down dividend timing, making them more accurate for individual investors.

If you’d like to compare:

Adjust Your ETF Returns for Total Returns

ETFs are relatively new when compared to common stocks and mutual funds. Still – at least for ETFs that pay dividends – we often see returns quoted out of context. When you buy VTI or DIA, don’t only look at the price return on your fund. Be sure to factor in any additional shares you buy from the dividends you receive.

(Or, at least, know that you’re spending the dividends.)

We hope you enjoyed the ETF total return calculator. Use it in good health, and tell your friends! Also, try the closed end fund return calculator.

Stock Total Return and Dividend Reinvestment Calculator (United States)

Investing      by

Below is a stock return calculator which automatically factors and calculates dividend reinvestment (DRIP). Additionally, you can simulate daily, weekly, monthly, or annual periodic investments into any stock and see your total estimated portfolio value on every date.

There are over 4,500 American stocks in the database. Data is accurate to within the last 7 days. Read beyond the tool for stock reinvestment calculation methodology, notes, and other information about the DRIP tool.

Stock Total Return and Dividend Reinvestment (DRIP) Calculator

Note: The calculator does not account for spin-offs.

How To Use the Dividend Calculator (DRIP)

To begin, you need to enter at least a stock ticker. As you type, it will search through legal stock tickers to help you complete the field and explore the set.

Basic Stock Details and Inputs

Basic options for stock portfolio value modeling.
  • Stock Ticker: Enter a valid, active stock ticker from IEX
  • Starting Amount ($): Enter an initial investment amount, in dollars
  • Starting Date: Enter when an investment was first made*
  • Ending Date: Enter when an investment was sold*

° Depending on the stock data, we might adjust the starting and ending date. Look carefully after modeling a scenario.

Advanced Dividend and Periodic Investment Options

Modeling options for periodic investments and dividend event reports.
Advanced options concentrating on dividend events and periodic investments

Click the ‘Toggle Advanced’ button to open the advanced stock options panel.

  • Show Events: Check the box for a listing of every dividend on that ticker in our database. If you choose to simulate periodic investments, they will be added as well.
  • Periodic Investments: Select the box to create a reinvestment scenario for a given ticker.
  • “Monthly”: If you are simulating periodic investments, select how often you would have invested in the stock.
  • Regular Amount: The amount invested every period selected from the left pull-down below it. (Such as in a DRIP or Dividend Reinvestment Plan)

Interpreting Portfolio Model Results

Stock total return calculator results screen showing graph of portfolio value.
Results of the total return calculator for an investment
  • Final Value ($): The value of the investment on the ‘Ending Date’.
  • Annual Return: Our estimate to the annual percentage return by the investment, including dollar cost averaging. (Also see our compound annual growth calculator)
  • Graph: The value of the stock investment over time. Note – if you are on desktop – you can drag over the graph to see the value of the portfolio on any day.

How do the periodic stock investments work?

The tool attempts to time dividends based upon the ex-dividend date of stocks in our database. Where the tool sees a dividend, it invests at the daily open price. All other prices in the tool, such as the final portfolio value and daily updates, are based on close price.

When you choose to model periodic investments, the tool in shorthand invests every 1, 7, 30, or 365 days, respectively. (Read: no accounting for leap years!). Where we register a dividend and investment on the same day, the investment goes in at the open price but (as you’d expect), it doesn’t factor into the dividend amount.

Does this tool perform stock valuation?

Remember, “past performance is no guarantee of future results”!

If you see a previously successful investment (maybe especially if you do!), don’t extrapolate gains to the sky.

Stock valuation is art more than science. Value investors try to model a fair value based on the characteristics of the company – especially financials and cash flows. Along value lines, we have a few tools for you to attempt to value stocks:

There are no guarantees in stock valuation – it’s hard to predict the future. However, those tools might help point you in the right direction.

Source and Methodology of the Stock Total Return Calculator

The tool uses the IEX Cloud API on the backend. IEX Cloud is a paid API provider, so we have some (light) limitations in place:

  • Stock data may be up to 7 days old.
  • Splits are a manual process
    • Please be patient with splits. We hope to eventually automate these.
  • There are rate limits in place for your usage:
    • Maximum 50 scenarios per day
    • Maximum 10 scenarios per minute
  • The tool doesn’t – and can’t – account for spinoffs

Limitations and Disclaimers

The stock total return calculated is idealized, based on closing prices and unrealistic dividend timing, and will never match exact returns.

The tool is for informational purposes only and we cannot warrant the results. Verify any information you gather from this tool on your own. Treat the stock data as initial research.

We are not modeling taxes, management fees, dividend payment timing, slippage, and other sources of error. It is possible that the dataset contains errors as well.

Bug Reports, Feature Requests, and Requests to Help with the Stock Total Return Calculator

I need your help with this tool – we only had 2 testers. Let me know if you find a bug. Include which ticker caused the issue so I can debug the data.

As for enhancements: outside of ads, I’m not compensated to build and maintain this tool. If you have significant feature requests, make a contracting inquiry.

We wish we could help you with your stock research questions. Unfortunately, we have to stress that this information is for informational and research purposes only. We will not respond to requests to provide investment returns in a legal capacity. We can only help you with research inquiries.

(You probably need a professional known as a “forensic accountant” for legal purposes.)

Musings on the Any Stock Dividend Reinvestment Calculator

We originally built a version of this stock total return calculator for DQYDJ’s five year anniversary (and 749th published article). Unfortunately, data sources came and went – and we’re on iteration 3 or 4 now.

(This time, we’re much more confident we can keep it going – we really liked playing with the IEX Cloud API.)

But, really, our aims are altruistic with this tool. For the last decade we’ve stressed that you need to produce fair, dividend reinvested return comparisons when discussing investments.

That means this tool aligned perfectly with the other dividend reinvestment tools we have elsewhere on the site. Try comparing your results to one of these (with inflation adjustments turned off):

As for styles of investing, we think the best thing to do with a windfall is so invest a lump sum. For investing from your paycheck, we suggest dollar cost averaging.

Adjust Your Returns for Total Returns

Even though we’ve been fighting this battle for years, price returns still get all the press.

Price is only one element of return, however. Stocks payout dividends in dollars per share or in new shares of stock; simply quoting price returns misses a real (and significant!) portion of total returns.

It is especially egregious when companies pay special dividends. These can be massive payouts that (if ignored) would look like a massive overnight loss.

With this calculator, skip the half-truths and run your scenarios directly. All you need to provide is a ticker and some dates, and we’ll do the total return math for you. And now, also try it with ETFs here.

We hope you enjoy the any stock dividend reinvestment calculator. If you see articles quoting price returns on dividend paying stocks – send them our way, deal?

The First Ten Years of DQYDJ

Offbeat      by

Where were you ten years ago today?

Funnily enough, I know where I was – logged into WordPress for the first time, drafting a blog post about HSA arbitrage.

That’s right: 10 years ago today on May 24, 2009 DQYDJ published our very first post.

The More Things Change…

For the last ten years we’ve published 1 – 3 posts a week on finance, economics, investing, health and (even) fantasy football. Our editorial calendar has never stayed consistent; we’ve gone through annual phases of research, interactive tool-building, and reacting to current events.

Don’t Quit Your Day Job… has even changed its look quite a few times over the years.

Most recently, we moved to the current design in January:

Our consistently inconsistent wardrobe.

The context behind our posts has changed too. We weathered the Great Depression (the impetus for the site), we’ve moved houses, and cities, and – yes – even day jobs. Between we three original authors we now count 2 wives and 3 children. We’ve written through – ahem – two extremely different Presidential styles.

But what’s interesting is how much we’re similar to 2009.

We’re still eager to help, contrarian, slightly irreverent, and – we hope you agree – a unique read. We consistently deliver tools and research you won’t find anywhere else on the internet. We continually blur the lines between a web resource and a simple blog. And we do this all with a smile on our faces.

We’ve always aimed to bring you something different on this site. I am confident we’ve succeeded.

DQYDJ: A Humbling Success

The most exhilarating aspect of building DQYDJ over the last decade has been, without a doubt, having you readers along for the ride.

The site has succeeded beyond our wildest dreams. Around a million and a half of you have checked in on this humble site already this year. Every day we are awed by your overwhelming support, and it still feels like we cheated somehow to get here.

150+ calculators, 1,200+ posts, thousands of comments, tens of thousands of daily visits, and millions of unique users later – and we’re just getting started. From the bottom of my heart, thank you for the support.

It’s been quite the journey.

Stay Tuned for Our Ten Year Gift to You…

I did plan to roll out a gift to you all to mark the occasion.

Edit: we built an updated Stock Return Calculator for your enjoyment!

(And subscribe if you haven’t yet)

If You Always Maxed Out Your 401(k) How Much Money Would You Have?

Investing      by

Boy looking at an acorn he holds between two fingers.

The 401(k) is one of the best accounts to save a significant amount for retirement in the United States. 401(k) contribution limits are generous, and allow you to shield a healthy amount of income from taxes. However, the majority of people don’t contribute the maximum to their 401(k) – which leads us to ask: what if you always maxed out your 401(k)?

What if you always maxed out your 401(k)?

If you only invested in the S&P 500, started working in January 1999, and always maxed your 401(k) you’d have around $825,000 today.

(For other start dates, see the chart below.)

Maximizing a 401(k) for every career start year

If you had started maxing out your 401(k) back in 1995 or earlier in an S&P 500 fund, we estimate you’d be a 401(k) millionaire!

A roughly 60 year old worker who started contributing the max in 1982 would have a massive $3.2 million account. Even a roughly 35 year old worker who started maxing out a 401(k) in 2007 would have about $485,000.

Here’s the graph showing career start dates and maxed out 401(k) balances for every career start year back to 1982:

Balances if you always maxed out your 401(k) and started in 1982-2019
Balance in May 2019 if you Always Maxed your 401(k)

As you can see, no matter what year you started your account, after a few years it was a tremendously great deal. 

You not only built a tax-free reservoir of wealth, but also shielded all of those contributions and gains from state and federal taxes!

401(k) Maximum Assumptions

It’s impossible to do a post like this without some hand-waving. We invented an S&P 500 index fund using our S&P 500 Periodic Return Calculator as the only investment option.

Here’s everything we assumed for this post:

  • We tracked both the current account balance in a 401(k), as well as the annual return implied by the current balance and your total contributions (XIRR)
  • We assumed you only invested in a S&P 500 index fund with a typical fee
  • Numbers track 401(k) balances based on starting in January of each year since 1982
  • The simulation assumes equal contributions each month
  • We added a 3% employer match
  • Our data ends on 05/03/2019

Of course, making this “exact” isn’t possible. Perhaps you only had expensive funds available, a greater or smaller match, or some other difference. Still – we’re happy with the simulation.

Who maxes out their 401(k)?

Hopefully, you do.

Unfortunately, the odds are against that – so I’m glad you’re reading! The vast majority of account holders do not max out their 401(k)s.

In 2018, Vanguard released a report quantifying just how rare it was for an account holder to maximize a 401(k): only 13% of people maxed their 401(k)s in 2017.

That’s a low number, but is actually an improvement from the 10% seen in 2012!

We’ve shared the history of 401(k) contribution limits. Even if you didn’t max while younger, one benefit available to older workers is the ‘catch-up’ contribution. This allows account holder who are 50 years old or older to contribute an additional amount to their accounts – a full $6,000 in 2019.

Unfortunately, the participation rates for catch-up contributions are also low: 14% of those eligible used them in 2017. In 2015 that number peaked at 15%.

It’s not all bad news, though: in 2017, participants (including any employer match) averaged a contribution of 10.3%, which is healthier than the United States average savings rate!

Always maxing out your 401(k) on autopilot has been a very successful strategy! (A picture of jets)
Always maxing out your 401(k) on autopilot has been a very successful strategy!

What are average 401(k) account balances?

Thanks to a Fidelity analysis of Q3 2018 balances we know in 2018:

  • The average 401(k) balance was $106,500
  • The average IRA balance was $111,000

Unfortunately, looking only at 401(k) balances doesn’t tell the whole story, which is why we included IRA balances.

One of the awesome features of 401(k)s is portability. When you leave a job, you are able to roll over your 401(k) into an IRA. 

This means that any study of 401(k)s will have a reverse survival bias – you’ll only see balances for people still with their current company, or who have chosen to not roll over their 401(k) into an IRA.

Take the two together as roughly $215,000. We estimate that, in theory, any maxed 401(k) account started before 2012 and invested only in the S&P 500 would already be higher.

Also, see how you would have fared if you always maxed an IRA.

What else can you learn from maxed out 401(k)s?

From our study, we learned some interesting things about maxed out 401(k)s:

  • Ignoring recent account start dates, if you always maxed out your 401(k) starting in 2009 you have best results out of any year. You’d have seen a huge 12.95% annual return!
  • Maxed out 401(k)s that started in 1996 performed the “worst”… but still boast an awesome 8.35% annual return.
  • The median annual return if you always maxed out your 401(k) and started between 1982 and 2018 was 9.46%
  • The (simple) average annual return if you consistently maxed your 401(k) and started between 1982 and 2018 was 10.09%
  • If you always maxed out your 401(k), your leverage becomes massive after enough time. Accounts started in 1982 have $3.2 million balances on only $500,000 in personal contributions!

One of the features you can see in our chart is that we estimated annual return percentages (sort of like weighted compound annual growth rates) if you always maxed out your 401(k).

This used a function called ‘XIRR’, which we built into our S&P 500 Periodic Investment tool. XIRR allows you to find out the actual return on money based on periodic investments, as opposed to ‘simple’ returns based on a lump sum up front. XIRR is a weighted average, so each month’s contributions matter in the final result.

401(k) Maximum Contribution Methodology

  • The math is for a maxed out 401(k) contribution divided evenly for 12 months
  • We used our S&P 500 Periodic Investment Calculator to do the math
  • The fee estimates are inside the calculator; feel free to redo the math for your own assumptions!
  • The current chart ends in May of 2017
  • We started in 1982 because that’s when the 401(k) became popular (technically, it began 4 years earlier)
  • 1982-1986 technically had a $30,000 employee contribution limit – but we used a $7,000 limit for fairness.

How did you compute employer 401(k) matches?

  • We based all of the numbers on a 3% employer match (It’s estimated around 2.7%)
  • We estimated you earned 2 times the personal median income
    • See all income percentiles by age on our calculator

Always max out your 401(k)!

Some time back, we made a strong argument to always max out your 401(k). This study should solidify it: if you always maxed out your 401(k) you’d have a very healthy account balance. That’s even if you always just stayed in stocks.

That includes all of the ups and downs – and sideways – moves inherent to investing in stocks. They’ve handsomely paid off for you if you’re maxing out annually. (You can see what sort of historical returns the S&P 500 has with our convenient calculator, and historical returns in this other tool.)

Nothing speaks louder than results. If you always maxed out your 401(k) you’re doing very well!

I hope this was enlightening and useful – we’ll consider it a success if you move your 401(k) contributions just a little bit closer to ‘max’ after you read this. Let us know what you decide!

Have you always maxed out your 401(k)? Even if you didn’t, how does your balance compare to the chart? Is maxing out your 401(k) a good strategy?

If You Always Maxed Out Your IRA How Much Money Would You Have?

Investing      by

The Individual Retirement Account or IRA is an excellent tax free account available to most American workers. Unlike 401(k)s, IRAs are completely portable and usually have fewer restrictions on the number of investments they allow. They unfortunately come with smaller contribution limits than 401(k)s. Still, most people don’t take full advantage of the accounts… so we have to ask: what if you always maxed out your IRA?

What if you always maxed out your IRA?

If you started an IRA in 1989 and always contributed up to the limit while investing in the S&P 500, you’d have around $390,000 today. All that’s on a total of around $110,000 invested.

You can find the number for other account start dates in the chart below.

Maximizing a IRA in every year since 1974

If you had started maxing out your IRA in 1979 or earlier, we estimate you’re currently an IRA millionaire!

A roughly 60 year old who started maxing out an IRA in an S&P 500 Index Fund in 1982 had around $785,000 in their account. A roughly 35 year old who started in 2007 now claims around $135,000.

For every account start year going back to 1974, we ran the numbers. This chart shows the value of an account started in January of the listed year:

Chart showing balances if you always maxed out your IRA and started in 1974-2019
Balance in May 2019 if you Always Maxed your IRA

Note that some of these years span longer than a ‘typical’ career. 1974-2019 is 45 years, so presumably a person is either retired or started the IRA pre-career.

You can find the complete history of IRA contribution limits on our site.

What did you find out about maxing your IRA?

We found that for starting every period in the last 45 years, you’ve never seen average annual growth under 8.69%.

For accounts open longest, you’re probably also seeing a million or more dollars in account balance! And that includes a wild amount of leverage – accounts started in 1974 sit around $1.56 million on only $133,500 in contributions.

It was good news all down the chart, too. If you always maxed out your IRA, invested in the S&P 500, and have had the account since 2009, we estimate your account is at least 6 figures. 

Since IRAs aren’t bound to a formal job, that means folks who are maybe 28-34 (and always maxed their IRAs) could have over $100,000 based on IRA contributions alone!

Whether you chose a Roth-style IRA or a Traditional IRA, you are getting a great deal. Along with that tax benefit, your account itself also grows without the drag of taxes.

What other IRA assumptions did you make?

  • We used the S&P 500 Reinvestment and Periodic Investment Calculator for computations and estimates
  • We assumed you only invested in a S&P 500 index fund with a typical low fee
  • Numbers track IRA balances based on starting in January of each year since 1974
  • The simulation assumes equal contributions each month
  • Our data ends on 05/03/2019

What else did you learn from the maxed out IRA study?

Just like our 401(k) maxing out study, we learned a lot of interesting things in this study.

  • The (simple) average annual return if you always maxed out your IRA starting in Januaries between 1974 and 2018 was 10.21%
  • The median annual return while maxing out your IRA between 1974 and 2018 was 9.95%
  • Investors starting in 1996 so far have fared the worst, returning “only” 8.69% a year
  • IRAs started in January 2009 and always maxed out returned an estimated 12.94% annually so far!

In every time period, starting an IRA and always maxing it out was an excellent financial move!

Always Maxing Out Your IRA is the Best Option

On this site, we’ve argued forcefully to always maximize your retirement funds. This study only furthers the case for cranking your savings up to the max. 

Even in the worst case, an always maxed out IRA still would have returned over 8.5% a year… a very good result. Also, a very good result which you could have attained by merely buying and holding an index fund.

(And that strategy is often best for the common investor.)

While we wouldn’t suggest staying 100% in stocks (especially a mere 500 stocks from a single country), passive portfolios work best for the vast majority of people. With that in mind, you shouldn’t try to beat the above numbers… consider them an investing ideal and a theoretical (and just a guess).

Have you always maxed out your IRA? Even if you haven’t, how does your balance compare to the above chart? 

Should You Focus on Spending Less or Earning More?

Personal Finance      by

Woman contemplating if she should spend less or save more while looking at treeline and sunset.

One of the age old arguments in personal finance is the relative priority of earn more or save less. Since there are only two ways to increase your savings – earning more money or spending less of what you have – you do, unfortunately have to prioritize.

Let’s pick up the gauntlet: should you focus on spending less or earning more?

Spend Less or Earn More: The Order of Operations

Plenty of writers have weighed in on this question. Unfortunately, few have answered with the proper nuance. When trying to increase your net worth, you need to tackle both sides of the equation.

Of course, when you try to do multiple things simultaneously you optimize for neither. You do need to prioritize both; our advice avoids dividing your attention by adding a third variable to the equation: time.

Should you first spend less or try to earn more?

Our advice boils down to a single phrase:

First, spend less. Second, earn more.

Admittedly, there’s a ton encapsulated in there. We’ll expound on the most important points, but to preview our argument:

First, spend less. Second, earn more.

DQYDJ
  • Any time you spend less, there is an immediate return.
  • Money saved today is worth more than money saved from future income.
  • You save to invest, not for a rainy day.
  • When cutting spending, you learn what you truly value.
  • There is a limit to how far you can cut spending, but not on earning more.
  • When you have a feel for expenses you’re better prepared to scale income.

Ready to see where we’re going with this?

Let’s address why we give the advice in this order.

Picture of scissors in soft focus
Cut expenses before you focus on earning more

Spend Less Before You Concentrate on Earning More

If you read other opinions on this topic, you’ll find people coming down strong on either side.

Income purists argue to accumulate a fortune you need to earn more. Frugality enthusiasts counter with examples of people living on absurdly low amounts annually.

They’re both missing the big picture.

Even with a top one percent income it’s entirely possible – simple, even – to outspend your cash flow. And the most frugal person still needs resources coming in to increase savings; there’s no way to cut spending into the negatives.

So: walk before you can run. You need to get a handle on your spending first.

Money You Don’t Spend Benefits You Immediately

A huge benefit of reduced spending is how quickly it helps you. If you make the conscious decision to not spend a dollar today, that’s a dollar in your pocket immediately.

Sometimes those immediate savings also translate to ongoing cash flow improvements. Cutting recurring bills (like overpriced services) saves you both in the current month and over time. Fixing habits (such as crutch meals) can do the same – if you can break them.

Tax Drag – A Penny Saved is Worth More than a Penny Earned

As we’ve pointed out, a penny saved isn’t a penny earned. Because of taxes, a penny saved is worth much more than a penny earned.

Add it up – depending on your income, a dollar saved might be worth earning $1.50, $2.00 or more. That’s because that extra dollar in income is taxed at your marginal rate – you’d have to earn more than a dollar to match what you save by cutting.

Save to Invest: Time in the Market is Most Important

If you’re working through the spend less vs. earn more debate right now, this is literally the youngest you’ll ever be while thinking through this. While you’re today-years-old, you’re in a better position than you’ll ever be to think through investing your new savings.

And you should be thinking about investing. The majority of money you save in this process needs to be earmarked for investing. Not future spending.

One secret of the stock market and other investments is they tend* to go up over time. So, by spending less today and investing the difference, that money is worth even more (on average) than investing future money.

* This isn’t always true, even for diversified investments. See our Nikkei Return Calculator. You’ll still be better off with investment declines than having nothing, though.

Cutting Spending Teaches You What You Value

We’re not sympathetic to full frugality here on DQYDJ. When you later switch focus to earning more, we expect you to spend more on some categories than you will when focusing on spending.

That’s not the point, though. In the beginning of your journey, you should cut spending as much as you can. Only until you go without – temporarily – will you realize what you truly value.

Maybe you’re like me and you really like your rib-eyes. Maybe you’ve got a coffee habit you truly enjoy. Perhaps you get better work outs in at the more expensive gym.

Whatever you value is personal – I couldn’t tell you. You’re not going to live 100% frugally forever (and if you do try, this isn’t the site for you). Concentrating on saving more first will help you know yourself and your family’s priorities.

Save More Before You Try to Earn More

Temporarily, your focus needs to be on saving more money.

Cut out spending wherever you can, and find how close to the edge you can take it. See how high you can raise your savings rate – we suggest a minimum savings rate of 20%, although an eventual target of 50% or more is ideal.

Over a lifetime, earning more dominates. Only by concentrating on spending now, at the beginning of your journey, will you have the experience you need while you accumulate a significant amount.

When you cut spending:

  • Any expenses you cut are useful immediately without waiting.
  • Saved money is worth more since you’ve already paid tax on it.
  • It’s usually worth more to invest money today versus in the future.
  • You learn what you truly value.

Use a service such as Personal Capital (our review here) or Mint.com to track your spending across all your accounts. Use what you learn in the next few months to figure out what you care about and start your investment pipeline.

You can spend money on some things you’re foregoing once you shift to income – what you can’t do is spend money on everything.

Graph up and to the right of a stock.
Once you’ve tracked and cut expenses, focus on income growth.

Work to Earn More Once You Understand Your Expenses

Hopefully that last section convinced you to concentrate on your spending first. The immediate rewards from spending cuts, the after-tax nature of savings, the time value of money, and the experience you’ll build are worth it.

But – let’s be frank – the income side houses the majority of potential gains. And if you’re still in your 20s or 30s, odds are your highest earning years are in your future.

Writers who tell you that cutting expenses to the bone is the optimal path to build wealth long-term are either lying or misinformed. Saving more of what you have is the prerequisite – the harsh medicine – you need before turning your eyes to focus on income. You want that system in place so you don’t need to watch as closely while you scale.

Once you’ve cut most of the excess from your expenses, you need to concentrate on scaling your earnings power.

There is a Limit To How Far You Can Cut Expenses

It’s extremely important you try to cut expenses first. Not to the bone, mind you – but to the point you realize what truly matters to you.

There is a genre of financial blogs which glorify frugality. Frugality for frugality’s sake is overrated. Better is to realize what you’re optimizing for: low impact on the planet, simplicity in life, self-sufficiency. If you like those things, those are noble goals – frugality for frugality’s sake isn’t.

The other issue with expenses is you can’t spend a negative amount. There is a limit to how far you can cut before you can’t go further. People have blazed this path – even at the extremes, growing all your food and making your own consumables costs either money or time!

Income doesn’t have that issue. In theory, there’s no limit (although in practice there are thresholds). Once you’ve cut 80-90% of your extraneous expenses, you’re better off concentrating on the income side of the ledger.

Cutting Expenses Taught You a Spending Model

It’s healthy to think of your cutting expenses phase as creating a spending template. When you go through the exercise for a few months, you get a feel for what your expenses look like in a good month.

At first, this is difficult – you get into the weeds and think through every purchase. However, like with all things you get better with practice.

After some months of spending reduction, you know what a good credit card bill looks like and you can sniff out the exceptions without losing tons of time. You’ve probably got automation in place tracking your spending through Personal Capital or Mint. You don’t need to dive into the details on every purchase anymore – by feel you know when your spending is running too hot or too cold.

Now you have a template. A template means leverage.

As your income increases you don’t need to sink as much time into evaluating your spending. Instead, you can concentrate on the more interesting things: investing more and earning more.

Income Begets Income: Experience Compounds

A helpful way of evaluating income is through the lens of your own time. In this paradigm, income is either passive or active: either it earns without your input, or you need to invest time to make money.

For example, a traditional job is active income. In exchange for a dedicated amount of time and your work product, your employer pays you money.

Contrarily, many investments are passive income. In exchange for a dedicated amount of money – capital at risk – investments (hopefully) pay you back in dividends or capital gains.

Of course, everything exists on a scale: being a landlord for property you own is passive until you get a midnight call to fix a toilet!

Everything you do to earn income compounds. Active income sources build experience, which leads to better jobs, consulting gigs, or business ideas. Passive income sources build cash flow or principal, which can be reinvested or tapped.

The name of the game – again – is leverage. You want to scale your experience, your cash flows, or your capital gains into even more income. Since you have a template in place, expenses mostly take care of themselves – leaving you to concentrate on earning more.

After Expenses, Spend Most of Your Time On Income

Again, knowing your expenses is a necessary step. However, once you’ve pivoted to an income focus you’re going to spend the majority of your time thinking about earning more.

Over a career, once expenses are in place scaling your income dominates in importance. To recap:

  • There’s a limit to cut expenses… but not to increase income.
  • Cutting expenses gives you a scalable template while you earn more.
  • Active and passive income pay off with experience, cash flow, and capital gains.

That initial spending focus is important; it teaches you what you need while you grow. However, it’s fundamentally a scarcity focus. Income is the opposite; it’s an abundance focus.

It’s important to understand both, but after expenses are in place turn most of your attention to generating income. The lessons you learn from your early expense concentration will serve you well when you move to this stage.

Path leading down stairs to the beach.
With a spending template and multiple forms of income, eventually turn your focus to enjoyment

Cut Expenses, then Earn More, then Enjoy!

Hopefully we’ve convinced you that you need to tackle this problem in stages.

When you’re first getting your personal finances under control, you need a laser-focus on expenses. See what you can cut, see where there are alternatives, and develop those healthy spending habits.

Once you have a spending template and understand the trade-offs, switch to earning more income. Your earlier experience will help you spot exceptions and outliers, and you’ll be able to scale your spending to newer and higher levels of earnings.

Over the long term, like a career, it’s a better use of your time to earn more. However, that’s not where the journey begins – first, you need to cut expenses.

What are the Magical Saving Rate Breakpoints?

Personal Finance      by

City with tall buildings, mountains, and a bay.

One question we get quite a bit is related to the fundamentals of saving: is there a magic savings rate?

In the past we’ve looked at the ideal savings rate. There we suggested 20% as a minimum savings rate, with the caveat you should save more if you can.

Interestingly, there are also some magical savings rates. These rates are mathematically elegant: without even worrying about returns, they help you reason about savings and amounts. Let’s discuss those magical mathematical breakpoints and savings rates today.

The Most Magical Savings Rate

The most magical of all the savings rates is 50%.

When you save 50%, for every year you work you’re saving one year’s worth of spending. In essence, you’re paying for the entire next year by working during this one.

Importantly, this property doesn’t require any investment gains whatsoever.

Presumably, you’re earning some interest on your savings. Even if you’re only being paid a small return, everything on top of 50% is gravy.

Savings Rates vs. Whole Years of Spending

A coffee bean growing.
Higher savings rates grow your spending buffer deceivingly quickly.

20%, 25%, and 33% are also magical savings rates. Although they don’t provide a spending buffer for an entire year, they also make the math easy on income replacement:

  • 20% savings rate: for every 4 years of work, you save 1 year of spending.
  • 25% savings rate: for every 3 years of work, you save 1 year of spending.
  • 33% savings rate: for every 2 years of work, you save 1 year of spending.

How does it work so cleanly?

It boils down to a simple fact: money you save is money you aren’t spending. Without knowing any more about your situation, I know if you save money you didn’t pay it in tax or spend it.

Extremely High Rates and Spending Breakpoints

Because of the above property that saving is non-spending, extremely high savings rates make the financial picture even better. For this article, we’re calling a savings rate over 50% extremely high savings rates.

That makes the inversion of the above magical rates interesting. Flip the above rates for spending and here’s what you get:

  • 80% savings rate: every year, you save 4 year of spending.
  • 75% savings rate: every year, you save 3 year of spending.
  • 66% savings rate: every year, you save 2 year of spending.

Sometimes it helps to look at savings really as spending buffer building.

Magic savings rates that show number of years of spending buffer added annually.
Savings Rate vs. Years of Spending Accumulated per Year

The Deceiving Top End

Now, undoubtedly, extremely high rates are… extremely hard to sustain. However, they cover up an interesting mathematical property: savings rates aren’t linear, they’re closer to exponential.

Take 50% savings, for example, which saves one year worth of spending. It takes an additional 16.7% savings to turn 1 year of savings in a single year to 2 years of savings.

Now you can see the curve…

Respectively, it takes 8.3%, 5%, then 3.33% to add another year of spending buffer in a single year. These high rates are deceiving – by the time you get to 90% savings, that’s 9 years of savings buffer for a single year of spending.

Capturing the Magic of High Savings Rates

A 90% savings rate is more than twice as effective as an 80% rate.

-DQYDJ

The best part about reasoning about savings rates in this way? It doesn’t require coming up with investment gains or interest returns. All of these numbers are achievable with money under your mattress.

(Don’t store money there…)

The key takeaway: people tend to group these rates together, especially at the top end. However, because savings is “not spending”, extremely high savings rates are volatile.

The difference between 80% savings and 90% savings is a whole 5 years of spending buffer at 90%. Stated differently: a 90% savings rate is more than twice as effective as an 80% rate.

Now, the magic makes more sense. If you’re targeting financial independence, your goal should be as high a rate as possible. The more you save, the more years of buffer you build at once… and the less you need to worry about investment returns.

Body Fat Percentage by Age Comparison Calculator for the United States

Health      by

On this page is a body fat percentage comparison calculator by age for adult men and women in the United States in 2015-2016 and 2005-2006. It estimates distributions for both DEXA scan body fat percentages or hydrostatic weighing & caliper body fat percentage estimates.

At home we use the cheap Accu-Measure caliper to track our body fat percentage. You can also estimate your body fat from waist size & height.

Alternatively, see body fat percentage for all US adults here. We also have an (inferior) BMI distribution post and BMI calculator.

Body Fat Percentage by Age Comparison Calculator for US Adults

The tool uses 2005-2006 and 2015-2016 NHANES data from the CDC to construct the body fat percentage distribution.

Using the Body Fat Percentage by Age Comparison Calculator

  • Body Fat Percentage – enter a body fat percentage..
  • Male / Female – select a sex
  • Age – enter the age range of the person measured
  • Measurement – answer whether the body fat percentage was estimated from hydrostatic weighting/calipers, or Dual-energy X-ray Absorptiometry (DXA) scan
    • For “BodPod” pick DXA
    • For Bioimpedence scales/devices pick Calipers.
  • Calculate – when all fields are ready, hit the button to rank a percentile
  • Compare to: – choose the distribution to compare against; we’ll convert the measurement in question if necessary. There is a ~4% difference between estimate types, but not across the range. See the methodology.
  • Graph Ages – body fat distribution varies significantly by age. You can select other ages to compare male and female distributions at those ages.

The body fat percentage by age distribution visualization is interactive. Hover your mouse over the graph to see the male/female body fat percentage breakpoints for each centile.

Median and Average Body Fat Percentage for Men and Women

Essential fat is mandatory fat in and around organs, in nerves, in the brain, in marrow, and in other places where fat is needed for proper bodily function. Post-puberty, men and women have different baseline essential fat needs

Roughly ~2-5% of male mass is essential body fat. Women have between ~9-13% essential fat. Losing essential fat compromises bodily function – and can lead to death. Note these theoretical “minimums”, as well as the difference between men and women.

Remember, all statistics below are estimated using the listed methodology. Caliper results are further estimated off of the DXA estimates.

Average Body Fat Percentage by Age for Women

Age CategoryFemale Average BF% (DXA)Female Average BF% (Caliper)
18-2437.05%33.57%
25-2938.09%34.75%
30-3439.73%36.59%
35-3940.98%38.00%
40-4441.39%38.46%
45-4940.46%37.41%
50-5442.39%39.59%
55-5942.91%40.18%
60-6443.64%41.00%
65-6943.89%41.28%
70-7443.73%41.10%
75-7942.74%39.98%
80+43.17%40.47%

Average Body Fat Percentage by Age for Men

Age CategoryMale Average BF% (DXA)Male Average BF% (Caliper)
18-2424.81%22.48%
25-2925.40%23.16%
30-3427.76%25.85%
35-3928.53%26.73%
40-4428.34%26.51%
45-4928.17%26.32%
50-5429.25%27.55%
55-5929.33%27.63%
60-6430.17%28.60%
65-6931.06%29.60%
70-7431.10%29.65%
75-7931.53%30.14%
80+31.10%29.65%

Median Body Fat Percentage by Age for Women

Age CategoryFemale Median BF% (DXA)Female Median BF% (Caliper)
18-2437.80%34.42%
25-2938.48%35.19%
30-3440.27%37.21%
35-3940.99%38.02%
40-4442.38%39.57%
45-4940.13%37.04%
50-5442.41%39.61%
55-5943.27%40.57%
60-6444.00%41.40%
65-6944.91%42.43%
70-7444.60%42.08%
75-7943.95%41.35%
80+44.14%41.56%

Median Body Fat Percentage by Age for Men

Age CategoryMale Median BF% (DXA)Male Median BF% (Caliper)
18-2424.02%21.59%
25-2925.57%23.36%
30-3427.78%25.87%
35-3928.74%26.96%
40-4428.81%27.05%
45-4928.31%26.48%
50-5429.02%27.28%
55-5929.39%27.70%
60-6429.71%28.06%
65-6930.87%29.39%
70-7430.15%28.57%
75-7931.37%29.97%
80+30.71%29.21%

Selected Body Fat Percentage Centiles for Men and Women

We pulled out some selected body fat percentages for both men and women. These are, of course, also included in the calculator if you’d prefer to consume them that way. (Also note that body fat percentages near the extremes – the top/bottom 1-3% – have extra error built in.)

Bear with us since this reporting encompasses four tables, for men and women and for DXA and caliper derived measurements.

Selected Body Fat Percentiles for Men by Age (DXA)

Age Category10%25%50%75%90%
18-2415.71%18.70%24.02%29.42%35.82%
25-2916.23%20.47%25.57%29.73%36.20%
30-3419.66%22.77%27.78%32.03%36.87%
35-3919.47%25.16%28.74%32.34%36.75%
40-4419.80%25.19%28.81%31.33%34.79%
45-4920.53%24.43%28.31%32.05%35.30%
50-5423.12%24.88%29.02%32.03%36.63%
55-5921.70%26.49%29.39%33.18%37.96%
60-6423.31%26.07%29.71%34.40%38.02%
65-6926.12%27.19%30.87%34.88%37.65%
70-7426.01%28.06%30.15%34.54%37.89%
75-7926.40%28.25%31.37%34.87%38.59%
80+26.59%27.29%30.71%34.17%37.69%

Selected Body Fat Percentiles for Men by Age (Caliper)

Age Category10%25%50%75%90%
18-2412.12%15.52%21.59%27.74%35.02%
25-2912.71%17.54%23.36%28.09%35.46%
30-3416.62%20.17%25.87%30.71%36.23%
35-3916.40%22.88%26.96%31.07%36.09%
40-4416.78%22.92%27.05%29.91%33.86%
45-4917.61%22.06%26.48%30.73%34.44%
50-5420.56%22.57%27.28%30.72%35.95%
55-5918.94%24.41%27.70%32.02%37.47%
60-6420.78%23.92%28.06%33.41%37.53%
65-6923.98%25.20%29.39%33.96%37.11%
70-7423.86%26.20%28.57%33.57%37.39%
75-7924.30%26.41%29.97%33.94%38.18%
80+24.52%25.32%29.21%33.15%37.16%

Selected Body Fat Percentiles for Women by Age (DXA)

Age Category10%25%50%75%90%
18-2426.78%30.75%37.80%42.18%45.89%
25-2928.67%32.45%38.48%44.44%48.30%
30-3431.99%34.48%40.27%43.50%48.38%
35-3929.96%35.65%40.99%46.18%49.34%
40-4433.34%36.55%42.38%45.80%48.77%
45-4931.67%35.24%40.13%45.04%49.60%
50-5434.38%39.02%42.41%45.51%48.96%
55-5934.65%38.59%43.27%46.00%50.33%
60-6433.12%39.28%44.00%48.13%50.37%
65-6938.30%39.23%44.91%47.41%50.39%
70-7438.02%38.76%44.60%47.01%49.80%
75-7934.87%38.32%43.95%46.71%49.63%
80+37.36%39.15%44.14%46.33%48.91%

Selected Body Fat Percentiles for Women by Age (Caliper)

Age Category10%25%50%75%90%
18-2422.01%26.48%34.42%39.35%43.53%
25-2924.14%28.40%35.19%41.90%46.24%
30-3427.88%30.68%37.21%40.83%46.33%
35-3925.59%32.00%38.02%43.86%47.42%
40-4429.40%33.01%39.57%43.43%46.77%
45-4927.51%31.53%37.04%42.57%47.70%
50-5430.56%35.80%39.61%43.10%46.98%
55-5930.87%35.31%40.57%43.65%48.52%
60-6429.15%36.09%41.40%46.06%48.58%
65-6934.99%36.03%42.43%45.24%48.60%
70-7434.67%35.50%42.08%44.79%47.93%
75-7931.12%35.00%41.35%44.46%47.75%
80+33.92%35.94%41.56%44.03%46.93%

Healthy Body Fat Percentage

Disclaimer: Nothing on this site is medical advice. If you‘re concerned with your body fat or other health markers, please consult with a medical professional.

The American Council on Exercise publishes body fat percentage ranges which roughly correspond with BMI health categories. These numbers are based on caliper or hydrostatic weighting body fat percentage readings. We’ve translated them (according to the listed methodology) to DXA estimates below.

ACE Health Guidelines for Body Fat Percentage Ranges (Caliper)

Health RangeWomenMen
Essential Fat10-13%2-5%
Athletic14-20%6-13%
Fit21-24%14-17%
Acceptable25-31%18-24%
Obese32%+25%+

ACE Health Guidelines for Body Fat Percentage Ranges (DXA Scan)

Here are the estimates translated for DXA readings according to our methodology.

Health RangeWomenMen
Essential Fat16.1-18.8%6.8-9.4%
Athletic19.7-25%10.3-16.5%
Fit25.9-28.6%17.4-20.0%
Acceptable29.4-34.8%20.9-26.1%
Obese35.7%+27.0%+

Body Fat Percentage Distribution Methodology

For the most part, the methodology in this post matched the methodology from our previous aggregate post on body fat percentage distribution in the United States.

Here’s the short version of the methodology for this post

  1. Calculate the RFM – Relative Fat Mass – for 2005-2006 and 2015-2016 NHANES samples and across age groups. Reuse the 65-69 age group ranges for 70-74, 75-79, 80+ age ranges (no data otherwise).
  2. Compute the difference between RFM and DXA measured body fat centiles for all age groups and sexes. Compute the difference between RFM and DXA measured body fat percentage average for all age groups and sexes.
  3. Apply the differences to the 2015-2016 RFM computed centiles for all age groups and sexes. Apply the difference in average for all age groups and sexes.
  4. Where DXA to caliper conversion is necessary for males, use the 7-site regression equation from Stephen Ball, Thomas S Altena & Pamela D. Swan (2004)
  5. Where DXA to caliper conversion is necessary for females, use the 7-site data and a DQYDJ-derived linear equation from Stephen Ball, Pamela D. Swan & Rosemarie Desimone (2004)

An explanation for how and why we came to this methodology is in the previous post. Because of the uncertainty around conversions, be especially wary of values near the top and bottom of the ranges.

Also, note the SEE – standard error of estimate – is roughly 4.2% for the caliper and DXA conversions. It is possible – however unlikely – that a DXA reading would be less than a hydrostatic weighing or caliper reading.

Body Fat Percentage Distribution by Age for Men and Women

Body fat percentage is a much better way to track your physical health status than BMI. (Of course, we do also have a BMI distribution by age calculator and BMI calculator).

BMI only takes into account your height and weight in making a determination on health status. Body fat percentage attempts to divide lean and fatty composition for an individual, isolating the most damaging kind of tissue – stored fat.

Variations in the ‘lean’ types of tissue or fluids, such as water and blood volume, organ weight, bone weight (“big boned” vs. “small framed”), and especially muscle make a big enough difference in an individual to sometimes cause BMI errors. Additionally, as original BMI models were based on middle aged Caucasian men and women, BMI systematically makes Type I and Type II errors more common for other races and ethnicities. We’ll follow up with a post on how often body fat percentage and BMI disagree.

Back to body fat percentage by age – it’s very useful to look at the data in this way. Women usually hit two (or three) major hormonal shifts which affect body composition – puberty, menopause, and (for upwards of 70+%) pregnancy and childbirth. Men also hit puberty, and face some combination of a lifestyle and age related decline in testosterone post-puberty which makes it harder to hold onto muscle as they age.

Both sexes, unless committed to frequent exercise, face the devastating effects of sarcopenia, or age related decline in muscle mass. This can be cause a whopping 3-5% of muscle loss per year in idle individuals.

Our message: grab the cheap Accu-Measure caliper – calipers will give you a fine directional reading on body fat percentage. Lift weights a few times a week. Eat well every day.

Do these things and you’ll have a healthy body fat percentage.

Asset Allocation in 2019

Personal Finance      by

Every year, “conveniently” timed with tax season, we remember that DQYDJ is ostensibly a personal finance site. Let’s turn tax-frowns upside down with a post on asset allocation here in in April, 2019.

Why bother? It comes back to skin in the game – a phrase recently repopularized by Nassim Taleb. In his book with the too-convenient title Skin in the Game, he lays out the reasoning perfectly:

“Don’t tell me what you think, tell me what you have in your portfolio.”
– Nassim Taleb, Skin in the Game

Positioning Our Portfolio for Safety in April 2019

Asset allocation is an interesting topic. We like to approach it with a view of all of our liquid – read: non-real-estate – assets.

In our recent post on the yield curve we mentioned our target for a 60/40 risky/safe ratio. We talked about it again in our 2018 savings rate post. We*’re anticipating choppier investment waters than the last few years.

How did we do after the self-audit? Pretty close!

Safe Assets34.72%
Risky Assets65.28%

*”we” here equals mid 30s, married, with two kids.

To be honest, it’s not all that far off from our allocation last April: 62/38. However, investment gains and savings over the year threw it off – this allocation wasn’t a given.

A few months ago risky assets were upwards of 80% of our liquid portfolio.

Domestic and International Split in April 2019

Last year, we mentioned that our allocation to international – at 29.5% – felt low. Here’s this year:

Cash & Bonds (Domestic)34.72%
International Stock12.73%
Domestic Stock52.55%

So – 87/13 if you care about the safe stuff, 80/20 if you don’t.

We’re a bit uncomfortable here. There are some excellent arguments for overweighting the United States, of course:

  • We plan to retire here (Forex risks are baked in)
  • Large public companies already do business overseas (JL Collins has best led the charge on this argument)
  • We know the US best

The third argument is, of course, the weakest. Knowing it well introduces bias. Additionally, in theory, buying a well constructed index means we don’t need to know a country.

For the record, that 20% allocation is us over-weighting Pacific markets and Europe. We’ll watch this, but I’m not as concerned about fixing this bucket as I was in the past.

Style Allocation in April 2019

I broke down our allocation into four styles based on the types of investment:

  • Large Cap Stocks (roughly the 5% largest public stocks)
  • Medium/Small Cap Stocks (including vested equity in my employer)
  • Short Term Debt, Cash, and CDs (<= 2 years duration)
  • Intermediate and Long Term Debt
PK's Asset allocation in April 2019
Asset allocation in April 2019. Pie chart to annoy you.

The takeaway here?

We should probably flip our small/mid cap exposure with large cap….

As for the Short vs. Long/Intermediate term disparity? It isn’t really fixable with the yield curve in its current state.

Best case, perfectly timed 30 year Treasuries would have yielded 4.85% in April 2010 – buying today gets you under 3% for 30 years. With short term cash yielding over 2% in all our (non-checking) accounts there’s really no need to fix this.

Why Bother Messing with Asset Allocations?

Setting aside the fact we had roughly the same percentage of safe & risky assets last year, why bother changing it around? Isn’t it market timing to move to only 60% risky assets at our age?

Maybe, but how you define this allocation doesn’t phase us. Our goal is to set ourselves up for a minimum of stress in a choppy market.

Imagine: starting with a 60/40 breakdown, where safe assets appreciate by 5% in a fall while risky assets fall 50%. That leaves us around 42/58 risky/safe – and only 28% down!

50% isn’t really a random number. That was what the last two bear markets temporarily destroyed in value.

(If stocks surge in 2019 accompanied by a mid 2% return on safe assets? Well, I’ll have to fix my allocation for this post next year…)

I don’t think working out of a 60/40 breakdown for a while is bad. The trick is, of course!, moving back to a riskier allocation when and if we see a real fall.

How is your asset allocation post-tax season?

What Was Your Savings Rate in 2018?

Personal Finance      by

Every year, the “blessing” of tax season provides us the “convenient” opportunity to examine our personal financial performance in the previous year.

And what is the most important marker of financial performance? I’m glad you asked – I’d argue it’s your savings rate.

The input to this system is, of course, income. From income, there are really only three buckets for every dollar of income:

  • Taxes
  • Spending
  • Savings

When you’re staring at documentation on income and taxes, you might as well sum up either spending or savings. If you know three of the four, then you can compute the fourth for free.

In 2018, our family’s net after-tax saving rate was 44.0%. Using an expansive savings definition including principal paydowns, our savings rate was 50.6%.

PK Household Savings Rate History

Savings rate in 2018 for the PK family
Strict savings rate from 2005-2018, Expansive Savings Rate 2016-2018

Here’s a graph of our savings rate over the last 14 years. We’ve generally kept the ship pointed in the right direction. (…Ignoring 2016, haha.)

We’re generally not fans of the more expansive savings rate. However (speaking of ships), that ship has sailed – most personal finance experts and bloggers use an expansive definition of after-tax savings. For the last three years we’ve computed both rates.

Why don’t you like principal payments in saving rate?

First, to be clear: we lost this argument. When you compute your savings rate, you should include principal paydowns. This means the portion of your student loans, auto loans, property loans, or other installment loans which goes to principal counts as savings on the year.

This is because principal paydown is accretive to net worth: if you pay debt now, you obviously don’t owe it anymore.

Our problem was (is) calling that savings.

Take a 6 year car loan, for example. In nearly 100% of cases, you can’t resell a car for your purchase price after 6 years. That’s 6 years of tracked phantom savings!

Of course, since 2009 or 2011 in the US, real estate is a huge exception – everything is more expensive now. Presumably, after 6 years of mortgage payments you’d more than capture your additional principal if you sold.

So… it’s a complicated subject. We have computed a rate using both methodologies for the last few years.

2018: Joining the 50% Savings Rate Club

Those nuanced feelings aside, we were very happy to pass the 50% savings rate point for the first time!

50% is the most important magical breakpoint for savings rates. When you save 50+% in a year, you’re banking one year’s worth of expenses for a year of spending.

On top of that, high savings rates are deceiving.

The difference between a 75% savings rate and 80% seems tiny. However, a 75% savings rate is the same as saving three years worth of living expenses while an 80% savings rate is four years. Buried in that 5% percentage point difference is an entire year of work!

So, we’re very happy to crack 50%. In 2019 we hope to save an even higher percentage of income – especially as (we suspect) the economy is going to slow down a bit. Or… at least not grow as quickly.

We’ll have an asset allocation post soon so you can see how we’re positioned going into April 2019.

What was your 2018 savings rate (calculated using your favorite method)? Where do you come down on savings rate methodology? What’s your 2019 savings rate goal?

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